Court of Appeal resolves confusion over trustee's ability to claim pension income - Horton v Henry revisited

Court of Appeal resolves confusion over trustee's ability to claim pension income - Horton v Henry revisited

The long-awaited Court of Appeal judgment in Horton v Henry [2016] EWCA Civ 989 has recently been handed down and, from the bankrupt’s perspective anyway, it has been the worth the wait. This judgment has resolved the conflicting rulings of two earlier High Court decisions: Horton v Henry itself and the earlier case of Raithatha v Williamson [2012] EWHC 909 (Ch).

So what did these High Court decisions decide?
It is probably worth going back a little further in time before looking at these decisions and the reforms introduced by section 11 of Welfare Reform and Pensions Act 1999 (the “Welfare Act”). Section 11 provided that ordinarily pension funds do not form part of the bankruptcy estate and therefore do not automatically vest in the trustee in bankruptcy. However, where a bankrupt earns an income during his bankruptcy, under section 310 of the Insolvency Act 1986 (the “1986 Act”), his trustee is entitled to apply for an order compelling the bankrupt to pay a portion of that income into the bankruptcy estate.  This section expressly defines “income” as including any payments made under a pension scheme (it extends to cover all payments in the nature of the income made to the bankrupt or payments to which he becomes entitled).

The High Court in Raithatha v Williamson ruled that a trustee can compel a bankrupt effectively to draw down any pension income to which he/she is entitled post-bankruptcy to fulfil an income payments order.  Following this decision, the trustee in Horton v Henry sought an income payments order to include payments from Mr Henry’s four undrawn pension funds, from which he was entitled to draw throughout his bankruptcy but had chosen not to do so. However, the High Court in Horton v Henry (refusing to follow the earlier High Court decision in Raithatha v Williamson) concluded  that only pensions which were already ‘in payment’  could be subject to an income payments order, not undrawn pension funds. Its rationale was that until the bankrupt has elected to draw down his pension, he  was not ‘entitled’ to his pension and an income payments order could not be made against it.

Court of Appeal decides…
The trustee appealed the decision in Horton v Henry to the Court of Appeal. In rejecting the trustee’s appeal, the Court of Appeal agreed with the High Court that the trustee was unable to compel the bankrupt to draw down his pension and hence the pension was not income capable of falling within the bankruptcy estate. The contractual right to draw down a pension fund could not be construed as ‘income’ within the meaning of section 310(7) of the 1986 Act: that would be contrary to the very purpose of the Welfare Act, which was to protect the individual’s rights to retain any undrawn pension fund and effectively to ring-fence it from his/her creditors (assuming the pension fund had not been amassed via excessive contributions, as exempted by the Welfare Act). 

So, it is now clear that only pension policies which are ‘in payment’ may be subject to an income payments order application by a trustee in bankruptcy.

Contact our experts for further advice

Search our site