banktuptcy and pensions (42)
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts) on 1 January 2013
Superseded by changes in the law: see article 41.
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
When an individual is declared bankrupt the general rule is that his estate vests automatically in his TIB under s306 of the Insolvency Act 1986 (IA 1986).† ďEstateĒ is defined for these purposes as all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, except for items for the bankruptís personal use in his employment and items for the basic domestic needs of the bankrupt and his family (IA 1986, s283).
bankruptcy before 29 May 2000
In cases where the bankruptcy order was made before 29 May 2000, it was established by the decision in Re Landau  Ch 223 that the trustee in bankruptcy (TIB) was entitled to claim the bankruptís entire pension benefits and not just his pension in payment.† All the bankruptís rights under the scheme (excluding protected rights) vested in the TIB and continued to be vested in him even after the bankrupt was discharged, enabling the TIB to claim entitlement to them until all debts were discharged or the fund exhausted.
In order to provide some protection for members, many pension schemes introduced clauses, which operated to forfeit a memberís entitlement to benefits automatically upon his bankruptcy and to bring into operation protective trusts, under which the pension schemeís trustees had a discretion to make payments up to the value of those benefits to a particular class of beneficiaries, usually comprising the bankrupt and his family.
bankruptcy after 28 May 2000
In cases where the bankruptcy order was made on or after 29 May 2000, s11 Welfare Reform and Pensions Act 1999 (WRPA 1999) applies to prevent rights under a registered (then approved) pension scheme from vesting in the TIB on his appointment.† This does not mean that the bankrupt memberís benefits under the scheme are entirely free from the claims of the TIB.† The TIB has no claim to the underlying pension scheme assets but is able to claim money paid to the bankrupt under an income payments order (IPO).
Where the bankruptcy order is made on or after 6 April 2002 all forfeiture clauses are void: in the case of occupational pension schemes, by the repeal of s92(2)(b) of the Pensions Act 1995 by WRPA 1999, s 14(3), and, in the case of personal pension schemes, by s159A of the Pension Schemes Act 1993, inserted by WRPA 1999, s14(1).
When a pension becomes payable the TIB may, between the date of bankruptcy and the date of discharge, apply for an IPO under IA 1986, s310, of which ss(7) states that such an order may be made in respect of every payment in the nature of income including any payment under a pension scheme apart from guaranteed minimum pensions and protected rights.† ďAny paymentĒ includes lump sums arising on a memberís death in service and from the commutation of pension as well as the pension itself.
As an alternative to an income payment order, from 1 April 2002 the IA 1986, s310A (inserted by the Enterprise Act 2001, s260) provides for an ďincome payment agreementĒ to be made between the bankrupt and the TIB, but it cannot be imposed if the bankrupt is unwilling.
IA 1986, sections 342A to 342C, inserted by inserted by WRPA 1999, s15.
On the TIBís request for an excessive pension contributions order, the court must consider, whether any pension contributions by or for the bankrupt were made for the purpose of putting assets beyond the reach of his† creditors and whether the total amount of any contributions is excessive in view of his circumstances when paid.†† The court may make an order to restore the position to what it would have been had the excessive contributions not been made.† The pension provider must, on written request from the TIB, provide such information as the TIB reasonably requires and may be required to pay an amount in respect of the excessive contributions to the TIB.
the Raithatha decision
The main finding of the High Court in Raithatha v Williamson  EWHC 909 (Ch) is that an IPO may be made against benefits, which the bankrupt is entitled but has not exercised his right to draw from the scheme, including both pension payments for the duration of the IPO (up to three years) and the tax free lump sum of up to 25% of the value of the bankruptís pension fund.† This outcome applies to both occupational and personal pension scheme.
Trustees in bankruptcy might consider, as well as seeking IPOs even, as in this case, if the bankruptís discharge date is imminent, obtaining an injunction to prevent the bankrupt from taking any steps to draw his pension, because the maximum recovery for the creditors (tax free lump sum and pension) could be frustrated, if the bankrupt were to crystalize his entitlement by starting his pension with no tax free lump sum.
As pension schemes are prohibited from exercising forfeiture powers on bankruptcy, there is little that they can do to protect members, but one possibility could be to provide that bankruptcy automatically triggers a benefit commencement event, under which a memberís pension would start and no lump sum would be paid. The pension can be subject to an IPO, but the cost to the bankrupt of the IPO will be less than suffering the loss of 25% of the fund and pension under an IPO.
copyright Roderick Ramage
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