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Bankruptcy and pension rights revisited… an unhappy marriage or a fairytale ending?

Posted: 01/12/2016

When this topic was last considered two years ago, there was a real danger of pension rights (previously thought of as sacrosanct) being within the reach of trustees in bankruptcy by way of an income payments order (IPO). There were also two conflicting first instance decisions in play. The issue? Whether a pension entitlement capable of drawdown by election, but not yet in payment, can fall within the definition of income in section 310(7) of the Insolvency Act 1986 (IA86), and so be the potential subject of an IPO.

Following the appeal decision of Horton v Henry, the danger for bankrupts has passed, leaving pension rights generally out of the trustee’s reach. However, whilst the conflicting case law has been reconciled and the immediate debate quietened, this is unlikely to be the end of the somewhat stormy relationship between a bankrupt individual’s valuable pension rights and the rights of their creditors. The policy debate has once again been raised as to how those rights should be properly balanced. Post Horton v Henry, is there to be the fairytale ending that was hoped for, or does there simply remain an unhappy marriage with an uncertain and potentially tempestuous outcome?

Legislative clarity: the honeymoon period

The extent to which a bankrupt’s pension rights could form part of his bankruptcy estate had been settled law prior to the Welfare Reform and Pensions Act 1999 (WRPA). The position, as set out in Re Landau, was that personal pension rights of a bankrupt individual were a ‘chose in action’ constituting property that could vest in a trustee in bankruptcy under sections 436, 283 and 306 IA86.

This position was reversed once the WRPA came in to force (together with the combined effect of the Pensions Acts 1993 and 1995 in relation to occupational pensions). Section 11 WRPA explicitly excluded pension rights under an ‘approved pension arrangement’ from the bankruptcy estate. Together with the amendments to section 310 IA86, it was thought that this broadly ensured that pensions rights would not form part of a bankruptcy estate. The WRPA brought the position for personal pensions into line with that for occupational pensions – as proposed by the Goode Report in 1993 which preceded the implementation of the WRPA.

The position was clear - rights under a bankrupt’s personal pension scheme did not automatically vest in a trustee in bankruptcy. There was a very clear distinction, to which we will later return, between pension rights (and the associated decisions as to how those rights were exercised), and payments received under the pension scheme where the rights to receive the pension had been exercised. The former generally remained exclusively with the bankrupt and could not be interfered with, whilst the latter could be the subject of an IPO.

Raithatha v Williamson: seeds of conflict

However, in 2012, the unexpected and for some deeply concerning judgment of Bernard Livesey QC in Raithatha v Williamson effectively labelled pension rights as ‘fair game’ for a trustee.

Section 310 contains provision for a trustee in bankruptcy to apply to a court for an IPO over income received by the bankrupt over and above his/her reasonable domestic needs. The key issue is the definition of ‘income’ for the purposes of section 310, which reads as follows (emphasis added):

“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”. 

The question was whether pension rights under a personal pension, where the pension was capable of drawdown but where a bankrupt had not yet elected to receive payment, fell to be income to which he would become entitled. Pre-Raithatha the answer was an unequivocal ‘no’ – as there was only a right to payment, and no actual payments.

This was generally considered to strike the right balance between the personal pension and insolvency regimes, and in particular the rights of creditors to be paid, as against the increased burden on the state were private pension holders to be stripped of their pension investments in retirement. Further, this was in line with Lord Mandelson’s reforms to the insolvency regime through the Enterprise Act 2002, where the entrepreneur was not to be unduly penalised due to “non-culpable” financial failings leading to bankruptcy.

Raithatha, however, left the regimes in direct conflict. Bernard Livesey QC held that where a bankrupt was eligible to draw down on his pension, but (crucially) had not yet elected to do so, the court could empower the trustee to compel the bankrupt to call down on his pension. This would make it subject to an IPO despite the bankrupt receiving no actual pension payments. This effectively permitted the trustee to step into the shoes of the bankrupt and make decisions as to his pension for the benefit of creditors. It removed, in a single stroke, the differentiation between pension rights and payments under a pension, and left a deepened chaos in its wake. The potential ramifications of this were exacerbated by the forthcoming 2015 pension reforms, the dual effect of which could be to crystallise the entire pension pot and hand the lot to the trustee in bankruptcy under an IPO. Great news for creditors, less so for the entrepreneurial non-culpable bankrupt who had undertaken a degree of prudent personal pension planning.

