Can a trustee in bankruptcy force a bankrupt to crystallise a pension policy?

How safe is the pension of a bankrupt from a trustee in bankruptcy (trustee)? Steve Dillon, a partner and head of insolvency at Gosschalks, says that, although a recent decision concerning an income payments order (IPO) suggests that there is no need to panic now, the prudent pension advisor will err on the side of caution until the Court of Appeal has an opportunity to settle the issue.

Original news

Horton v Henry [2014] EWHC 4209 (Ch), [2014] All ER (D) 193 (Dec)

Mr Henry was made bankrupt. His assets on the date of the bankruptcy included four pension policies. Mr Henry did not wish to crystallise the policies and, without crystallisation, the precise value of the policies could not be determined. The applicant trustee, Mr Horton, applied to the court for an IPO, effectively seeking that Mr Henry be ordered to crystallise his policies and to exercise his elections in a manner desired by Mr Horton. The Chancery Division held that there was no power to require Mr Henry to elect in any particular way. The application would be dismissed.

What particular issues were considered in this case?

The case concerned whether a trustee was entitled to an IPO under the Insolvency Act 1986 (IA 1986), s 310, in particular in connection with the pension of a bankrupt.

The key issue was whether sums which Mr Henry could elect (but had not elected) to receive under pension policies during the currency of or before his bankruptcy amounted to monies to which Mr Henry was entitled (within the meaning of IA 1986, s 310(7)) and therefore could be the subject matter of an IPO. Put another way—could the court, on the application of a trustee, force a bankrupt to make the election(s) required to crystallise a pension policy to enable the sums realised thereby to be appropriated for the bankruptcy estate?

In considering the issue, Mr Robert Englehart QC (sitting as a Deputy Judge of Chancery Division) was very mindful of the markedly similar set of circumstances and issues faced by Mr Bernard Livesey QC in Raithatha v Williamson [2012] EWHC 909 (Ch), [2012] 3 All ER 1028. In his decision in Raithatha (which has been criticised), Mr Livesey QC decided that the bankrupt was 'entitled' to payment under an uncrystallised pension policy because he could simply ask for it to be crystallised.

What conclusions did the court reach?

The court in Horton disagreed with that in Raithatha, deciding that sums that would be due in future under an uncrystallised pension policy were not sums to which Mr Henry was entitled (within the meaning of IA 1986, s 310(7)); that there was no power available to the court to force Mr Henry to make the various elections he would have to make to crystallise entitlement to sums under the pension policies; and that, therefore, Mr Horton was not entitled to those sums by way of an IPO.

What was the court's reasoning in reaching the conclusions it did—particularly in relation to its findings on entitlement to payment under the pension scheme?

The court in Horton was troubled by the concept that an election to crystallise a pension policy benefit equated to simple request for payment. It felt instead that crystallisation involved a number of different elections, including choosing from a range of potential benefits, and that this created a barrier to sums potentially payable under a policy being considered sums to which a bankrupt was entitled. The court also felt that, until crystallisation, the amounts involved were not capable of ascertainment, and that such amounts could not properly be considered sums to which Mr Henry was entitled.

If there was a power within IA 1986 for the court to compel Mr Henry to make these various elections, then the question of entitlement could have been resolved that way—but there was not. This was notwithstanding counsel for Mr Horton ('ingeniously') suggesting that a bankrupt's duty (under IA 1986, s 333(1)(c)) to do all things as a trustee reasonably requires for the purpose of carrying out his function would provide that power. The court rejected that argument as circular, essentially because the uncrystallised sums were beyond the reach of IA 1986 and steps taken to obtain them could not be steps reasonably required for the trustee exercising his function.

What effect will the court's findings have on the future approach of trustees where bankrupts hold personal pension policies and also for members of such schemes?

In the short term it will clearly reduce or negate applications for IPOs following the reasoning in Raithatha. In the medium to long term I would expect trustees to have half an eye on automatic crystallisation dates for pension policies when considering applications to suspend discharge from bankruptcy.

Are there any implications for trustees of occupational pension schemes and for members of these schemes as a result of this decision?

From April 2015, members of pension schemes that have reached the age of 55 can elect to withdraw the entirety of their pension. In the wake of the decision in Raithatha, no doubt many pensions advisors have been frantically warning clients of the risk that their entire pension could be taken by a trustee and considering what contingency planning is available.

The decision in Horton suggests that there is no need to panic now but, given that both Raithatha and Horton are decisions at first instance, the prudent pension advisor will err on the side of caution until the Court of Appeal has an opportunity to settle the issue.

What happens next?

Most commentators (including myself) would agree that the decision in Horton would seem to reflect more accurately than Raithatha the intention of Parliament in removing most pensions from the 'pot' available for trustee in bankruptcy realisations (ie via the Welfare Reform and Pensions Act 1999).

However, the position of pension policy holders, the trustees of their policies and their various advisors will remain in limbo until the Court of Appeal determines which reasoning is correct.

UPDATE: Horton v Henry was appealed, and the Court of Appeal handed down it's judgment on 7 October 2016. For further reading on the appeal judgment, see blogs posts: Court of Appeal dismisses appeal in IPO case and Court of Appeal provides clarity on pension rights of bankrupts.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Income payments orders: What is an IPO, who can apply when, what can be caught and how much can the trustee claim?

How a pension is dealt with in bankruptcy

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First published on LexisPSL Restructuring and Insolvency and LexisPSL Pensions