A trustee in bankruptcy has no right to compel a bankrupt to draw funds from their pension to pay bankruptcy debts or fees.
Summary
This case considered whether an income payment order includes a bankrupt's right to draw down a pension lump sum and, if so, on what terms to make it.
The Court of Appeal confirmed that a trustee in bankruptcy does not have the right to compel a bankrupt to draw funds from an uncrystallised pension. The funds are exempt from income payment order assessments.
Background
Henry was made bankrupt on 18 December 2012. Aged 58, he had four pension policies with annuities available from his 70th birthday and a lump sum option exercisable on his 60th birthday.
The day before Henry's discharge from bankruptcy, the trustee in his bankruptcy, Horton, filed an application in court for an income payment order that would rely on funds from Henry's various pensions.
An income payment order is a court-ordered financial contribution to bankruptcy debts and costs. The terms of an order can include monthly payments or a lump sum where appropriate. It is made under section 310 Insolvency Act 1986.
The High Court had held that Henry could not be compelled to draw down his pension to meet the terms of the income payment order. The trustee appealed.
The court's decision
The Court of Appeal rejected the trustee's argument and upheld the High Court decision. It confirmed that a trustee in bankruptcy cannot require a bankrupt to draw down any lump sum from a pension that is expressly excluded from the bankrupt's estate.
Pension is an excluded asset
The court held that a bankrupt's contractual right to draw down their pension as a lump sum or regular payment did not fall within the meaning of 'income' under the Insolvency Act. The definition of income was intended to capture income the bankrupt expected to receive during the bankruptcy. It should not be possible to convert excluded property as a means of generating new income in bankruptcy.
Excessive pension contributions
It was Parlimant's legislative intention to enable a trustee to claw back excessive pension contributions that had unfairly prejudiced the bankrupt's creditors, rather than threatening a bankrupt's savings in an undrawn pension pot.
Comments
A trustee in bankruptcy cannot compel a bankrupt to draw down funds from a personal pension where they have not already chosen to do so. Only pension policies that are already in payment can be included in the income payment order assessment.
This case was welcomed by debt advisers as provided much-needed clarity following conflicting High Court decisions.
The judgment can be contrasted with the possible accessibility of a debtor's pension pot via the third-party debt order enforcement procedure, following Blight v Brewster in 2012. See Pensions and enforcement of judgment debts for more on this type of enforcement