Personal Pension Schemes
The Trustee in Bankruptcy and the Pensioneer Trustee
Catherine Burton, a Professional Support Lawyer to the Bankruptcy Support and Reconstruction Group at DLA, Solicitors, considers the impact of recent changes in the law surrounding a trustee in bankruptcy’s rights to a bankrupt’s personal pension benefits
(taken from Isssue No 12 – July 2000)
Trustees of personal pension schemes will be familiar with standard requests from trustees in bankruptcy (TiBs) seeking acknowledgement of the TiB’s right to any benefits to which, prior to his bankruptcy, the bankrupt would have been entitled. The larger corporate trustees have developed their own standard responses. Following recent case law, the introduction of legislation (some of it surprisingly hastily) and the outcome of pending court applications, those standard letters may need to be amended.
Let’s start at the very beginning.
Vesting of a bankrupt’s assets in his TiB
The Department of Trade and Industry has overall responsibility for the administration of insolvency in England and Wales. The Secretary of State appoints Official Receivers (ORs) who are attached to their local High Court of County Court having bankruptcy jurisdiction. The bankrupt is obliged to provide a statement of his affairs which the OR uses as a basis for his report to creditors coupled with the OR’s own observations about the affairs of the bankrupt in general.
Save in certain circumstances, it is the OR’s duty, as soon as practicable in the period of 12 weeks from the date of the bankruptcy order, to decide whether to summon a meeting of the bankrupt’s creditors for the purposes of appointing a trustee in bankruptcy (TiB). The meeting must take place within four months of the bankruptcy order and must be publicly advertised.
The bankrupt’s estate vests `automatically` without assignment, conveyance or transfer in the OR immediately upon the making of the bankruptcy order. The OR will act as manager and receiver of such property until a TiB is appointed, but where there are few assets in the estate, a TiB is unlikely to be appointed and the OR will continue to act as trustee throughout the bankruptcy.
The bankrupt’s estate comprises all the property belonging to or vested in the bankrupt at the commencement of the bankruptcy and all property over which the bankrupt can exercise a power. If that property is not for the time being comprised in his estate and the power cannot be exercised by the bankrupt until after the release of the OR or TiB, then it will not fall into his estate. `Property` is defined at section 436 of the 1986 Act to include money, goods, things in action, land and every description of property wherever situated, obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.
The bankrupt’s estate does not include equipment necessary for his employment and such clothing and furniture as is required to meet his and his family’s basic domestic needs. By virtue of s 283(3) of the 1986 Act also excluded from the bankrupt’s estate is any property held by the bankrupt on trust for any other person.
Vesting of personal pension benefits in the TiB
In December 1996, Ferris J held in Re Landau (1998) Ch 223 that in the absence of any provisions for forfeiture, all of a bankrupt’s rights under a personal pension policy (NPI retirement annuity contact issued to comply with s.226 of the Income and Corporation Taxes Act 1970) vested in his trustee.
In 1989 Mr Landau had converted the policy into a fully paid policy under which no further premiums would be payable and exercised his right to reduce the annuity age from 70 to 65. He was made bankrupt in 1990, was discharged from bankruptcy in 1993 (leaving many unsatisfied liabilities) and attained the age of 65 in 1994. When Mr Landau’s TiB endeavoured to commute the pension and to receive a fixed five year annuity for the benefit of his creditors, Mr Landau referred the matter to court.
Ferris J was satisfied that Mr Landau’s bundle of contractual rights under the policy constituted a chose in action which fell within the definition of `property` for the purposes of the Insolvency Act 1986 notwithstanding that at the start of the bankruptcy, nothing was immediately payable under the policy. Immediately prior to his bankruptcy, Mr Landau had a present right to compel NPI to make payments under the policy in the future. His attaining 65 did not result in anything new being acquired or devolving upon him. Applying the same reasoning, Ferris J was also satisfied that the annuity should not be regarded as income of the bankrupt, which, by section 310 of the 1986 Act may be claimed by the TiB but only during the course of the bankruptcy and before the bankrupt’s discharge.
Public reaction to Landau
The decision has not been without its critics. For some time the Bankruptcy Association has campaigned and lobbied to protect pension rights from the `hungry hands` of unpaid creditors. One of the primary aims of the Association’s Millennium Campaign has been to ensure that subject to the introduction of safeguards to prevent unscrupulous individuals from making excessive contributions to their schemes shortly prior to their bankruptcy, all pension income, from whatever source and all lump sum payments associated with pensions would be exempt from bankruptcy proceedings.
