CASE NO: CHBKF 99/0780/b3, CHBKF 99/1280/B3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
On appeal from THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (IN BANKRUPTCY)
ROYAL COURTS OF JUSTICE
STRND, LONDON WC2A 2LL
Thursday 6 April 2000
21. It is in those circumstances that there are now before us (i) an
appeal by Mr Dennison from the order made by Mr Justice Blackburne on 7 July
1999 in the proceedings Krasner v Dennison, and (ii) an appeal by Mr
Lesser from the order made by Mr Justice Jacob on 16 November 1999 in the
proceedings Lawrence v Lesser. In neither appeal (for reasons which are
understandable) do we have the benefit of a reasoned judgment in the court
below. The reasons for the orders which are the subject of these appeals are to
be found in the judgment of Mr Justice Ferris in In re Landau.
The vesting of a bankrupt's estate in his trustee
22. Before turning to the judgment in In re Landau it is convenient to
refer to the provisions in Part IX ("Bankruptcy") of the Insolvency Act 1986
("IA 1986") relevant to the vesting of property in the trustee in bankruptcy.
23. Section 306 IA 1986 provides for the vesting of the bankrupt's estate in
the trustee immediately on his appointment. It is in these terms:
"306(1) The bankrupt's estate shall vest in the trustee immediately on his
appointment taking effect or, in the case of the official receiver, on his
becoming trustee.
(2) Where any property which is, or is to be, comprised in the
bankrupt's estate vests in the trustee (whether under this section or under any
other provision of this Part), it shall so vest without any conveyance,
assignment or transfer."
24. In that context the "bankrupt's estate" is defined by section 283(1)
IA 1986:
"283(1) Subject as follows, a bankrupt's estate for the purposes of any of
this Group of Parts [Parts VIII to XI IA 1986] comprises -
(a) all property belonging to or vested in the bankrupt at the commencement of
the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this
Part [Part IX IA 1986] is comprised in that estate or is treated as falling
within the preceding paragraph.
. . .
(4) References in any of this Group of Parts to property, in relation to a
bankrupt, include references to any power exercisable by him over or in
respect of property . . . and a power exercisable over or in respect of
property is deemed for the purpose of any of this Group of Parts to vest in the
person entitled to exercise it at the time of the transaction or event by
which it is exercisable by that person (whether or not it becomes so
exercisable at that time).
. . .
(6) This section has effect subject to the provisions of any enactment not
contained in this Act under which any property is to be excluded from a
bankrupt's estate."
25. In that context, the commencement of the bankruptcy means the day on which
the bankruptcy order is made - see section 278 IA 1986. "Property" is defined,
in section 436 IA 1986, to include:
". . . money, goods, things in action, land and every description of property
wherever situated and also obligations and every description of interest,
whether present or future or vested or contingent, arising out of, or
incidental to, property;"
26. The basic provision, therefore, is that all property (including things in
action, present or future, vested or contingent) belonging to or vested in the
bankrupt at the date of the bankruptcy order vests in the trustee immediately
on his appointment - sections 283(1)(a) and 306(1) IA 1986. In the interim,
between the making of the order and the appointment of a trustee, the official
receiver is receiver and manager of the bankrupt's estate - see section 287(1)
IA 1986. Property not belonging to or vested in the bankrupt at the date of the
bankruptcy order, but acquired by him subsequently ("after-acquired property"),
does not vest in the trustee unless and until it becomes comprised in the
bankrupt's estate by virtue of some other provision in Part IX IA 1986 - see
section 283(1)(b) IA 1986.
27. After-acquired property becomes comprised in the bankrupt's estate
under the provisions in section 307 IA 1986. The section is in these terms, so
far as material:
"307(1) Subject to this section and section 309, the trustee may by notice in
writing claim for the bankrupt's estate any property which has been acquired
by, or has devolved upon, the bankrupt since the commencement of the
bankruptcy.
(2) . . .
(3) Subject to the next following subsection, upon the service on the
bankrupt of a notice under this section the property to which the notice
relates shall vest in the trustee as part of the bankrupt's estate; and the
trustee's title to that property has relation back to the time at which the
property was acquired by, or devolved upon, the bankrupt.
(4) ...
(5) References in this section to property do not include any property
which, as part of the bankrupt's income, may be the subject of an income
payments order under section 310."
28. Section 309 IA 1986, to which section 307 IA 1986 is made subject, requires that, except with the leave of the court, a notice under section 307 shall not be served after the end of the period of 42 days beginning with the day on which it first came to the notice of the trustee that the property in question had been acquired by, or had devolved upon, the bankrupt. Section 307(4) IA 1986, to which section 307(3) is made subject, protects the title of persons who themselves acquire after-acquired property from the bankrupt in good faith, for value and without notice of the bankruptcy.
