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Pensions and insolvency: Horton v Henry [2016] EWCA Civ 989

Date:13 OCT 2016
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Recent years have seen a number of decisions on the interpretation of s 310 of the Insolvency Act 1986 (IA) and s 11 of the Welfare Reform and Pensions Act 1999 (WRPA).

Section 310 IA provides for Income Payment Orders (IPOs). It allows the court to make an IPO claiming for a bankrupt’s estate so much of the income of the bankrupt during the period for which it is in force as it may specify. Section 310(7) IA provides that the ‘income of the bankrupt’ comprises every payment in the nature of income, which is from time to time made to him, or to which he from time to time becomes entitled. Section 11 WRPA deals with the effect of bankruptcy on pension rights. It provides that where a bankruptcy order is made, any rights from an approved pension arrangement are excluded from the bankrupt’s estate. However, in making an IPO, s 310(7) IA includes in the income of the bankrupt any payments under a pension scheme (save as excluded by s 310(8) IA), and is expressed as being despite anything in s 11 WRPA.

Until the decision of the Court of Appeal in Horton v Henry [2016] EWCA Civ 989, there was a tension between the decided cases as to whether a bankrupt’s present entitlement to compel payment of benefits fell within the ‘income of the bankrupt’. In Raithatha v Williamson (a bankrupt) [2012] EWHC 909 (Ch), a deputy judge of the Chancery Division held that it did. However, in Re X [2014] BPIR 1081 and Hinton v Wotherspoon [2016] EWHC 623 (Ch), a District Judge and High Court Bankruptcy Registrar respectively had held that it did not.

In Horton v Henry, the Court of Appeal answered the question definitively. Giving judgment, Lady Justice Gloster (with whom Lord Justice McFarlane and Sir Stanley Burnton agreed).

Horton v Henry

The facts (paras [6] and [7])

The appellant (A) was the trustee in bankruptcy of the respondent (R), who had been adjudged bankrupt on his own petition on 18 December 2012. At the date of judgment in the Court of Appeal, R was aged 61.

A was appointed R’s trustee on 15 March 2013. There were creditor claims in excess of £6.5 million. R acknowledged indebtedness of £387,075, but disputed the true value of the creditors’ claims.

At the date of the bankruptcy, R’s assets included four pension policies. These comprised two groups:

  1. A Self-Invested Pension Policy (SIPP) with Suffolk Life. R had taken this out in 2007. At October 2014, the SIPP had a value of £848,022-76. Its terms entitled R to ‘crystallise’ some or all of its separate units on or after his 55th birthday, taking 25% of the crystallised amount (subject to the lifetime allowance) as a pension commencement lump sum without incurring a tax charge. Based on the valuation of £848,022-76, the maximum 25% tax free lump sum would be around £212,0005, together with recurring drawdown and/or annuity payments in accordance with elections made. There was, however, a measure of uncertainty as to what would be available if the SIPP were crystallised, because the investments in the underlying fund were not all readily realisable shares (para [7(iv)(a)]).
  2. Three personal pension policies, with Phoenix Life Limited (the Phoenix Life policies). Each provided for an annuity payable on R’s 70th birthday (October 2024). The plan entitled R to give written notice to vary the date for taking benefits, provided that the date fell between his 60th and 75th birthdays. The forms of benefit which an annuitant might elect included an option to commute part of an annuity by taking a lump sum, ‘not exceeding three times the annual amount of the part of that annuity which is not commuted’ and various forms of annuity. The options were to be exercised by written notice. However, if an annuitant had not exercised them by the age of 75, he received a simple annuity of level amount. The Phoenix Life policies had no fund value. There was simply a guaranteed annuity income of £2,450-68 of each at age 70, subject to the lump sum option at age 60 (para [7(iv)(b)]).

The applications (para [7(v)-(viii)])

R’s discharge from bankruptcy was on 18 December 2013. The day before, with R aged 59, A filed an application under s 310 Insolvency Act 1986 for an IPO requiring R to pay A a sum equal to:

  1. the percentage of the pensions presently available to be drawn down by him as a tax free lump sum; and
  2. such further periodic income as might also be derived from the pensions for the 3-year duration permitted by s 310(6)(b) IA.

