What happens to Pensions in Bankruptcy?
Locations
The High Court has recently brought welcome clarity to how pensions are dealt with in the event of a bankruptcy, in the case of Lehane –v- Wealth Options and Brian O'Neill.
The background to the Judgment delivered in January 2021 was an attempt by the Official Assignee (the "OA") to access a personal retirement bond of a bankrupt, for the benefit of the creditors of the bankruptcy estate. The policy provided the former bankrupt with a number of options within five years of the date of his adjudication – (i) the payment of a tax-free lump sum, (ii) the purchase of an annuity (iii) to invest an additional sum in an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF) or (iv) to collect a taxable lump sum.
A dispute arose between the OA, the bankrupt and the pension company as to what, if any, of the three payments the OA was entitled to recover for creditors of the bankruptcy estate.
The Court was asked to consider whether the OA was entitled to exercise the former bankrupt's options to realise the personal retirement bond and collect both the taxfree sum and taxable lump sum.
The Law
It is useful to set out generally what the relevant provisions of the Bankruptcy Act 1988 (the "Act") are and how they relate to the disupte between the three stakeholders in this case.
The Act provides that where a bankrupt has an interest, at the date of adjudication, under a "relevant pension arrangement"[1] which entitles him / her to an income or an amount of money other than income, this will vest in the OA[2].
The Act goes on to provide that if a bankrupt has an entitlement, either at the date of adjudication or within five years of it, "to perform an act or exercise an option" such that s/he would be in receipt of an income, or an amount of money other than income (a lump sum), then the OA can exercise that option with a view to collecting from the pension arrangement for the benefit of the bankruptcy estate[3].
However, in a separate section the Act also provides that in order to collect a portion of a bankrupt's income, the OA must apply to the High Court for a bankruptcy payment order, and crucially that such an application must be brought within the period of the bankruptcy (usually within one year of the date of adjudication)[4].
In a previous landmark judgment, in Re Coady[5], the High Court held that an annuity from a pension arrangement (a monthly or annual income) amounts to 'income' which requires the OA to apply to Court for a bankruptcy payment order.
The Coady Judgment had also held that a lump sum payment (such as a 25% tax free lump sum) was an 'amount of money other than income' and did not require a bankruptcy payment order.
In Re O'Neill
In this case, the former bankrupt argued that there was no definition of "income" or "an amount other than income" in the Bankruptcy legislation. He argued that since the relevant Tax legislation required all realisations from a pension arrangement to be deemed 'income', this was the definition to be applied to pensions in a bankruptcy.
He further argued that if this interpretation was applied, the OA would have to apply to Court for a bankruptcy payment order before he was entitled to recover any category of payment from his pension, particularly the taxable sum.
Finally, the former bankrupt had not co-operated with the OA in the application to the pension company for recovery of any aspect of the pension.
The Judgment
Ms Justice Pilkington rejected Mr O'Neill's position, endorsed the position held in Re Coady and held that:
- No bankruptcy payment order is required for any lump sum payment from a pension arrangement, whether it is a tax-free lump sum or a taxable lump sum;
- The Official Assignee is entitled to complete the necessary documentation which may be required to collect such sums and/or take such other steps as are necessary to procure payment from a pension arrangement for the benefit of the creditors of a bankruptcy estate;
- The bankrupt is under a statutory obligation to provide the OA with 'every reasonable assistance' in completing the necessary documentation to realise entitlements under the pension arrangement.
Commentary
This decision, building on the previous jurisprudence of the Court in a complex area, brings welcome clarity to the treatment of relevant pension arrangements in bankruptcies for all stakeholders: the Official Assignee, the bankrupt, the pension companies and the creditors.
By way of summary, if at the date of adjudication or within five years thereof, there is an income, an amount of money other than income or the option to realise a relevant pension arrangment, they all vest in the OA as a matter of law.
If a Bankrupt is in receipt of an income (that is to say, a monthly or annual income being paid to the bankrupt) or the exercise of an option would entitle him / her to an income, then the OA must apply to Court for a bankruptcy payment order within the period of bankruptcy.
If there are lump sum payments available to the bankrupt, or the option to procure one within five years of the date of adjudication, those sums and options vest in the OA without the requirement to apply to Court for a bankruptcy payment order.