Chancery law

Bankrupts' pensions rightsLesser v Lawrence; Dennison v Krasner, Court of Appeal, The Times, 18 April 2000These appeals raised common questions which had never before been addressed by the Court of Appeal; Whether rights under retirement annuity contracts or personal pension arrangements effected by individuals who become bankrupt vest in the trustees in bankruptcy, and, if so, whether payments derived from those rights could be the subject of an income payments order under s.310 of the Insolvency Act 1986 ('IA 1986').Both appellants been subject to bankruptcy orders and held personal pension schemes and annuity contracts.

Those schemes and contracts, so as to ensure that compliance with the Income and Corporation Taxes Acts, contained restrictions preventing assignment.The court found that the statutory provisions in relation to assignment of pensions policies did not restrict the alienation of rights or benefits under such policies.

The statutes merely prescribed conditions that had to be satisfied before such annuity contracts or pension schemes could be approved by the Inland Revenue and qualify for favourable tax treatment.

Further, it was held that contractual terms which sought to prevent the vesting of property in a trustee in bankruptcy would be contrary to public policy and could not prevent such benefits from so vesting.

Under s.310 IA 1986 the court may, on the application of the trustee, make an income payments order out of income received by the bankruptcy.

The IA 1986 was amended by the Pensions Act 1995 to provide that 'income' includes 'any payment under a pension scheme' except for guaranteed minimum pension and certain protected pensions.Chadwick LJ stated that s.310 did not apply to income which the bankrupt receives by virtue of some right to which he was entitled at the date of the bankruptcy order.In such a case the right, and the income received by virtue of that right forms part of the bankrupt's estate under s.283 IA 1986.

He agreed with the decision of Ferris J in Re Landau [1998] Ch 223 that at the commencement of the bankruptcy the bankrupt had a present right (which formed part of the bankrupt's estate) to require the pension provider to make payments under the policy in the future.The appellants had relied on Ex parte Huggins (1882) 21 ChD 85, where the Court of Appeal had been willing to treat as 'income' for the purposes of the Bankruptcy Act 1869 income derived from pension rights, to argue that pension payments were also income within s.310 IA 1986.

However, the Court of Appeal found that in enacting the relevant sections of IA 1986 Parliament intended to change the law and that therefore Ex parte Huggins was not binding.The appellants also tried to rely on Article 1 of the European Convention on Human Rights, namely that persons are entitled to the peaceful enjoyment of their possessions and that should not be deprived of their possessions except in the public interest.

The Court of Appeal considered that, since Parliament had looked at the relevant issues on several occasions within the last 25 years, it was impossible to hold that Parliament had failed to take proper account of the public interest.

However, this analysis ignores the fact that the effect of the most recent piece of relevant legislation emanating from Parliament namely s.11 of the Welfare Reform and Pension Act 1999 is to reverse Re Landau.Creditors who wish to take advantage of this decision and obtain the benefit of debtors' pensions must therefore act quickly before the 1999 Act comes into force.

by Dov Ohrenstein, 3 New Square, London