At 17 December 2013, R was entitled to crystallise all or part of the SIPP, to draw benefits and to take up to 25% of the amount crystallised as a tax free lump sum. On 7 October 2014, R became entitled to receive benefits under each of the Phoenix Life policies.

R opposed the application. He submitted that:

  1. The pension benefits were not income to which he had ‘become entitled’ for the purposes of s 310(7) IA.
  2. It was in any case unreasonable in all the circumstances to require R to elect to draw any benefits, because he wished to ‘preserve the maximum capital value’ of the pensions for ‘as long as possible’ (until his 67th birthday on 7 October 2021) with a view to transferring the remaining balance to his children.

The question (para [2])

The Court of Appeal formulated the question as:

‘Does a pension entitlement in respect of which a bankrupt has a present right to elect to draw down payment (but which he has not yet exercised) fall to be included in the assessment of his income ‘to which he from time to time becomes entitled’ within the meaning of section 310(7) of the Insolvency Act when the court is considering whether and, if so, on what terms, to make an IPO under section 310?’

The decision of the High Court (paras [8] and [9])

Mr Robert Englehart QC, sitting as a deputy High Court judge, had answered that question ‘no’. The word ‘entitled’ in s 310(7) IA suggested a reference to a pension in payment under which definitive amounts had become contractually payable. Nothing in s 310 IA obviously gave the Court power to decide how a bankrupt was to exercise the different elections open to him under an uncrystallised SIPP or personal pension, and there was no obvious route to find that a trustee had the power. Various commentaries supported this.

However, the learned deputy judge held that if he had jurisdiction to make an IPO, he would have done so to the full extent claimed. This was for the factual reason that on R’s evidence, none of the pension entitlement was needed for meeting R’s reasonable needs or those of his family.

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The law (paras [16] to 34])

Gloster LJ began her analysis by setting out the various applicable statutory provisions.

The basic starting point is that all property (including things in action, present or future, vested or contingent) belonging to, or vested in the bankrupt at the date of the bankruptcy order vests in the trustee immediately on his appointment (ss 283(1)(a) and 306(1) IA), subject to other statutory provisions excluding specific property (s 283(6) IA) (paras [17]-[20]).

Secondly, none of R’s rights in relation to the SIPP and the Phoenix Life policies vested in A as trustee on R’s bankruptcy as part of the bankrupt estate, including any rights exercisable by R to require the pension providers to pay him an income or a lump sum under the terms of the pensions: s 11 WRPA (paras [21]-[23]).

Thirdly, where property is excluded by some other enactment from the bankrupt’s estate, it cannot be the subject of a notice claiming it as after-acquired property for the benefit of creditors: s 307(2)(b) IA; and nor can property which, as part of the bankrupt’s income, may be the subject of an income payments order under s 310 IA: s 307(3) and (5) IA (paras [24]-[26]).

Fourthly, in summarising the statutory position in respect of IPOs ([27]-[33]) and the WRPA, with reference to other pertinent legislation, Gloster LJ quoted directly (para [30]) the learned deputy judge’s analysis:

‘In short, the position since 1999 has been that rights under personal pension arrangements do not in general vest in a trustee in bankruptcy. Nevertheless, as has always been the case with occupational pensions, provision has been maintained for an IPO to be made in certain circumstances. It may be thought that the parenthetical words in section 310(7) [i.e. ‘(despite anything in section 11 or 12 of the Welfare Reform and Pensions Act 1999)’] were required in order to ensure that the position under personal pension policies did not diverge from that applicable to occupational pension schemes. There was no question of the 1999 Act going so far as to protect from creditors all income of a bankrupt even where such income stems from a pension. This was also the case as regards occupational pension schemes under the 1995 Act: see section 91(4)’

Finally, Gloster LJ set out s 333 IA, which deals with the duties of the bankrupt in relation to the trustee. In particular, s 333(1) IA requires the bankrupt to (a) give to the trustee such information as to his affairs, (b) attend on the trustee at such times, and (c) do all such other things, as the trustee may reasonably require for the purposes of carrying out his relevant statutory functions (para [34]).

The law (paras [35] to 57])

Gloster LJ identified three issues.

