The Court of Appeal ruling in Horton v Henry [2016] EWCA Civ 989 handed down on the 7th October 2016 held that a Trustee in Bankruptcy cannot compel a bankrupt to draw down his pension.
Background
Prior to 2000, a bankrupt’s pension formed part of the bankrupt’s estate and could be taken once the bankrupt had reached pension age. The Welfare Reform and Pensions Act 1999 introduced legislation which protected bankrupt’s pension where the pension had not yet been paid.
The landmark ruling in Raithatha v Williamson [2012] EWCH 909 gave Trustees access to a bankrupt’s assets which had previously been out of reach. The main implication of the case was that a bankrupt over the pension age could be made to draw down their pension, against their wishes, with the sum becoming part of the bankrupt’s estate.
The decision did not fit well with public policy and was swiftly appealed. However, the case settled before it was heard in the appeal court.
In 2014 the case of Horton v Henry held that a Trustee in bankruptcy had no power to compel a bankrupt to draw his pension. The ruling directly contradicted the decision in Raithatha two years earlier and the case was appealed by the Trustee in Bankruptcy.
In April 2016 the UK government introduced new legislation namely the Defined Contributions Pension Scheme, which made changes to the way individuals could draw down their pensions. The pension age was lowered to 55 years and the amount of which an individual could draw down was increased from a maximum of 25% of the lump sum to an unlimited lump sum. Therefore an individual from the age of 55 could, if they chose to do so, draw down the whole of their pension as a lump sum.
The impact of this legislation would mean that in the event the Court of Appeal followed the ruling in Raithatha, it would enable a Trustee in Bankruptcy to order a bankrupt over the age of 55 to draw down the entirety of their pension to form part of the bankrupt’s estate. The appeal of Horton v Henry was awaited with baited breath.
Horton v Henry [2016] – The Appeal
The court considered whether a Trustee had the capacity to compel a bankrupt (of pension age) to draw down his pension. If the Trustee did have capacity then the proceeds of the pension would become income available to the estate under an Income Payment Order (section 310 Insolvency Act 1986).
The Court of Appeal held that the bankrupt did not have to comply with a request from the Trustee to draw down his pension unless the bankrupt freely elected to do so (under s. 333 Insolvency Act 1986), further stating that the ability of the bankrupt to elect to draw down a pension was not a “payment in the nature of income…to which [the bankrupt] from time to time becomes entitled.” (section 310(7) Insolvency Act 1986).
The Court stated that to allow the Trustee to access pension funds through an Income Payments Order would “drive a coach and horses” through the legislation and the intention of Parliament, being to encourage people to save for retirement.
The Outcome
It is clear that public policy did play a part in the appeal court decision and considering the government’s recent legislation, the decision reached in the court of appeal is clearly a decision to protect individual pensions and encourage people to save for retirement.
It is also worth noting that an Income Payment Order cannot reduce income below the reasonable domestic needs of the bankrupt and his/her family. Therefore, depending if a bankrupt (of pension drawing age) was forced to draw down a significant lump sum this would in all likelihood leave the bankrupt below the threshold.
There are of course exceptions available to Trustees to recover pension contributions. One such example is where a bankrupt has made excessive contributions to a pension fund the Trustee may use the provision under section 342A of the Insolvency Act 1986 to recover monies.
For further advice on the impact of the decision please contact Kate Roberts on 0151 230 1216 or kate.roberts@dtmlegal.com.