Dodging Landau: The use of forfeiture clauses
In many situations the substantive issues have been diverted to a consideration of the validity of forfeiture clauses. Previously seen far more often in the realm of occupational pensions, such clauses purport to terminate the bankrupt’s rights under the policy and to give the trustee absolute discretion to pay the benefits to or for the benefit of the bankrupt and/or his dependants. Such a forfeiture provision in an occupational scheme was held to be valid in Re Trusts of the Scientific Investment Pension Plan (1998). However the validity of such clauses in the context of personal pension schemes is uncertain. Each clause must be construed by reference to the provisions of the trust deed, particularly in light of a seemingly popular, recent trend for some trustees to insert forfeiture provisions in their standard policy terms and conditions and to seek to apply them retrospectively.
Overcoming Landau: The case law route
Dennison -v- Krasner, Lesser -v- Lawrence
On 6th April 2000 the Court of Appeal gave judgment in two cases where discharged bankrupts had appealed against the lower court’s decision that all their rights under various pension policies in existence at the date of bankruptcy had vested in their trustees. The Court of Appeal rejected the bankrupts’ arguments and upheld the principle first established in Re Landau that all of a bankrupt’s rights under a personal pension policy are property which automatically vests in his TiB. The TiB can take all benefits whether in the form of a lump sum or annuity and does not need to obtain an income payments order to claim the annuity.
The Court went one step further than Re Landau when it considered the effect of the conditions for approval set out in the Taxes Acts. They do not prohibit assignment but merely make approval conditional upon such provisions being included in the terms of the policy document. In Re Landau the prohibitions contained within the scheme rules were held, as a matter of interpretation, not to prevent assignment by operation of law and in particular not to prevent assignment by automatic vesting in a TiB. In Lesser -v- Lawrence the Court of Appeal clarified the point further, saying that any attempt to contract out of the automatic assignment and vesting provisions in a bankruptcy must fail on grounds of public policy. Arguably, therefore the introduction and purported retrospective reliance upon forfeiture clauses should now be regarded as ineffective.
Overcoming Landau: The statutory route – somewhat swifter than anticipated!
The Welfare Reform and Pensions Act 1999
The Landau decision prompted considerable Parliamentary lobbying. The Welfare Reform and Pensions Act 1999 was given Royal Assent on 11th November 1999. Media attention has always been focused primarily on its stakeholder provisions but nestling amongst them, at sections 11 to 16 are provisions dealing with pensions and bankruptcy. In brief they are intended to protect approved pension arrangements from claims by TiBs, other than applications for income payments order or to recover excessive contributions made to put assets beyond the reach of creditors.
Previous statements in Parliament had indicated that section 11 would not be effectively introduced until April 2001. However following the Court of Appeal’s judgment in Lessser -v- Lawrence and Dennison -v- Krasner Members of Parliament urged the Department of Social Security to advance the introduction of this legislation. The Bankruptcy Association will no doubt have been delighted to note that rather unexpectedly, albeit following brief consultation with the Insolvency Service, on 22nd May this year the Secretary of State for Social Security introduced a statutory instrument which has brought several (but not all) provisions of section 11 into force with effect from 29th May 2000.
This means that where a bankruptcy order is made on a petition presented after 29 May the bankrupt’s rights under `approved pension arrangements` are excluded from his estate. `Approved pension arrangements` will include all tax approved personal pension plans, retirement annuity contracts, occupational pension schemes and related additional voluntary contribution funds.
Provisions to recover excessive contributions
Insolvency practitioners have noted with some concern that the accompanying provisions in the Act which will allow a TiB to apply to court to recover excessive pension scheme contributions have not yet been brought into force. The DSS has acknowledged that further consideration needs to be given to these sections of the Act and whilst it is keen to effect a swift introduction, it is currently anticipated that they will not be brought into force until November at the earliest.
Effect of the statutory provisions on the Court of Appeal’s decision
The new provisions do not operate retrospectively. Existing bankruptcies and those where bankruptcy orders are made on petitions presented before 29 May 2000 are not affected. The Court of Appeal’s judgment in Dennison -v- Krasnerand Lesser -v- Lawrence concerned bankruptcies which commenced before the effective introduction of this Act. The judgment is therefore unaffected by this legislation. However, whilst permission to appeal was refused by the Court of Appeal, the debtors have now petitioned the House of Lords for leave to appeal. The application is likely to be heard before the end of July 2000.
For the time being pensioneer trustees may expect a brief reprieve from TiB correspondence as they put current pre-29th May 2000 cases on hold until the outcome of the debtors’ petition and if successful, until the final judgment of the House of Lords in Lesser-v Lawrence and Dennison -v- Krasner. They may however wish to divert their attention to making a note of any unusually large contributions to schemes maintained by `impecunious entrepreneurs`! It seems certain that the excessive contribution provisions of the Act, when brought into force, will be retrospective in effect.