Bankruptcy case has implications for financial remedy claims

Divorce|October 13th 2016

In another life I keep an eye on all, or at least most, new cases reported on the Bailii website, looking for cases that may be of interest to family law practitioners, so that I can publicise them. The other day I came across a bankruptcy case by the name of Horton v Henry. Now, knowing that bankruptcy can be a factor in financial remedy proceedings following divorce, I had a quick look at the report to see if it involved divorce proceedings. As it did not, I concluded that it would not be of interest to family practitioners. I was wrong.

Horton v Henry makes a very important point that has implications for financial remedy claims, where one party is an undischarged bankrupt and has a pension. It is of importance to both parties, but in particular to the spouse who is making a claim against the pension, i.e. the non-pension owning spouse. Obviously, that spouse will not want the other spouse’s trustee in bankruptcy to get their hands on the pension, as that will reduce or extinguish their claim.

For the benefit of non-lawyers I should perhaps very briefly explain what happens when a person is made bankrupt. A ‘trustee in bankruptcy’ will be appointed to manage the bankruptcy. The assets of the bankrupt will pass to the trustee, who will use them to pay off the bankrupt’s creditors. There are, however, certain exceptions to what assets of the bankrupt the trustee can use. One of those exceptions is the bankrupt’s pension.

So where then is the problem? Well, there are exceptions to the general rule that trustees can’t get their hands on the bankrupt’s pension, for example, where the bankrupt’s pension contributions are deemed to be excessive (a bankrupt cannot avoid obligations to his creditors by paying excessive amounts into his pension). Another exception is that the trustee can apply for an ‘Income Payments Order’ (IPO), which basically claims so much of the income of the bankrupt as is above the reasonable domestic needs of him and his family.

OK, having got that background information out of the way we come to the point at issue in Horton v Henry. What if the pension is not yet in payment, the bankrupt was entitled to receive it, but had not elected to do so? In such circumstances, can the trustee apply for an IPO in respect of the pension, thereby forcing the bankrupt to elect to take his pension?

A High Court judgment in 2012 controversially decided that the court could make an IPO in such circumstances. I say ’controversially’, because it had generally been considered that orders could not be made in these circumstances, as Parliament had specifically decided to protect the pensions of bankrupts.

Horton v Henry is a lengthy and complex judgment of the Court of Appeal. Thankfully, however, I can summarise the decision very briefly: the Court of Appeal overturned the 2012 decision, making it clear that the court cannot force a bankrupt to elect to take his pension in order to repay his creditors. Giving the leading judgment Lady Justice Gloster said:

“…it would drive a coach and horses through the protection afforded to private pensions and rights … if, by the simple expedient of an application for an IPO, a trustee … could in effect obtain payment of the entirety (or almost the entirety) of a bankrupt’s pension fund into the bankrupt’s estate so as to meet the claims of his creditors, notwithstanding that the pension was not in payment.”

She went on:

“In my judgment, Parliament has decided to draw the balance between, on the one hand, the interests of the State in encouraging people to save through the medium of private pensions (so that in old age or infirmity they will not be a burden on the resources of the State), and, on the other, the interests of creditors in receiving payment of their debts, by the mechanism … which enable[s] a trustee to claw back excessive pension contributions made by the bankrupt where such contributions have unfairly prejudiced the bankrupt’s creditors.”

Obviously, the fact that the other spouse has been made bankrupt will have a serious impact upon a party’s financial remedies claim. This decision will be very welcome news to those claiming parties, at least meaning that if it is not in payment the other spouse’s pension will not have been lost to the trustee, and will therefore be available to make a claim against.

Note that I have purposely made some simplifications to the law, in order to make this post more easily readable. If you are seeking to make a claim against your (former) spouse and they have been made bankrupt, you should obtain the specific advice of a specialist family lawyer.

The full report of Horton v Henry can be found here. Warning: it is pretty heavy going, unless you are a bankruptcy/pensions practitioner. Not for the faint-hearted!

The blog team at Stowe is a group of writers who share their advice on the wellbeing and emotional aspects of divorce or separation from personal experience. Guest contributors also regularly contribute to share their knowledge.

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  1. Andrew says:

    Of course if you are not a family lawyer but you run a business on which you and your family depend, and if a major debtor has gone bankrupt and the survival of your business depends on getting a decent dividend, you might think that the law is a mess and is far too favourable to bankrupts and their families and pays no proper attention to the claims of creditors. You might think that the money which went out as contributions paid to the pension fund could and should have been paid to the creditors.
    The law needs to be reformed to give the trustee the right to an IPO in circumstances such as this. But it should also allow the trustee to cash the fund in for the benefit of the estate.
    Very often the collapse of the marriage and the collapse of the business go hand in hand. In such cases the creditors’ claims should prevail and the claims of the ex-spouse, usually the ex-wife, must come second. And as I have said before, lump sum orders should be released on discharge in bankruptcy like other debts.
    If anyone disagrees I would like to know why.

  2. John Bolch says:

    The creditors do of course generally prevail over the spouse, but I guess it’s all a question of balance, as Lady Justice Gloster said.

  3. Andrew says:

    It should not be balance. Creditors first, last and always. I know it sounds harsh but marriage is after all said to be a partnership “for better, for worse, for richer, for poorer” – and giving the spouse a break may put others into bankruptcy.
    Is there any principled reason for discharge in bankruptcy (assuming the bankruptcy to be genuine and not an abuse) not releasing lump sum orders?

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