29. Section 307(5) IA 1986 excludes from the operation of section 307(3)
"property which, as part of the bankrupt's income, may be the subject of an
income payments order under section 310 IA 1986". Section 310 is in these
terms, so far as material:
"310(1) The court may, on the application of the trustee, make an order ("an
income payments order") claiming for the bankrupt's estate so much of the
income of the bankrupt during the period for which the order is in force as may
be specified in the order.
(2) The court shall not make an income payments order the effect of
which would be to reduce the income of the bankrupt [when taken together with
any payments to which subsection (8) applies] below what appears to the court
to be necessary for meeting the reasonable domestic needs of the bankrupt and
his family.
(3) An income payments order shall, in respect of any payment of
income to which it is to apply, either -
(a) require the bankrupt to pay the trustee an
amount equal to so
much of that payment as is claimed by the order, or
(b) require the person making the payment to pay so much of it as is
so claimed to the trustee, instead of to the bankrupt.
(4) . . .
(5) Sums received by the trustee under an income payments order form
part of the bankrupt's estate.
(6) An income payments order shall not be made after the discharge of
the bankrupt, and if made before, shall not have effect after his discharge . .
.
(7) For the purposes of this section the income of the bankrupt
comprises every payment in the nature of income which is from time to time made
to him or to which he from time to time becomes entitled, including any payment
in respect of the carrying on of any business or in respect of any office or
employment [and any payment under a pension scheme but excluding any payment to
which subsection (8) applies.
(8) This subsection applies to -
(a) payments by way of guaranteed minimum pension; and
(b) payments giving effect the bankrupt's protected rights as a
member of a pension scheme.
(9) In this section, "guaranteed minimum pension" and "protected
rights" have the same meaning as in the Pension Act 1993.]"
[The words within the square brackets, in subsections (2), (7), (8) and (9),
were added by the Pensions Act 1995]
30. At first sight the scope of section 310 IA 1986 seems reasonably clear. It
applies to property ("income of the bankrupt") which would not, but for an
order under the section, form part of the bankrupt's estate. It does not apply
to property which already (absent any order under the section) does form part
of the estate. There are four factors which point to that conclusion. First,
the order is made on the application of the trustee. There would be no need for
the trustee to apply for an order "claiming for the bankrupt's estate" property
that was already comprised in the estate. Second, the effect of the order is
that sums received by the trustee under it form part of the bankrupt's estate -
see section310(5) IA 1986. There would be no need for that provision if the
property was already comprised in the estate. Third, section 310(3) IA 1986
provides that the order must be addressed either (a) to the bankrupt, requiring
him to make a payment to the trustee of an amount out of the payment which he
has received or (b) to the person who would otherwise be making the payment to
the bankrupt, requiring him to make a payment to the trustee instead of to the
bankrupt. That provision clearly contemplates that the monies to be paid to the
trustee pursuant to the order would not be payable to him but for the order.
Fourth, there is nothing in the section which enables the bankrupt to apply for
an order against the trustee; as there would need to be if the section was
intended to apply to property which (absent any order under the section) was
already part of the estate.
31. It follows that the property to which section 310 applies ("income of
the bankrupt") is not property within section 283(1)(a) IA 1986 ("property
belonging to or vested in the bankrupt at the commencement of the bankruptcy").
Property belonging to or vested in the bankrupt at the commencement of the
bankruptcy does form part of the bankrupt's estate; unless it is expressly
excluded from the estate by some other provision in section 283 itself - see,
for example, section 283(2) (tools of the trade), section 283(3) (property held
on trust), section 283(3A) (assured, protected and secure tenancies) - or by
some other enactment (section 283(6) IA 1986). Property excluded under sections
283(2) and (3A) is the subject of specific "claw-back" provisions -see section
308 and 308A IA 1986. Section 310 IA 1986 is not part of that scheme. The
section is plainly intended to apply to after-acquired property, to which the
bankrupt had no entitlement at the date of the bankruptcy order. Further, the
property to which the section does apply ("income of the bankrupt") is taken
out of the provisions of section 307 IA 1986 by subsection (5) of that section.
So it is after-acquired property which can only be claimed for the estate by
means of an income payments order.
32. With these considerations in mind it is not difficult to identify the
nature of the property which is within section 310 IA 1986. It is described in
section 310(7) as originally enacted:
" .. . . every payment in the nature of income which is from time to time
made to [the bankrupt] or to which he from time to time becomes entitled,
including any payment in respect of the carrying on of any business or in
respect of any office or employment . . ."