Horton v Henry: beginning of reconciliation?

Disappointingly, whilst permission to appeal was granted, the matter settled before the Court of Appeal was able to consider the situation. The result was a period of several years of uncertainty where the insolvency and pensions worlds waited in concern to see how this judgment, which drove a nail of conflict into pensions law and broader policy, would be applied and/or resolved. 

In December 2014 their patience was rewarded by the first instance decision of Robert Englehart QC in Horton v Henry. The similarity between the case facts forced the court to reconsider Raithatha in some detail. The conclusion of the court was, simply, that the Raithatha decision was wrong. The court held that the trustee could not reach as far as the bankrupt’s pension rights in comparable circumstances. 

Two inevitabilities followed from this. First: permission to appeal was granted – there were two conflicting first instance decisions requiring the Court of Appeal to reach a conclusion on the point for the sake of clarity. Secondly, in the interim period before the appeal came on, the judiciary had to make a choice as to how the conflicting cases would be applied. Fortunately, the first instance judges in cases such as Hinton v Wotherspoon had no difficulty in holding the Horton decision to be the correct one.

Horton v Henry – the appeal: ordinary language and a marital reckoning

The pensions and entrepreneurial world heaved a collective sigh of relief when the Court of Appeal agreed that the decision in Raithatha was indeed not to be followed. The analysis put forward in the judgment of Gloster LJ (with which McFarlane J and Sir Burnton concurred) is illuminating, and offers clear guidance to the way in which this issue is to be dealt with as a matter of construction.

The court’s view was, as a matter of proper construction of the relevant statutory provisions, that a bankrupt’s pension rights could not form part of his estate. Section 310 IA86 offers no basis from which to conclude that a bankrupt’s right to crystallise his pension should fall within the definition of ‘income’ in section 310(7). It just does not follow. The court looked to the context and objectives of the statute in addition to the ordinary language of section 310, and concluded that for pension rights to form part of the bankruptcy estate was in their words: “wholly unrealistic” (paragraph 42).

Furthermore, as a matter of policy, Gloster LJ felt strongly that to permit Raithatha to stand would be to allow pension rights deliberately protected by statute to be converted into unprotected ‘income’. Such a conversion was entirely superficial; an uncrystallised future right is most definitely not akin to income in its natural state, and this could not have been the intention of Parliament.

The court returned to the important distinction between pension rights and pension payments, as inherent in the statutory provisions  Gloster LJ identified that the ordinary language of section 310(7) itself expressly refers to ‘payments in the nature of income’ – thus distinguishing clearly between the active flow of money to which an IPO should rightly be attached, and not a choses in action or ‘bundle of rights’ which must be exercised before they can be converted into a payment capable of being the subject of an IPO.

The distance between the concepts of ‘rights’ and ‘payments’ becomes very apparent if you think about converting a right into a payment. This would require the trustee to make complex decisions about the pension right in question: what to drawdown, when, whether to elect in favour of lump sum payment, etc. In the context of crystallisation, whilst payments are clearly crystallised, pension rights are not capable of crystallisation without those decisions being made. Equally, if the court were to seek to effect crystallisation for the purposes of an IPO, it would have to determine factors such as the level of savings from his pension the bankrupt would need for the remainder of his life. This is a far cry from assessing a bankrupt’s needs for the duration of an IPO as against his or her ‘reasonable needs’.

The Court of Appeal clearly also had an eye to the policy ramifications of its decision. Upholding Raithatha would have openly reversed the protective measures confirmed by the WRPA. Whilst the court in Raithatha in 2012 did not know that its consequences would be so greatly magnified by the 2015 pensions reforms, the Court of Appeal nonetheless had to grapple with this. The effect would have been to leave the pensions regime at such loggerheads with the insolvency position that divorce on grounds of unreasonable behaviour could be on the cards - the issue would have had to return to Parliament.

