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Horton v Henry; pensions, bankruptcy and divorce

Pranjal Shrotri, barrister, 36 Bedford Row identifies the importance of the forthcoming judgment of the Court of Appeal in Horton v Henry Any financial remedies practitioner with an ongoing

Pranjal Shrotri, barrister, 36 Bedford Row


Pranjal Shrotri,
 barrister, 36 Bedford Row  

Any financial remedies practitioner with an ongoing case involving (a) an undischarged bankrupt and (b) a pension should be keeping their eyes peeled for the upcoming Court of Appeal decision relating to the appeal from the High Court decision in Horton v Henry [2014] EWHC 4209 (Ch)

Its subject matter (the correct statutory interpretation of section 310(7) of the Insolvency Act 1986) won't automatically recommend it to your reading list, but the decision is one that will have an impact in finance proceedings involving bankruptcy.

Horton v Henry
Section 11 (1) of the Welfare Reform and Pensions Act 1999 provides that when a bankruptcy order is made against a person on a bankruptcy petition presented on or after 29th May 2000, any rights the bankrupt has under an approved pension scheme (which are by far the majority of pensions schemes) are excluded from his estate. The result: a general rule that a trustee in bankruptcy can't get their hands on a bankrupt's pension assets.

There are a number of exceptions to this general rule. First, in the unlikely event that a pension scheme is unapproved, Section 11 does not bite and the bankrupt's pension will not automatically be excluded from his estate. In those circumstances, however, the bankrupt can still apply to the court for his rights under the pension to be excluded from the estate.

Secondly, contributions to a pension deemed excessive can be recovered for the benefit of creditors.

It is the third exception to the general rule that is up for debate in Horton v Henry. Section 310 of the Insolvency Act 1986 provides that on the application of the trustee in bankruptcy, the court may make an Income Payments Order (IPO) against a bankrupt, essentially claiming for the bankrupt's estate the part of the bankrupt's income above that which is necessary to meet the reasonable domestic needs of the bankrupt and his family. The order can last for a maximum of 3 years, and must be applied for before the discharge of the bankrupt.

The issue the Court of Appeal will be deciding is this; does Section 310 (specifically, Section 310(7)) permit an IPO to be made in respect of a pension which is not yet in payment, but which the bankrupt is entitled to receive at the time of the trustee's application?

Until the High Court decision of Raithatha v Williamson [2012] EWHC 909 (Ch)  it had been assumed that the answer was no, and that a pension had to be in payment for it to form the basis of an application for an IPO. In Raithatha, the court decided that to the contrary, the correct statutory interpretation of section 310(7) entailed that an IPO could be made in respect of pension income which the bankrupt was entitled to receive, but had not yet elected to receive. In short, the court could force a bankrupt to elect to take part of his pension and see it made subject to an IPO.

When taken in tandem with the recent increase in flexibility regarding pension drawdowns, the implications of this decision are significant. Given that many individuals can now cash in the entirety of their pension pot as soon as they reach retirement age, an undischarged bankrupt over retirement age may suddenly find himself compelled to draw substantially on his pension assets for the benefit of his creditors.

The decision in Raithatha left many with a sense of unease. It was much criticised, both by insolvency practitioners and the judiciary . Although the court in Raithatha granted permission to appeal, the case ultimately settled. It was thus seen as a welcome development when, in Horton v Henry, the issue came before the High Court again.

The court at first instance in Horton decided to reinstate orthodoxy; it reluctantly decided that Raithatha had been wrongly decided, and that section 310(7) did not in fact allow pensions that were not in payment to be made subject to an IPO.

In light of its departure from Raithatha, the decision in Horton was, unsurprisingly, appealed by the trustee in bankruptcy. The Court of Appeal is expected to determine the issue definitively in the next month or two.
Implications for Financial Remedies Cases.

In financial remedy proceedings in which one or both parties is an undischarged bankrupt, practitioners will be familiar with advising that an approved pension not in payment is safe from the clutches of a trustee in bankruptcy and that it is thus available for distribution between the parties. In the face of the two conflicting High Court decisions in Raithatha and Horton, and until the Court of Appeal's forthcoming decision on the matter, we can no longer be sure that this is the case.

An undischarged bankrupt over retireent age may be compelled to draw on his, as yet untouched, pension assets and hand a portion of these to his trustee in the form of an IPO. Given the recent changes in the rules regarding pension drawdowns, the portion to be handed over may be sizeable. This will, of course, impact on the quantum of pension that remains to be distributed in the context of financial remedy proceedings.

As a consequence, until the Court of Appeal's decision in Horton, practitioners should be wary of advising clients in financial remedy proceedings that the untouched pension assets of an undischarged bankrupt over retirement age will be available to the parties. Furthermore, any financial settlement between parties in these circumstances should only be reached after they have been advised of the risk that the Court of Appeal will decide that Raithatha was correct.