Pensions in Bankruptcy

Summary

On 4 April 2012, the High Court ruled, in the case of Raithatha v Williamson that the pension of Mr Williamson, who was bankrupt, could be used to repay his creditors. Until now, it has been accepted that pension benefits are protected from creditors. However, as Mr Williamson had reached pensionable age under the scheme in question, the Court ruled that the pension should be considered as income to Mr Williamson and so available to repay creditors.

Detail

Mr Williamson had been declared bankrupt and the Trustee in bankruptcy (Mr Raithatha) had not been able to recover sufficient funds to satisfy all the debts. The Trustee applied for:

• an Income Payments Order under the Insolvency Act 1986 and
• an injunction to prevent Mr Williamson from taking any measures which might put any of his pension benefits beyond the reach of his creditors.

The Court was asked to whether an individual could be compelled to elect to receive his pension (where he had not previously chosen to do so), as well as whether the injunction was appropriate.

Mr Williamson argued that:

1. a)under the Welfare Reform and Pensions Act 1999, his right to decide how and when to take his pension constituted his property and the Trustee had no right to interfere in such decisions;
2. b)in order for payments from the pension scheme to constitute “income” Mr Williamson must have started to receive them, or have become entitled to receive them, during the course of his bankruptcy;
3. c)there was no entitlement to receive payment before an election was made;
4. d)any lump sum paid from the pension scheme did not constitute “income” for the purposes of the Insolvency Act.

However, the Court ruled that:

1. a)its power to make an Income Payments Order existed expressly under the Insolvency Act 1986, despite anything in the1999 Act;
2. b)a bankrupt could not avoid part of his pension being paid to his creditors simply by choosing to defer receipt of it until after his discharge from bankruptcy. Such a choice would constitute discrimination in favour of the class of bankrupts who exercised such deferral;
3. c)entitlement to payment arises not merely when the pension is in payment but also where the bankrupt would be entitled to payment, under the pension scheme’s rules, merely by asking for it (for instance when he reaches pensionable age);
4. d)payments do not have to be periodic or regular to be classified as income.

Leave was granted for Mr Williamson to appeal and that appeal is due to be heard between 3 September and 2 November 2012.

Comment

Pension schemes have long been regarded as out of reach of the member’s creditors. This judgment changes that situation and makes assets potentially available to creditors where the bankrupt in question has reached the scheme’s pensionable age.