Pensions And Bankruptcy: A Difference Of Opinion

A recent decision of the High Court, that an Income Payments Order could not be made against a bankrupt's unexercised rights to draw his pension, has contradicted an earlier decision that pension benefits can be the subject of such an order. Other than "perplexed" and "confused", where does this decision leave us?

In Horton v Henry1 the High Court has held that a bankrupt's unexercised rights to draw his pension does not represent income to which the bankrupt is entitled within the meaning of s.310(7) of the Insolvency Act 1986, and so refused to make an Income Payment Order ("IPO") against those benefits. The decision has caused much head-scratching throughout the insolvency and pensions industries as it blatantly contradicts an earlier (controversial!) High Court decision in the case of Raithatha v Williamson2 – in this case, it was held that the pension benefits of a bankrupt can be the subject of an IPO. The court did consider Raithatha in the course of the Horton judgment but declined to follow it, feeling that it had been decided wrongly in the first place.

It is very unusual to have two different, conflicting decisions from courts at the same level. It is a well-established principle that a judge at first instance should, in general, follow another decision at first instance, unless convinced that the earlier decision was wrong.

Background

When an individual becomes bankrupt and a trustee in bankruptcy is appointed, all assets to which the individual is beneficially entitled vest in the trustee. The job of the trustee is to then realise the value of the bankrupt's estate and distribute the proceeds to outstanding creditors. If the bankrupt receives an income during his bankruptcy, the trustee may apply to court to have all or some of that income included in the bankrupt's estate – an IPO.

Pensions and bankruptcy generally

The Welfare Reform and Pensions Act 1999 is responsible for establishing the well known position that a bankrupt's rights under a registered pension scheme (or an approved pension scheme as it was in those days) do not vest in his trustee in bankruptcy. However, the same legislation made it clear that where a bankrupt was in receipt of income from his pension, the trustee in bankruptcy might seek an IPO over that income.

Unfortunately, as with all things pension-related, the legislative draftsmen failed in their task to cover every possible eventuality as far as pensions and bankruptcy is concerned (no surprise...