WELCOME TO CHARLES RUSSELL SPEECHLYS.
We would like to place strictly necessary cookies and performance cookies on your computer to improve our website service.
Otherwise, we'll assume you are OK to continue. Please close this message
In Hinton v Wotherspoon  EWHC 623 (CH), Jason Freedman and Aziz Abdul successfully secured an Income Payments Order (“IPO”) on behalf of the Trustee in Bankruptcy.
The court also provided useful guidance on the correct position where a bankrupt has made an election to draw down from his private pension but not given specific instructions as to application of the funds.
A trustee in bankruptcy may make an application for an IPO under under section 310 of the Insolvency Act 1986 (the “Act”). The purpose of an IPO is to allow a bankrupt’s excess income to be used to meet the claims of creditors.
Section 310(7) of the Act makes clear that the bankrupt’s income for the purposes of making an IPO includes every payment made to a bankrupt or to which the bankrupt becomes entitled, including any payment under a pension scheme.
The point at which a bankrupt becomes “entitled” to undrawn pension funds pension scheme is currently subject to two conflicting decisions:
In Hinton, the bankrupt, Mr Wotherspoon, had not only elected to drawdown, but had also elected to withdraw an amount from his pension fund which he was using to pay his household expenditure. As Mr Wotherspoon had historically elected to withdraw the maximum amount from his capped SIPP each year, he was held to be entitled to the maximum withdrawal each year for the purposes of the IPO.
Notwithstanding the above, the court also considered whether a bankrupt is ‘entitled’, for the purposes of section 310(7) Insolvency Act 1986, to pension funds held in drawdown where no election had been made as to how the funds should actually be applied.
The court stated that the approach in Horton was “plainly correct”. If an election had not been made, the mere existence of a drawdown fund was not sufficient to establish an ‘entitlement’ for the purposes of an IPO. At the point of drawdown there were still decisions to be made by the bankrupt, namely whether to take a lump sum or periodic payment, or to buy an annuity.
An IPO could only be made in respect of any lump sum or quantified payments that the bankrupt had elected to receive.
Further, as part of Mr Wotherspoon’s allowable expenditure, the court allowed private medical insurance.
In Hinton, the court preferred the approach in Horton i.e. that the bankrupt was not ‘entitled’ to pension funds held in drawdown where no election was made as to how the funds should be used.
Whilst it is unusual for pension funds to be held in drawdown and no election made as to how the funds should be used, the judgment in Hinton potentially changes the point at which a bankruptcy becomes entitled to income for the purposes of an IPO.
It should be noted that Horton is currently being appealed and judgment is due shortly. Accordingly, we will circulate an update on Horton as soon as possible.
As an aside, it is also worth noting that the court in Hinton, in assessing the bankrupt’s “reasonable domestic needs” for the purposes of determining the amount of the IPO, allowed the cost of private health care insurance. Insolvency Service guidance on the point states that private health care insurance is not normally allowed as part of the bankrupt’s expenditure. However, in Hinton, the court noted that the bankrupt’s on-going health problems meant that, if the policy was terminated, he would not be able to renew it after the expiry of the IPO. The court did not consider this to be fair or reasonable.
This article was written by Aziz Abdul.
For more information, please conatact Aziz Abdul on +44 (0)20 7427 1024 or email@example.com.