On October 7, the Court of Appeal ruled in Horton v Henry that pensions not yet in payment are protected from bankruptcy. Graham McPhie, partner at Moon Beever, explains the implications for creditors
The issue at the crux of Horton v Henry was to what extent, if any, is a pension not yet in payment, available to be taken into account on an application by a trustee in bankruptcy for an income payments order?
Relevant factors for the profession before the Court of Appeal decision were:
The Court of Appeal has decided that:
The pension pot remains an asset excluded from the estate and income to which the bankrupt is entitled only applies to a pension fund that is actually in payment.
There is no right on the part of a trustee in bankruptcy to compel a bankrupt to take any particular election in relation to a pension scheme.
1. The clear rationale from the 1995 and 1999 Acts was to exclude pensions from the bankruptcy estate;
The decision at least has now settled the issue of the position of pensions and their interaction with the income payment regime of the Insolvency Act.
There has always been a balancing act to ensure that pension pots have a measure of protection.
However, creditors are not prejudiced by this result, because income from the pension can be taken into account for income payment purpose. Plus, excessive contributions to a pension can be recouped in certain defined circumstances.
The 2012 decision in Raithatha v Williamson had cast doubt on this. That doubt has now firmly been quashed.
The Court of Appeal has restored a position that many considered it should be, i.e. that pension pots are protected, and this was the legislative intention.
The court used statutory explanatory notes as an aid to interpretation.
This made it plain that the intention was for a trustee to be able to seek an income payments order on pension plans, which were in payment and not otherwise.
These notes had not been referred to in Raithatha.
Ultimately, the court agreed that the aim of the exclusion of pensions from a bankruptcy estate and the income payments regime was that only pensions in payment were susceptible to an income payments order.
The trustee has no right to force an election on a non-bankruptcy estate asset, in much the same way that there was no right to force a bankrupt to work, nor to request a payment from a discretionary trust.