(The ‘H’ on my keyboard is in for a tough afternoon!)
Good news for bankrupts. Bad news for creditors. Important news for trustees in bankruptcy and pension scheme trustees alike. The High Court, in the case of Hinton v Wotherspoon, has delivered a judgement that provides real clarity on how the pension income of a bankrupt can be subjected to an Income Payments Order (“IPO”).
Now, it has to be said at the outset, that a case on the same issue (Horton v Henry) – that Hinton proclaimed as “plainly correct” – was heard by the Court of Appeal in April. That decision will be crucial, as it will represent a binding decision from a higher court, unlike Hinton and Horton that are both first instance decisions in the High Court.
First let’s have a little pensions and bankruptcy 101, to explain why these cases are important and why you need to keep reading!
Under legislation, a bankrupt’s rights in an approved pension arrangement do not vest in the Trustee in Bankruptcy (TiB). Nice and clear… but there was a small problem. The legislation was supposed to make it clear that where a bankrupt was in receipt of income from their pension, the TIB could seek an IPO over that income. (Here comes the BUT…) But, the legislation was silent about whether a TiB might seek an IPO where the member had reached the age at which they could require immediate payment (or otherwise elected to take their benefits) but had chosen not to do so (an undrawn pension). That silence from the legislation led to an inevitable question: Could a TiB make an election for the bankrupt in order to make the pension income available for the creditors? Where there is uncertainty there is case law.
Prior to Hinton, the case of Raithatha v Williamson in 2012 (more ‘H’s!) made it clear that an undrawn pension could be subject to an IPO. So, the bankrupt may not have received a penny of their pension in their pocket, but a court could tie the pension to an IPO, or even force the bankrupt to make an election to draw-down. With the subsequent Pension Freedoms removing any restriction on the amount that can be drawn-down, Raithatha became more powerful, as it placed the bankrupt’s entire pension fund value at the mercy of a judge with an IPO.
However, Hinton disagreed. In obiter (which is a fancy legal term for something the judge says in passing that doesn’t necessarily affect the final judgement, but can influence others) , the judge dealt with the specific interpretation of whether a bankrupt was “entitled” to the undrawn pension, under section 310(7) of the Insolvency Act 1986. In short, if entitlement exists, an IPO can be attached to the pension – the TIB and the creditors are happy.
The High Court in Raithatha felt a bankrupt was entitled to the pension once they hit 55. Not so, accordingly to Hinton –a ‘sense of entitlement’ isn’t enough. Only once the bankrupt has elected to draw-down and elected how they are to receive the pension (i.e. lump sum, annuity, payments), can they be said to have an entitlement.
So, where does that leave bankrupts with pensions? Well, if they are like Mr Wotherspoon (the bankrupt in Hinton) and have already given instructions for draw-down, as well as how and how much they are to be paid, the trustee in bankruptcy can slap an IPO on it. However, if a bankrupt elects for draw-down but leaves the method and amount of payment undecided, the IPO cannot be attached.
Creditors will no doubt look at this decision and be frustrated. Hinton has offered bankrupts hope of keeping their pension safe, by moving funds to draw-down and then intentionally providing no further instructions on how they want to receive the funds. In filling a loophole in the legislation, has the Court just created another loophole? Lawyers certainly hope so, it’s good for business.
How does Hinton affect trustees? Well, for trustees of the ‘in bankruptcy’ variety, they can now be clear on what elements of a pension they can ask a Court to include in an IPO. As for trustees of the ‘pension scheme’ variety, Hinton provides much needed clarity on what they (and their administrators) need to do if they receive an IPO in respect of a scheme member.
Admittedly, for pension scheme trustees, the likelihood of an IPO coming across their desk is fairly unlikely. In 2014, out of over 20,000 individual bankruptcies, only 37 ended in the Court issuing an IPO (although close to 3,500 of those bankruptcies were settled out of court with an Income Payment Agreement (“IPA”), which may well include pension income).
The real impact of Hinton (assuming the Horton appeal follows suit) could come with the interpretation of “entitlement” in the context of the Pension Freedoms and the draw-down process. We are still in the early days of the Pension Freedoms, with many more legal arguments to be made, of which the question of when a member is or isn’t entitled to their pension income is bound to be one.
With that, I’m now off to watch Horton Hears a Who. It seems appropriate.