The High Court has ruled that the pension benefits of a bankrupt, who is entitled under the rules of the scheme to draw his pension, but who has not yet done so, can be the subject of an Income Payments Order (IPO) under the Insolvency Act 1986 (the Act).
Mr Williamson was one of two directors and shareholders of Phoenix Contracts (Leicester) Limited (Phoenix), a quasi-partnership company. In late 2007, the relationship between the two broke down and, in January 2009, the other director/shareholder, Mr Shepherd, issued a petition claiming that Mr Williamson should be ordered to purchase his shares in Phoenix. A court order to this effect was made in September 2010 and for the costs of the action. Shepherd presented a bankruptcy order for those costs in November 2010. Of Williamson’s debts of £1,249,653, £1,215,043 was owed to Shepherd.
When a bankruptcy order is issued against an individual under the Insolvency Act, a trustee in bankruptcy (the trustee) is appointed. The trustee will then arrange for the sale of the bankrupt’s assets. If debts remain following the sale, an Income Payments Order (IPO) may be issued by the court, requiring the bankrupt to make monthly payments from their income (for example, their salary), for a period of three years.
While state pension benefits will not be claimed from a bankrupt’s estate, other pension benefits may be claimed in certain circumstances. Since 29 May 2000, a bankrupt’s rights under a registered pension scheme have not been considered as an asset for bankruptcy purposes as they are excluded under section 11 of the Welfare Reform and Pensions Act 1999. However, the trustee in bankruptcy can claim any benefits that the bankrupt is receiving, including a cash lump sum, before they are discharged from bankruptcy.
In this case, as the sums collected by the trustee were insufficient to discharge Williamson’s debts, the trustee applied for an IPO.
The main application in this case related to Williamson’s pension benefits, the majority of which were aggregated in a personal pension arrangement. The rules of this arrangement provided that the minimum age for drawing down a pension is 55 years. At the time of the hearing, Williamson was 59. Williamson had not elected to take his benefits as he was in work and had no intention of taking his pension in the foreseeable future.
As Williamson had not made an election to draw his pension, the court had to consider whether it could compel him to do so, or authorise the trustee to exercise that power for him. In particular, the court looked at whether the pension entitlements which a bankrupt is entitled to receive, but has not yet elected to receive, constitute 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”4, and therefore constituted income by reference to which it was entitled to make an IPO.
The court held that “a bankrupt does have an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment.”
In reaching this conclusion, the judge considered that the question as to whether Williamson could be compelled to take his benefits depended on “the proper interpretation of the words in the context of the statute”. He noted that the power of the court to make an IPO under the Act is expressly to be made “despite anything in s.11 or 12 of the Welfare Reform and Pensions Act 1999”.5 The judge was of the view that it was not possible to interpret these words as though they read “despite anything except the right of the bankrupt to make an election….”.
Although the judge initially found the argument put forward for Williamson, that there was no entitlement to a payment because there was no express election, “to be an attractive argument”, he concluded that it was not the intention of the bankruptcy legislation to create a distinction between a person whose election to take their pension had preceded his bankruptcy and a person who had not yet elected to take their pension. This, he found, would “provide an anomaly which is difficult to justify”.
The judge also found that there was no breach of Williamson’s right to property under the European Convention of Human Rights, nor any discrimination on grounds of age.
This decision is surprising, given the general understanding that a pension which has not been put into payment cannot be accessed by a trustee in bankruptcy. It should be noted, however, that the decision relates to personal pension arrangements, under which the consent of a third party (such as the employer or trustees in an occupational pension scheme) is not required for the individual to draw their pension.
We understand that the case settled before going to appeal, leaving the law unclear on this point.