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A first instance decision handed down on 4 April 2012 allowed a Trustee in Bankruptcy the right to claim against an approved pension to repay creditors. The case of Raithatha (as Trustee in Bankruptcy of Michael Roy Williamson) –v- Michael Roy Williamson (a bankrupt) will change the way that Trustees in Bankruptcy will look at approved pensions and the income generated from it. In this case the Trustee in Bankruptcy won a claim against the bankrupt’s £1 million pension fund to repay creditors.

The principal issue in this case was whether:

1. An Income Payment Order (“IPO”) pursuant to section 310 of the Insolvency Act 1986, may be made where the bankrupt has an entitlement to elect to draw a pension but has not, at the time of the application, exercised the right; and

2. Whether it was appropriate for the Trustee in Bankruptcy to apply without notice for an injunction preventing the Bankrupt from dealing with the rights, interest and entitlements under a pension scheme of which he is a member.

The facts

Michael Roy Williamson (“the Respondent”) became bankrupt on 9 November 2010 following a shareholder’s dispute. The Trustee was unable to get sufficient funds to discharge the bankruptcy debt and the Respondent was discharged from bankruptcy on 8 November 2011.

Six weeks before the date of discharge, the Trustee in Bankruptcy (“the Trustee”) applied to the Court for an Income Payment Order (“IPO”) pursuant to section 310 of the Insolvency Act 1986 (“the Act”). The Trustee also sought an injunction to restrain the Respondent from exercising his rights in relation to the pension scheme.

This application arose out of the disclosure by the Respondent in his bankruptcy questionnaire about his various pension policies which provided an estimated amount of between £900,000 and £990,000. Most of the policies were aggregated in a scheme run by a private pension plan which provided that the minimum age at which the pension could be taken was 55 years of age. The Respondent was 59 years old at the time of the hearing, but he had not exercised his right to elect to take a pension because he was presently in work and had no intention to take his pension in the foreseeable future. He also submitted that he had no obligation to take his pension now and was not compelled to do so.

The Welfare Reform and Pensions Act 1999 (“WRPA”) states that if a bankrupt has not drawn on the pension, it is excluded from the bankrupt’s estate. On that basis, insolvency practitioners have taken the view that pensions and pension rights would be protected from the reach of a Trustee.

In this matter the Trustee in Bankruptcy was advised, prior to the Respondent being discharged from bankruptcy, to consider issuing an application against him under the IPO rules as the Respondent was entitled to begin drawing on his pension.

The question before the Court was whether there was power within section 310(7) of the Act to seek to recoup a proportion of the bankrupt’s pension fund when an election had not been made to draw on that fund by the bankrupt.

The Trustee submitted that pension entitlements, whether to draw a lump sum or an annuity which a bankrupt was entitled to receive, but not yet elected to receive, constituted a payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled within the meaning of section 310(7) of the Act and therefore constituted an income by reference to which a Court was entitled to make an IPO.

Counsel for the Respondent argued that amongst the bundle of contractual rights vested in the Respondent, one was for the right to decide when and how to exercise the various options under the pension arrangement concerning drawing down the pension and that these rights remained in his property and the Trustee had no right to interfere with those rights. It was also argued that in order to constitute “income” within the meaning of section 310 of the Act that payments must have either been received by the bankrupt or he must have at least been entitled to receive them during the course of his bankruptcy. It was also asserted that there was no basis for the Trustee to assert its claim where the Respondent’s entitlement to actual payment had not crystallised prior to the discharge.

Judgment

The Judge rejected the Respondent’s submission that the payment of a lump sum did not constitute a payment in the nature of income. The suggestion that it could not be income begs the question what it might be called if it was not income. In relation to the bundle of contractual rights, including the right of the Respondent to make an election, the Judge confirmed that this right remained vested in the Respondent by virtue of section 11 of the WRPA 1999, however the exercise by the Court of the power to make an IPO in respect of the pension entitlement is expressly to be made despite anything in section 11 or 12 of the WRPA 1999. He also concluded that the bankrupt’s rights were not being interfered with, nor was he being discriminated against by reason of his age. Finally, the Judge came to the view that there appear to be no logical reason for Parliament to have intended for an IPO to be made against the bankrupt who had elected to draw his pension and not against one who was entitled to but had refused.

Conclusion

Please note that this decision is only a first instance one (leave to appeal has been granted). Whilst this case will be of interest to a Trustee or creditor, any rights by a Trustee to bring such an application will be lost unless it is made before the discharge of the bankrupt. It should also be noted that a bankrupt may upon service of the section 310(7) application or indeed any time prior to making of the Bankruptcy Order immediately activate his pension on making the Bankruptcy Order and draw an annuity on the full sum. Whilst this could still be caught under section 310(1) of the Act it would represent a much less recovery for the Trustee in Bankruptcy than a lump sum under an annuity.