Raithatha v Williamson 
In what would appear to be a ground breaking decision, Deputy Judge Livesey QC, sitting in the High Court, handed down a judgment the effect of which is to give Trustee’s in Bankruptcy the power under section 310 of the Insolvency Act 1986 to claim, in certain circumstances, a bankrupt’s lump sum payment and annuity from a pension scheme which the bankrupt has not elected to take either before or during his bankruptcy. Such pension scheme rights were otherwise excluded (insofar as it was an approved pension scheme) by the Welfare and Pensions Act 1999.
Many practitioners will be aware that the case of Re Landau , followed by Jones v Patel , previously decided that any pension scheme rights that a bankrupt owned in an occupational or personal pension scheme automatically vested in the Trustee in Bankruptcy under section 306 of the Insolvency Act 1986. Parliament intervened, and the Welfare and Pensions Act 1999 came into force on 29 May 2000 which operated so as to exclude ‘approved pension schemes’ from being a bankruptcy asset. This most recent decision appears to side step the changes brought in by the Welfare Reform and Pensions Act 1999, at least in so far as it relates to a bankrupt who is of pensionable age.
The Background Facts
The bankrupt had previously disclosed to his Trustee in Bankruptcy that he had various pension policies and other pension entitlements amounting to a fund estimated at just under £1 million. The rules of the pension scheme provided that the minimum age at which the pension could be drawn was 55 years of age and the bankrupt was 59 years old with his 60th birthday imminent.
Whilst the accuracy of the figures were challenged, the bankrupt’s pension fund would have entitled him to a tax free lump sum of just short of £250,000 with a residual fund being available to purchase an annuity ranging between £23,000 - £43,000 per annum.
The important point was that the bankrupt had not exercised his right to elect to take his pension: he claimed that he was still in work and had no intention of receiving his pension for the foreseeable future. The bankrupt was of the view that there was no obligation for him to take his pension now and the Trustee could not compel him to do so.
The Trustee therefore issued an application under section 310 of the Insolvency Act 1986 for an income payments order (“IPO”). The Trustee relied upon the wording of section 310(7) which states:-
"For the purposes of this section the income of the bankrupt comprises every 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, including any payment in respect of the carrying on of any business or in respect of any office or employment and (despite anything in Section 11 or 12 of the Welfare Reform and Pensions Act 1999) any payment under a pension scheme but excluding any payment to which sub-section 8 applies”.
The issues that therefore came before the Court was whether or not the Court could compel the bankrupt, or otherwise authorise the Trustee to exercise the power, to elect to take the pension.
It was argued on behalf of the bankrupt that amongst the “bundle of contractual rights” vested in the bankrupt was the right to decide when and how to exercise his various options under his pension scheme which included the timing of the drawing down of the pension and the proportion of it as between a lump sum and annuity. It was contended that the Trustee had no right to interfere with those rights at all. It was further argued that the bankrupt did not have any entitlement to receive any payment until such time as he made his election.
The Trustee in Bankruptcy argued, in short, that the bankrupt was to be regarded as having an ‘entitlement to payment’ under the pension scheme when he qualifies to draw payment and is entitled to receive it on demand, that is to say by simply asking for it to be made to him.
The Deputy Judge rejected the arguments put forward by the bankrupt. The Deputy Judge was of the view that whilst the bundle of contractual rights, including the right to make an election, remains vested in the bankrupt by virtue of section 11 of the Welfare Reform and Pensions Act 1999, section 310 (7) of the Insolvency Act 1986 was clear when it said that the Court had the power to make an IPO payment in respect of a pension entitlement “despite anything in Section 11 or 12 of the Welfare Reform and Pensions Act 1999”. The Deputy Judge posed the question as to whether or not the legislation had been enacted to preserve a technical difference so that the person whose election had proceeded his bankruptcy would be caught by the section 310 regime, whereas the person who has not yet elected to take the pension would not. The Deputy Judge took the view that such a distinction provided an anomaly which is difficult to justify. His conclusion was that the proper interpretation is that the bankrupt does have an entitlement to a paid pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the pension scheme, he would be entitled to payment merely by asking for payment.
It should be noted that an additional issue in this matter was the fact that the Trustee had obtained an injunction preventing the bankrupt from taking any steps to draw down the pension and dissipate his assets as a result of conduct of the bankrupt in previous proceedings prior to bankruptcy. The Deputy Judge upheld the granting of that ex parte injunction.
Many practitioners will therefore have been advising bankrupts that if they had the opportunity of electing to take their pension then they should not do so until after discharge and that in the meantime, it could not be claimed by the Trustee as after acquired property or income. This current decision would suggest that such advice is no longer correct.
The implication for Trustees in Bankruptcy are that they should review their various bankruptcy estates and ascertain whether or not any of their bankrupts are of pensionable age, and if they have not elected to draw their pension to do so. In such circumstances, the Trustee may wish to consider an application for an IPO. The court, when considering the matter, we need to assess what proportion of the lump sum should be drawn down as this has an impact on the annuity which must still meet the bankrupt's reasonable needs.
For advisors providing debtors with bankruptcy advice, such debtors ought to be warned of the potential implications, which may of course have an impact on whether or not bankruptcy is a viable option.
Whilst leave to appeal was granted to Mr Williamson, and such appeal was fast tracked, it settled (on confidential terms) in November 2012, just a couple of weeks before the hearing date. It therefore remains good law for now, and it will be necessary to wait for another challenge to the decision to come forward. The decision should, nevertheless, be treated with caution pending any higher court decision. If it is upheld, then it may lead to legislative change, but unlike case law, such changes are not retrospective.
Anyone requiring advice should contact firstname.lastname@example.org or another member of our team.