Court of Appeal determines that a bankrupt cannot be compelled to dip into pension

The Court of Appeal, in Horton v Henry EWCA Civ 989, has determined that a trustee in bankruptcy cannot compel a bankrupt to drawn down on their pension if they have not already elected to do so.

The respondent was made bankrupt after issuing his own bankruptcy petition. The appellant was appointed as trustee in bankruptcy. The respondent’s assets at the date of bankruptcy included four pensions. The pensions were capable of being drawn down on by the respondent and were therefore capable of providing an income to the respondent, argued the appellant. The respondent had not drawn down on the pensions at the date of bankruptcy and instead met his day to day needs by handouts from his wife and family.

The day prior to the respondent’s discharge from bankruptcy the appellant filed an application pursuant to s310 of the Insolvency Act 1986 for an income payments order requiring the respondent to pay:

• the tax-free lump sum that the respondent was entitled to withdraw;
• further payments of any monthly or periodic income that the respondent could derive from his pensions.

The judge at first instance held that the respondent’s uncrystallised pension rights did not fall to be assessed as part of his income. This decision did not follow that of Raithatha v Williamson EWHC 909 (Ch), a previous High Court decision, despite very similar facts.

The issue before the Court of Appeal was whether a pension entitlement which a bankrupt has the ability to draw down on (but has not yet exercised) can be included as income available to him.

It was held that such pension entitlements are not to be considered as available income. The following reasons were given:

• The Insolvency Act and pension legislation had explicitly excluded pension rights from the estate of a bankrupt. Parliament had decided to draw a balance between, on the one hand, the interests of the State in encouraging people to save for their retirement, and, on the other, the interests in creditors receiving payment of their debts.
• A trustee could not require a bankrupt to take steps to obtain property that was excluded from their estate, and convert it into income receivable by him, so that it could be subject to an income payments order. A trustee could not require a bankrupt to work so as to receive a salary, nor to request a payment from a discretionary trust of which he was a beneficiary.
• If a trustee were able to compel the bankrupt to draw on his pension, then the courts would have to decide both the amount and manner of the draw down. The absence of criteria in the Insolvency Act informing the court as to how it should make such a determination was a "formidable obstacle to the trustee’s arguments".
• As a matter of construction of s310 of the Insolvency Act, there was no basis for concluding that a bankrupt’s contractual rights to draw down or crystalise his pension income within the definition of "income of the bankrupt".
• The Insolvency Act as well as the relevant provisions of the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999, drew a clear distinction between rights under a pension scheme and payments under such a scheme.

Accordingly, the appeal was dismissed.

This decision is a higher authority than Raithatha v Williamson and therefore sets a precedent that a bankrupt cannot be compelled to drawn down on an uncrystallised pension pot.