We can confirm that the eagerly awaited appeal of the decision in Raithatha v Williamson  EWHC 909 (Ch) has been vacated upon settlement. The significance of this is that the first instance decision of the High Court Chancery decision stands as a precedent which should be followed by District Judges.
Until the decision in Raithatha v Williamson, it had been generally assumed that an undrawn pension could not be caught by an Income Payments Order (“IPO”) and was therefore effectively beyond the reach of a Trustee in Bankruptcy (“TIB”). The principal issue in the Raithatha case was whether an IPO can be used by a TIB to secure monies from a Pension Scheme which a bankrupt is entitled to but had elected not to draw.
- The Bankruptcy Order was made on 9 November 2010.
- 6 weeks before the Bankrupt was discharged from Bankruptcy the TIB made a without notice application for an injunction to restrain the respondent “from taking any steps to activate, draw down, dispose of, or otherwise howsoever exercise or deal with any of his rights, interests or entitlements, whether to the payment of a lump sum and/or income, arising under any pension scheme of which he is a member or in which he has an interest”.
- Under the terms of the pension scheme the Bankrupt was entitled to take his pension at the age of 55. At which time he was entitled to a tax free lump sum plus a pension from the residuary fund.
- The Bankrupt was 59 years old at the time of the application, in employment and had no intention to exercise his right to elect to take a pension now.
- The TIB applied for an IPO and asked for the IPO to cover the bankrupt's undrawn pension.
The court decided that an IPO could be made in respect of the undrawn pension, as a bankrupt has an "entitlement" to a pension if he could receive one merely by asking for it. In reaching this decision Deputy Judge Livesey QC considered that the government was unlikely to have intended to create an anomaly between bankrupts who had decided to draw their pensions before bankruptcy and those who had not, as to do so would be discriminatory against creditors in favour of a class of bankrupts’ i.e those who happened not to have made an election to take their pension.
In making the decision the court also rejected the argument that income had to consist of periodic or regular payments and concluded that there was nothing to prevent a one off payment or a number of one off payments on different occasions from different sources as a result of different entitlements being classed as income for the purposes of an IPO.
Implications for TIB
Clearly this recent decision and the withdrawal of the Appeal is of considerable benefit to TIB’s who are dealing with bankrupt individuals with pension provisions. The TIB will no longer be dependent on the pension having been drawn down prior to the bankruptcy in order to obtain the benefit of it under an IPO. Instead he will now be able to compel an individual to take his pension benefits thereby providing access to the bankrupt's lump sum entitlement and pension income for a three year period.
When considering whether to make an IPO in relation to a Bankrupt’s pension, it is important to note that although s310 of the Act permits such an application, the court must consider the reasonable needs of a bankrupt. Reasonable domestic needs are determined by reference to the circumstances of each case and may include expenses such as private school fees where removal from a school might be detrimental to the children. In Boyden v Watson(2004) the court rejected an application for an IPO as the Bankrupt had insufficient funds once his reasonable domestic needs had been met. So in seeking payment from a bankrupt individual's pensions savings, the amount of money sought will need to be balanced with their reasonable domestic needs.
It is further important to note that the Raithatha decision was in relation to a personal pension. The position for occupational pension schemes, where a Bankrupt member has reached the normal retirement age, is less clear. The reason being that it is questionable whether the Trustees of an occupational scheme could be forced to exercise their discretion in favour of a TIB. It has also been suggested that trustees of occupational pension schemes may seek to revise the scheme rules in order to maximise the level of protection for members against claims presented by the TIB in the event of bankruptcy.
This decision marks a significant departure from the previous protection afforded to a Bankrupt’s pensions and whilst it introduces a welcome limitation on a Bankrupt’s security in retirement it is wise for a TIB to proceed with caution as the judgement is likely to face challenges in the future.
The decision is in line with another recent High Court decision of Blight v Brewster  EWHC 165 (Ch), in which a debtor (rather than a Bankrupt) was ordered to take his tax-free lump sum from his pension pot to meet the claims of his creditors. In this case the judge considered there to be ‘a strong principle and policy of justice to the effect that debtors should not be allowed to hide their assets in pension funds when they have a right to withdraw monies needed to pay their creditors.”
There are however a number of people within the profession who disagree with the decision reached by Deputy Judge Livesey QC, not only because it seems inconsistent with the Government’s confirmed and extended policy of “security on retirement” but also because the Judges conclusion could be argued to discriminate against older members of society who have reached the age at which they can draw down their pension.
It will remain to seen whether the decision will be challenged in a future case, but as things stand the case will bind District Judges hearing applications for income payment orders.