The first issue was whether ss 310 and 333(1) IA, read in conjunction, enable a trustee in bankruptcy to require a bankrupt, who has reached the age at which he is contractually entitled to draw down or ‘crystallise’ his pension (but has not done so), to elect to do so, so that the trustee may apply for an IPO in relation to the funds drawn down, or to be drawn down. The answer was ‘no’ (paras [35(i)] and [36] to [56]).

First, it could not be said that the ‘functions’ of the trustee under s 333(1) IA relate to property expressly excluded from the estate which vests in him on the bankruptcy. This would ‘drive a coach and horses through the protection afforded to a bankrupt’s pension rights by the Insolvency Act and pension legislation if a trustee were able, in effect, to require a bankrupt to make the entirety of his pension available for satisfaction of a creditor’s claims, but he simple expedient of a request under section 333 or a court order under section 363(2), thereby converting excluded property into “income”’ (para [38]). ([36(i)] and [37] to [40])

Secondly, the italicised words ‘For the purposes of this section the income of the bankrupt comprises every payment in the nature of income … to which he from time to time becomes entitled’ in s 310(7) IA did not mean that once a bankrupt pension holder has reached the age when he is entitled to draw down his pension on request, his vested right to elect, and the subsequent payments to him fall within s 310(7) IA, thereby enabling him to be compelled to elect to draw down his pension under s 333 IA, s 363(2) IA, or the general jurisdiction of the court. There was no basis, as a matter of construction of s 310 IA, for the conclusion that a bankrupt’s contractual rights to draw down his pension come within the s 310(7) IA definition of ‘income of the bankrupt’. There is a clear distinction in context between payment and rights. ‘The contractual right to elect, by service of a notice on the pension provider, to receive a lump sum or income payment, in the pension context is very different in character from an actual payment or the right to receive that actual payment, once the relevant election has been made’: paras [42]-[43]. The IA, WRPA and associated legislation clearly distinguish between rights under a pension scheme and payments under a pension scheme: para [44]. Further, such an interpretation would also ‘drive a coach and horses through the protection afforded to private pensions and rights thereunder by virtue of section 11 of the WRPA’: (para [45]). The mechanism of ss 342A to 342C IA, by which a trustee may claw back excessive pension contributions made by the bankrupt in certain circumstances was not an unsatisfactory remedy, and it was for Parliament to decide how to balance the protection of the interests of creditors with the safeguarding of the savings of private pension holders: paras [45]-[46]. ([36(ii)] and [41] to [56])

Under both heads, if A were correct, the court would be required to determine the precise nature of the election the bankrupt must make; but the absence of statutory criteria informing the court as to how this should be done was ‘a formidable obstacle to [A]’s arguments’: para [47]. That s 310 IA applies only to pensions in payment also ‘sits far more easily with the statutory language’: para [48]. There was no analogy between the delayed issue of a final invoice for works and the exercise of an option under a pension plan: paras [49] and [50]. The Court’s interpretation was also supported by the legislative history of the pensions legislation and the amendments to the IA (although these were not determinative: paras [51] to [53].

Essentially, then, under s 310 IA, the phrase ‘payment in the nature of income… to which he from time to time becomes entitled …’ refers to a pension in payment (para [54]). Consequently, the Court of Appeal did not accept the decision of the learned deputy judge in Raithatha (above), concluding (para [55]) that he had both failed to appreciate the effect of the changes brought about by s 11 WPRA, and also had not been referred to the relevant Explanatory Notes to the WRPA, which were necessarily a useful aid to context and interpretation.

Having dismissed the appeal on the first issue, the second and third did not arise for consideration (para [57]). They concerned (secondly) what criteria apply to determine the manner in which, and the extent to which, the bankrupt may be required by the trustee to draw down his pension; and thirdly, how, if such power exists, it should be exercised in this case, having regard to reasonable domestic needs.

Concluding thoughts

The question of access to pension funds often arises as way to finance financial remedy settlements. There are increasingly flexible ways of drawing on pension funds to do so. There are often tax consequences in doing so. If a secondary market for the sale of annuities back to pension companies is created, sale will doubtless come at a cost.

So when might the courts force holders of defined contribution pension rights (aged over 55) to draw down their pensions against their will in order to fund divorce settlements? Horton is confined as it is to insolvency, and silent about the family context. This is unsurprising. An authoritative decision setting the parameters in which parties may be required to reach into their pension funds in financial remedy proceedings would be of great assistance.