Insolvency Solicitors Suffolk – Bankruptcy: Pension Pots – no longer ring-fenced from creditors’ claims

John Bradshaw

The High Court decision in Raithatha vWilliamson (“Raithatha”) has been referred to as a ‘landmark’ case the result of which is that a bankrupt’s pension pot is no longer protected from their creditors.

In 1998 the High Court held in the case of Re Landau that pension rights held by a bankrupt would pass automatically to his Trustee in Bankruptcy (“Trustee”), in the same way as other assets. However, concern was raised about individuals who are made bankrupt close to retirement age, questioning how they would support themselves. This prompted Re Landau to be effectively reversed by s11 Welfare Reform and Pensions Act 1999 (“WRPA”), which states that a bankrupt’s rights under a pension do not pass automatically to their Trustee.

A Trustee can ask the Court to make an ‘Income Payments Order’ providing for the bankrupt to make a contribution towards his debts from income for a period of three years. The bankrupt must be left with an amount of income that meets his ‘reasonable domestic needs’. The WRPA did state that any payment under a pension scheme could be classified as income.

In the case of Raithatha, the Trustee, succeeded in a claim against Mr Williamson’s circa £1 million pension fund to secure funds for the benefit of creditors.

A bankruptcy order was made against Mr Williamson in November 2010 following a shareholder dispute. Mr Williamson had not drawn on his pension.  If he had an application could have been made for an Income Payments Order to seek to recover part of Mr Williamson’s income for the benefit of creditors. As he had not drawn on his pension pursuant to the WRPA it was thought to be excluded from the Mr Williamson’s bankruptcy estate.

In Raithatha, the Court held that an Income Payments Order could be made in respect of the undrawn pension, as Mr Williamson had an entitlement to his pension but had chosen not to draw it. In reaching this decision Deputy Judge Livesey QC concluded there was no logical reason why there should be a distinction between a bankrupt who had drawn down his pension and was caught by the legislation and one who could draw his pension but had chosen not to do so.

The solicitor acting for the Trustee told the FTAdviser: “For some years therefore, lawyers, insolvency practitioners, pension trustees and IFAs have taken the view that pensions which had not been activated, even if they could, were protected from the reach of a trustee in bankruptcy, but this is no longer the case.”

Raithatha was in the process of being appealed to the Court of Appeal, however the appeal was vacated late last year as a result of settlement having been reached.  Accordingly, for the moment, Raithatha remains good law and will bind District Judges faced with such applications.

John Bradshaw is an Insolvency & Business Recovery solicitor at Barker Gotelee, solicitors in Ipswich

Insolvency Solicitors – click here for more information on our range of services