Pension Protected for Bankrupt

Bankruptcy laws strike a delicate balance between satisfying creditors and enabling debtors to make a clean break so that they can get on with their lives. In one ruling that clarified the law, the Court of Appeal decided that the balance came down in favour of allowing a bankrupt businessman to preserve his private pension.

The man was adjudged bankrupt on his own petition and, although the amount of his debts was disputed, creditors claimed that he owed more than £6.5 million. On the day before he was discharged from bankruptcy, his trustee in bankruptcy applied for an income payments order under the Insolvency Act 1986. Such an order would have entitled his creditors to most of his pension.

In refusing the trustee’s application, a judge noted that the man wished to preserve his pension for the benefit of his children on his death. With that in mind, he had not exercised his contractual options to draw down lump sums or other payments from his four pension policies. The judge found that the trustee could not require him to exercise the options for the benefit of his creditors.

In dismissing the trustee’s challenge to that decision, the Court found that his arguments, if correct, would drive a coach and horses through the protection afforded to private pensions by the Welfare Reform and Pensions Act 1999, legislation that was designed to encourage people to save for their old age.

The Insolvency Act contains a mechanism by which trustees can claw back excessive pension contributions that unfairly prejudice creditors’ interests. However, that was not the situation in this case and, in the circumstances, the man could no more be required to crystallise his pension rights for his creditors’ benefit than he could be required to find work so that his salary might be the subject of an income payments order.