Horton v Henry- the Court of Appeal rule on income payment orders whether a Trustee can make an application for a debtor's pension to be included in any bankruptcy

Posted by James Bowen on
In the matter of Robert William Leslie Horton  (As Trustee in Bankruptcy of Michael Gerard Henry) v Michael Gerad Henry [2016] EWCA Civ 989

In Summary

This case was an appeal by a Trustee in Bankruptcy ("the Trustee") against a court order that the Trustee could not compel a bankrupt to elect to draw down payments from his personal pensions where he was eligible to make such an election but had chosen not to do so. A bankrupt would not be compelled to obtain property that was excluded from the bankrupt estate and convert it into income receivable by his Trustee in Bankruptcy., His contractual right to crystallise his pension for the benefit of his creditors was not something that could be obliged in this way and was not defined as a payment in the nature of income within the meaning of section 310(7) of the Insolvency Act 1986

The Law

On the appointment of the Trustee, the bankrupt's assets vests in the trustee pursuant to section 306 of the Insolvency Act 1986 ("the Act"), this includes any money that is in Mr Henry's bank account at the date of the bankruptcy order.

Further to the assets the court can also subject for section 310 of the Act apply to Court to an "Income Payment Order" this is where a bankrupt is ordered to pay a portion of their income to the trustee whilst the order is in force. This money is then given to the bankruptcy estate in order to increase realisations to the creditors of the bankrupt.

The scope of section 310 of the Act is defined in subsections 7 and 8 as:

"(7)       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 any payment under a pension scheme but excluding any payment to which subsection (8) applies.

(8)        This subsection applies to—

(a) payments by way of guaranteed minimum pension; and

(b) payments giving effect to the bankrupt’s protected rights as a member of a pension   scheme.

This order must be granted by the Court and can only be for a finite period stipulated within the order.

This was considered alongside the Trustee's duties as stipulated in section 333 of the Act subsections 1 and 2:

(1)        The bankrupt shall—

(a) give to the trustee such information as to his affairs,

(b) attend on the trustee at such times, and

(c) do all such other things,

As the trustee may for the purposes of carrying out his functions under any of this Group of Parts reasonably require.

(2)        Where at any time after the commencement of the bankruptcy any property is acquired by, or devolves upon, the bankrupt or there is an increase of the bankrupt’s income, the bankrupt shall, within the prescribed period, give the trustee notice of the property or, as the case may be, of the increase.

The Facts

Mr Horton ("the Bankrupt") had one self-invested and three personal pension policies. Although he was entitled to elect to draw down payments under the policies, he had not done so. The trustee sought an income payments order in respect of income to which the bankrupt would become entitled if he elected to draw down payments.

The dispute was whether in accordance with section 310(7) of the Act whether the Trustee could compel Mr Horton under section 333(1) to draw down payments under the policies and crystallise his pension for the benefit for the creditors.

There were two arguments open to the Trustee:

  1. The first was that even if the Bankrupt's present entitlement to draw down payments was not income within the meaning of section 310(7) of the Act, a Trustee could use section 333(1) of the Act to require the bankrupt to make the election to enable him to carry out his section 310(7) of the Act functions.
  2. The second was that the words "payment in the nature of income ... to which he from time to time becomes entitled" in section 310(7) of the Act meant that once a bankrupt became entitled to crystallise his pension, both his vested right and the subsequent payments fell within section 310(7) so that he could be compelled under section 333 of the Act to make the election.

The Decision

Both arguments failed and the appeal was dismissed.

The first argument failed because it was deemed that the Trustee had functions in relation to property that was excluded from the estate pursuant to section 310(8) of the Act could not be overcome by a section 333 request and was not a reason to grant the order. There was a fear from the Court that granting this order could lead to a failure in legislation that was there to protect a bankrupt's pension. Lady Justice Gloster Judge stated "It would drive a coach and horses through the protection afforded to a bankrupt's pension rights by the Insolvency Act and pension legislation if a trustee were able, in effect, to require a bankrupt to make the entirety of his pension available for satisfaction of his creditors' claims, by the simple expedient of a request under section 333 or a court order under section 363(2) , thereby converting excluded property into "income"."

It was also argued that to make such an order it could open the floodgates on Trustees using pensions for the benefit of the Creditors.Blight v Brewster [2012] EWHC 165 (Ch), [2012] 1 W.L.R. 2841 was considered.

The second argument also failed. The wording of the Insolvency Act, when placed in comparison with and placed alongside the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999, did not support the notion of allowing the Trustee to crystallise his pension and this was not a payment in the nature of income to which he was entitled. In the context of section 310 of the Act, "payment" did not mean a chose in action or bundle of rights which, when exercised, gave rise to the making of a payment. The purpose of section 310 was to capture income and not to require a bankrupt to exercise a power to liquidate his property such as a pension even when this would have been to the benefit of the creditors. 

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James is a Trainee Solicitor in our Cardiff Office.

James Bowen
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