Krasner v Dennison (Lawrence v Lesser)

Rights under a retirement annuity contract or personal pension arrangement which exist when bankruptcy commences are property forming part of the bankrupt’s estate. This includes rights to future or contingent payments. A contractual prohibition against assignment does not prevent vesting in the trustee by operation of law. An attempt to preserve such benefits from creditors by contract is contrary to the public policy of the bankruptcy legislation.

Section 310 of the Insolvency Act 1986 applies to income acquired during bankruptcy which would not otherwise vest in the trustee. It does not apply to payments derived from rights already vested in the trustee. Parliament may expressly exclude pension rights from a bankrupt’s estate, but the tax-approval requirements governing the policies in these appeals did not provide that protection.

These conjoined appeals concerned retirement annuities and personal pension benefits belonging to two discharged bankrupts. In Krasner v Dennison, Blackburne J followed In re Landau [1998] Ch 223 and declared that the policies vested in the trustee. In Lawrence v Lesser, a county court made a similar declaration and payment order; Jacob J dismissed the bankrupt’s first appeal.

The Court of Appeal considered whether statutory and contractual restrictions against assignment prevented the pension rights from entering the bankrupts’ estates under the Insolvency Act 1986. If the rights vested, the court also had to decide whether their proceeds remained subject to the income-payments regime in section 310. A further issue was whether that result was inconsistent with Article 1 of the First Protocol to the European Convention on Human Rights.

1. Both appeals dismissed unanimously. Chadwick LJ gave the judgment, with which May and Kennedy LJJ agreed. Rights existing under the annuity contracts and personal pension arrangements when each bankruptcy commenced formed part of the bankrupt’s estate. The statutory definition of property included things in action and present, future, vested and contingent interests. The rights therefore vested in the trustee under sections 283 and 306 of the Insolvency Act 1986.

2. The tax legislation did not itself restrict alienation. It prescribed conditions which a retirement annuity contract or personal pension scheme had to satisfy to obtain favourable tax treatment. Although those conditions informed construction of the policies, the legal effect of each restriction depended on the contract and the general law.

3. A contractual prohibition against assignment did not prevent transmission to a trustee in bankruptcy. It is contrary to public policy for a person to contract out of the bankruptcy code or preserve property for personal enjoyment after bankruptcy at the expense of creditors. Parliament could, and in other pension legislation did, exclude rights from a bankrupt’s estate by express language. Its failure to provide comparable protection for these arrangements before section 11 of the Welfare Reform and Pensions Act 1999 represented a deliberate legislative choice.

4. Section 310 of the Insolvency Act 1986 did not apply to payments derived from rights which vested in the trustee at the commencement of bankruptcy. The section supplies a separate regime for income acquired during bankruptcy which would not otherwise form part of the estate. It does not control or qualify the vesting provisions. The express reference to pension payments in section 310(7) concerned payments under pension rights which legislation had excluded from the estate.

5. The earlier bankruptcy authorities treating income provisions as controlling vested property arose under materially different legislation. Under the former statutes, after-acquired property vested automatically, making a qualifying income provision necessary. Under the 1986 Act, after-acquired income falls outside the estate unless claimed through an income payments order. The court therefore declined to extend Ex parte Huggins, In re Huggins (1882) 21 Ch D 85 to section 310.

6. The result did not contravene Article 1 of the First Protocol. Vesting occurred under clear legislation and pursued the public interest in making a bankrupt’s property available to creditors. The statutory words could not reasonably bear the alternative construction advanced by the bankrupts.

1. Court of Appeal: Both appeals were dismissed unanimously. The declarations and payment order below remained effective.

2. High Court, Lawrence v Lesser: Jacob J dismissed Mr Lesser’s appeal from the county court but granted permission for a further appeal.

3. Southend County Court, Lawrence v Lesser: Yelton HHJ declared that the pension rights vested in the trustee and ordered repayment of benefits received by Mr Lesser.

4. High Court, Krasner v Dennison: Blackburne J followed In re Landau [1998] Ch 223, declared that the policies vested in the trustee and granted permission to appeal.