Blight v Brewster – a marital distraction?

Whilst the case law has now been reconciled, an element of the Court of Appeal’s judgment raises suspicion that we have not heard the last of this debate.

The focus until now has been on the ability, or not, to access a bankrupt’s pension rights post-insolvency event. The trustee in bankruptcy in Horton sought to run an interesting analogy with the position pre-insolvency to support his argument in favour of the IPO. He argued that, according to the decision in Blight v Brewster, a judgment creditor was able to obtain a forced injunction compelling the judgment debtor to elect to drawdown his pension, paired with a third party debt order against the proceeds once drawn down. As a matter of justice, the trustee maintained, the position in bankruptcy should follow suit.

Gloster LJ, quite correctly in the writers’ opinion, rejected this, citing the fundamental proposition articulated by Gabriel Moss QC in Brewster: “A person who files… for bankruptcy surrenders all his assets, save those protected by law, to a trustee in bankruptcy…filing for bankruptcy is a relief from the ability of creditors individually to execute upon the debtor’s assets, in favour of collective execution” (paragraph 39).

In practical terms, if you effectively surrender yourself to a class remedy in bankruptcy with all its consequences, in return you receive certain protection. Conversely, if you avoid bankruptcy and take that benefit of remaining solvent to “fight another day”, you must pay your due debts. On this basis, Gloster LJ agreed that the access to the pension rights by the judgment creditor in Brewster was justified in context, and importantly, that the access to pension rights pre-insolvency is entirely different to that currently in issue: “there is a meaningful distinction between the position prior to and after bankruptcy – prior to bankruptcy pensions are not protected, after bankruptcy they are” (paragraph 39).

This does, however, give pause for thought for judgment creditors weighing up whether to seek the bankruptcy of their judgment debtor, where the pension pot is a realistic primary asset. It remains to be seen whether there will be a shift in enforcement techniques by judgment creditors on this basis following the Horton appeal. It should be noted, in addition, that the court in Brewster stated expressly that whilst a receiver was not necessary in that case, the court would not refuse to appoint one if it was deemed necessary for the carrying out of the sanction.

Excessive pension contributions – a long-term domestic compromise?

The Horton appeal decision will inevitably leave trustees in bankruptcy disappointed at pensions rights now being out of reach in the usual course of events. This will place focus on potential alternative ways of accessing the pension pot, bringing the provisions relating to excessive pensions contributions within section 342A-C IA86 – introduced by the WRPA - onto centre stage.

Under those provisions it is possible for excessive contributions into a pension scheme (where a bankrupt is seeking to ring-fence his cash for future use via his pension) to be recovered for the benefit of creditors. Indeed, the legislative aim behind them was to offer a route of recovery for trustees in a situation where the bankrupt sought to abuse the protection otherwise offered under the WRPA. However, success under these sections is notoriously difficult and the requirement to demonstrate that the contributions have unfairly prejudiced creditors is onerous. Whilst some would argue that the onerous requirements are important to ensure that these provisions don’t become an alternative ’go to’ for frustrated trustees/creditors, the result leaves no easy recourse against the disingenuous bankrupt and may benefit from further testing/consideration.


Despite the impact of this well received appeal decision, and the clarity it brings, there is still an ongoing concern that a bankrupt is able to ring fence money for future use to the detriment of his creditors – with the associated cry that bankruptcy law has become too soft.

It must however be remembered that whatever the thoughts of those implementing or affected by the decision, it is for Parliament to decide where the line must fall between the interests of creditors on one hand and the protection of private pensions on the other, to avoid burden on the state. The role of the judiciary is to uphold the wishes of the legislature – and it is therefore for the pensions and insolvency regimes to look to Parliament now with a view to working through their continuingly rocky marriage.

This article was published in Commercial Litigation Journal in November 2016.

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