Creditors v. Private Pension Holders – Has UK Bankruptcy Law Gone Too Soft?
The recent UK Court of Appeal decision in Horton v. Henry has highlighted the protection afforded to a bankrupt holding a private pension to the detriment of his bankruptcy creditors.
The bankrupt, Mr Henry, was the holder of a number of pension policies all of which contained provisions entitling him to make elections which would trigger rights to receive payments (either as lump sums, annuities or regular instalment income). The Trustee, Mr Horton, applied under section 310 of the Insolvency Act 1986 (IA) for an Income Payments Order (IPO) requiring Mr Henry to pay (1) a sum equal to the percentage of the pensions presently available as a lump sum and (2) further periodic income for a period of 3 years.
Mr Henry objected on the basis that (a) the benefits which would be triggered under the policies if he were to make the necessary elections were not “income” to which he had become entitled to within the meaning of s310(7) IA (the provisions defining income for the purposes of obtaining an IPO) and (b) it was unreasonable to require him to draw down under the policies as he wished to preserve and maximise their value for transfer upon his death to his family.
In the High Court, the judge found against the Trustee on the basis that (i) Mr Henry’s uncrystallised pension rights did not constitute “income” as defined under the IA as the pensions were not in payment where definite amounts were contractually due and (ii) neither the Court nor the Trustee had power to decide how a bankrupt should exercise elections open to him under uncrystallised pension policies.
On appeal, the Court of Appeal also rejected the Trustee’s arguments (largely for the same reasons as the High Court) and dismissed the appeal, noting the distinction between pension rights (which are excluded from the bankruptcy estate) and actual payments receivable under a pension (which are capable of being the subject of an IPO).
The case highlights the difficulty in aligning the spirit of the insolvency legislation with the later reforms effected by pensions legislation.
In the former case, there is a drive to maximise returns to creditors and to discourage assets from being put out of the reach of creditors. In the latter case, there is a balance to be struck between bankruptcy creditors and the burden on the State if private pension holders are stripped of their pension investments in retirement.
As a bankruptcy creditor, the fact that a bankrupt is able to retain pension assets and gift them away to relatives whilst bankruptcy debts remain unpaid is a hard pill to swallow. This is even more so where the bankrupt has defrauded creditors in the run up to bankruptcy (although there is no suggestion of fraud in the current case). Is the law too weighted in favour of pension rights to the detriment of bankruptcy creditors? Should insolvency law go further and enable a Trustee to have more recourse to a bankrupt’s pension assets in certain circumstances? Whilst provisions already exist in the IA which enable Trustees to recover excessive contributions made into pension arrangements in limited circumstances (see s342c of the IA), should the IA go further and permit Trustees access to pension assets in prescribed circumstances (e.g. where the potential size of the pension pots are over a certain threshold)? There could be a cap on the amount a Trustee could claim from pension pots (to ensure the “burden on the State” argument is addressed) but at least such reforms may mean bankrupts with large pension pots would not retire on too much of a comfortable life at the expense of unpaid creditors.