Accessible pension funds with sufficient value must be taken into account when considering whether a debtor meets the insolvency test.
Summary
The High Court held that a debtor aged 55 or over might not meet the insolvency test, depending on how long it would take them to access their pension.
The 'cash flow' test should be used when considering insolvency, but the debtor would need to prove that they could not access their assets within a reasonable timeframe.
Background
Shaw was 64 years old and had access to a pension pot valued over £400,000 which would settle their £170,000 debt.
Bankruptcy adjudicator
The adjudicator refused Shaw's bankruptcy application because Shaw did not pass the insolvency test under s.263K(1)(b) of the Insolvency Act 1986 (IA 1986). This tests whether the debtor is "unable to pay his or her debts."
Though the decision in Horton v Henry [2016] EWCA Civ 989 established that a trustee is unable to demand a bankrupt draw down their pension, the adjudicator argued that Shaw had access to the pension pot and could be deemed able to pay the debts.
County Court appeal
Shaw made an application to the County Court to appeal the adjudicator's refusal, under s.263N(5) of the IA 1986 and Rule 10.44 of the Insolvency (England and Wales) Rules 2016.
The district judge reversed the adjudicator's decision and declared Shaw bankrupt.
The judge referred to the case of Re Coney (A Bankrupt) [1998] BPIR 333 which established that the correct test to apply when considering a debtor's ability to pay their debts was the 'cash flow' test. This tests whether the debtor can pay their debts as they fell due, rather than a 'balance sheet' test.
High Court application
The Office of the Bankruptcy Adjudicator made an application to the High Court to appeal the County Court's finding.
On behalf of the Office of the Bankruptcy Adjudicator, Mr Waiting argued (para 17) that the district judge did not establish the time period for the pension pot's conversion to cash and therefore could not compare this to the appropriate time within which the debts might be capable of being paid.
Waiting also submitted (para 20) that the burden was on Shaw to show that the pension pot would not be available within sufficient time to enable him to pay his debts within a reasonable timescale.
The court’s decision
The High Court reversed the County Court's finding and found that the adjudicator correctly applied the insolvency test. The County Court was incorrect to decide that the pension pot should be disregarded when applying the cash flow test.
The High Court considered Shaw's witness statements and concluded there was no evidence that Shaw had made any enquiries into how long it would take to realise the pension pot.
The burden lay with Shaw to demonstrate that he was unable to pay the debts. In absence of persuasive evidence from Shaw about the time by which pensions could be converted into cash, the pension sums should be taken into account.
Comments
This case is important for debtors considering bankruptcy or DRO as a debt remedy.
A debtor might not pass the 'insolvency test' if they are of sufficient age to draw down on their pension and their debts are less than the realisable value of the pension (after any costs and taxes have been deducted). The adjudicator should also consider how quickly the pension can be realised.
Ultimately, whether a debtor is 'unable to pay their debts' will be decided on a case-by-case basis taking into account their particular set of circumstances.
Debtor's evidence
Debtors must evidence their inability to access their pension pots "within a timescale which is objectively acceptable to reasonable creditors." (para 33)
It is advisable for a debtor to enquire about the process and timescales for accessing their pension before submitting a bankruptcy application. If they decide to proceed with the application for bankruptcy they have evidence readily available for the adjudicator to consider.
Reasonable timeframe
A key question is what is a reasonable timeframe to access a pension pot.
In para 29 of the High Court judgment, His Honour Judge Hodge QC gave an example. A property worth more than the total debts but which takes two to three months to sell could be viewed as a 'sufficiently readily available asset.' A debtor might not meet the insolvency test if their pension pot is accessible within this sort of timeframe.
The Judge's comments could be 'obiter' (made in passing and not binding) but might be persuasive in other court cases.