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Undrawn pensions remain protected in bankruptcy

The Court of Appeal has provided welcome clarification on whether a trustee in bankruptcy can compel a bankrupt individual to draw down any of his or her pension funds.

In a recent case (Henry v Horton) they decided that pensions that are not in payment at the time of the bankruptcy cannot be claimed for the benefit of the bankrupt’s creditors.

Before this case there was conflicting case law on the issue of recoverability of pensions within bankruptcy through what’s called an Income Payment Order (“IPO”) application.

Background

In an earlier case (Raithatha v Williamson) the High Court determined that the bankrupt was unsuccessful in his arguments that:

  • The bankrupt’s undrawn pension was not income and so could not be the subject of an IPO
  • The bankrupt was not “entitled” to “any payment in the nature of income” from his pension until he elected to withdraw it; before electing to draw his pension all he had was a right to make that election
  • That right was excluded from his pension estate and the court had no power to compel him to draw his pension, under section 310 of the Insolvency Act 1986 (“the IA”)
  • A lump sum could never costitute a payment in the nature of income for the purposes of section 310 (7) of the IA.

The most recent case – how has it changed?

When considering the Henry v Horton case, the High Court decided that the earlier Raithatha case had been wrongly decided.

In Henry v Horton the bankrupt brought the same arguments as the bankrupt in Raithatha, with the exception of the argument that a lump sum could never constitute a payment in the nature of income.

The High Court held that the bankrupt’s undrawn pensions could not be subjected to an IPO, and pensions not already in payment could not be payments to which the bankrupt was entitled. The trustee had no right,  on behalf of the bankrupt, to make decisions and elections relating to pensions, as the pensions were not part of the bankruptcy estate.

The Court of Appeal has agreed with the High Court’s decision and dismissed the trustee’s appeal.

It still remains the case that pension income that a bankrupt individual is receiving at the time of his or her bankruptcy may be subject to an IPO for a maximum period of three years.

For more information or advice on this, please contact Annabel Whittaker on 0115 9 100 256 or send her an email.

 

This is not legal advice. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website.

Posted on October 17, 2016

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