re Henry (A Bankrupt)

The Court of Appeal considered whether uncrystallised private pension rights, in respect of which a bankrupt has a present contractual right to elect to draw benefits but has not done so, fall within the definition of "income" for the purposes of an income payments order (IPO) under section 310 of the Insolvency Act 1986. The court held that section 310(7) is directed to payments in the nature of income and pensions in payment and does not extend to the bundle of contractual rights to crystallise or elect benefits under a pension scheme.

The court concluded that trustees and the court do not have power under section 333(1), section 363(2) or by means of an IPO to compel a bankrupt to convert excluded pension rights into income by requiring crystallisation. That construction preserves the protection afforded to approved personal pension rights by section 11 of the Welfare Reform and Pensions Act 1999 and the other pensions legislation, while recognising that Parliament has provided alternative remedies (for example sections 342A–342C) to address abusive pension contributions.

Background and parties:

• The appellant was the trustee in bankruptcy of the respondent. The trustee applied for an income payments order under section 310 of the Insolvency Act 1986 in respect of income which might become payable to the respondent if he exercised contractual rights under his personal pension policies to draw down lump sums or other payments.
• The respondent was bankrupt, owned a number of private pension policies (a SIPP and three Phoenix Life policies) and had reached ages at which he had the contractual right to crystallise benefits. He wished to preserve the pensions for his family and did not intend to make elections to draw benefits.

Nature of the application: The trustee sought an IPO requiring the respondent either to pay an amount equal to the tax-free lump sum available on crystallisation and/or such further periodic income as might be derived from the pensions, for up to the three-year duration permitted by section 310(6)(b).

Issues framed:

1. Whether rights to elect to draw pension benefits that are uncrystallised fall within the statutory definition of "income" in section 310(7) — i.e. payments in the nature of income "to which he from time to time becomes entitled".
2. Whether the trustee, by virtue of section 333(1) (duties of the bankrupt) or the court’s general powers (including section 363(2)), can require a bankrupt to exercise such rights so that the trustee can pursue an IPO in respect of monies drawn down.
3. If such power exists, what criteria would govern how the bankrupt is directed to exercise the options?

Reasoning and decision:

• The court held that the statutory language of section 310(7) is directed at payments in the nature of income and pensions in payment. The bundle of contractual rights to elect or crystallise a pension is materially different in character from an actual payment or a right to an actual payment once the election has been made.
• The court also observed practical and conceptual difficulties: there are no statutory criteria in section 310 or the WRPA specifying how the court should direct the manner of crystallisation (lump sum versus annuity, tax considerations, realisation of SIPP assets), nor how to balance short-term IPO limits with lifetime pension needs.
• Parliament has provided alternative remedies for abusive pension contributions (sections 342A–342C), and it is for Parliament, not the court, to change the line drawn between pension protection and creditor recovery.

Outcome: The appeal was dismissed; the trustee cannot require a bankrupt to crystallise excluded private pension rights to generate income for an IPO.

Appeal dismissed. The Court of Appeal held that section 310(7) of the Insolvency Act 1986 applies to payments and pensions in payment and does not include uncrystallised pension rights; a trustee cannot, by relying on section 333(1), section 363(2) or an IPO, compel a bankrupt to crystallise excluded pension rights. The statutory protection for approved personal pensions under the Welfare Reform and Pensions Act 1999 must be respected and Parliament’s remedial scheme (including sections 342A–342C) is the appropriate route to address abusive pension contributions.

Appeal from the High Court (Chancery Division) (Deputy High Court Judge Robert Englehart QC) judgment dated 17 December 2014: [2014] EWHC 4209 (Ch); [2015] 1 WLR 2488. Permission to appeal was granted by the judge below; the Court of Appeal dismissed the appeal on 7 October 2016.