33. The section is clearly intended to apply to income to which the bankrupt
had no entitlement at the date of the bankruptcy order; but to which he becomes
entitled during the course of his bankruptcy - say, as earnings from his
profession or employment. That income is to be made available to meet the
claims of his creditors in the bankruptcy; save to the extent that it is needed
to meet the reasonable domestic needs of the bankrupt and his family - see
section 310(2) IA 1986. The bankrupt is not to be the slave of his trustee;
but, if he is earning during the bankruptcy, he may be required to provide for
his creditors out of his earnings. The income to which the section applies is
not restricted to earnings; it includes other income which the bankrupt may
receive during the bankruptcy - say, an allowance from a parent or other
relative, or income under a discretionary trust. But the section is not
intended to 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 case the
right, and the income received by virtue of that right, forms part of the
bankrupt's estate under the provisions of section 283(1)(a) IA 1986. There is
no need for the trustee to have recourse to section 310 IA 1986 in those
circumstances.
In re Landau (a bankrupt)
34. It is convenient, now, to examine the decision in In re Landau
[1998] Ch 223. At the date of the bankruptcy the bankrupt was entitled to a
pension, payable in the future on his attaining the age of 65 years, under a
policy which had been approved as an annuity contract for the purposes of
section 226 ICTA 1970. The bankrupt, a former solicitor, was aged 61 years
when the bankruptcy order was made in 1990. He was discharged under the
automatic provisions in 1993. The annuity became payable when he attained age
65 years in the following year. He claimed the annuity payments. The trustee,
after some equivocation, claimed to be entitled to elect under the policy to
commute part of the annuity for a tax free lump sum; and to take that lump sum
and the reduced annuity as part of the bankrupt's estate. The policy contained
the familiar restriction against alienation; required as a condition of Revenue
approval.
35. Mr Justice Ferris, at [1998] Ch 223, 231E-G, identified three main
issues for decision: (i) whether, if the restriction on alienation were
disregarded, the policy would constitute "property belonging to or vested in
[the bankrupt] at the commencement of the bankruptcy", so as to form part of
the estate by virtue of section 283(1)(a) IA 1986; (ii) if so, whether that
result was precluded by the restriction on alienation in the policy; and (iii)
whether, if the policy vested in the trustee as part of the bankrupt's estate,
was it nevertheless within the scope of section 310 IA 1986 so as to be
available to meet the claims of creditors only if and insofar as an income
payments order were made. The bankrupt having been discharged from his
bankruptcy, it was too late to make such an order - see section 310(6) IA
1986.
36. The judge decided the first of those issues in favour of the trustee. He
pointed out that the `bundle of contractual rights' under the pension policy to
which the bankrupt had been entitled at the commencement of the bankruptcy fell
within the description `things in action . . . whether present or future or
vested or contingent'; and so had to be regarded as within the definition of
`property' in section 436 IA 1986. It was immaterial that the policy was not in
payment at the commencement of the bankruptcy. At the commencement of the
bankruptcy the bankrupt had a present right to require the pension provider to
make payments under the policy in the future. It was that right - and the
associated rights to elect when payments should commence - which formed part of
the bankrupt's estate for the purposes of section 283(1)(a) IA 1986; and which
vested in the trustee immediately on his appointment, under the provisions of
section 306 IA 1986.
37. There is no challenge, on the present appeals, to the conclusion reached by
Mr Justice Ferris on the first of the issues which he decided. If I may say so,
Mr Justice Ferris was plainly right to reach the conclusion which he did; and
for the reasons which he gave. The decision not to challenge that conclusion
was correct.
38. Mr Justice Ferris decided the second of those issues in favour of the
trustee also. He pointed out, correctly in my view, that the provisions of
section 226 ICTA 1970 - under which the policy with which he was concerned had
been written - were of limited relevance to the question which he had to
decide. Those provisions did not, of themselves, purport to make the rights
under the policy inalienable; they simply provided the background against which
the policy itself fell to be construed. The policy was plainly intended to
satisfy the requirements for approval under section 226 ICTA 1970; so, in the
case of ambiguity (if any) it would be appropriate to construe the policy in a
sense which gave effect to that intention. But the answer to the question "did
the restriction on alienation prevent the rights under the policy vesting in
the trustee in bankruptcy" lay in the terms of the policy itself. In In re
Landau, the relevant term was in paragraph 11 of the schedule: "This policy
cannot be surrendered and no annuity can be assigned or commuted except as
provided in provisions 8 and 9 of this schedule." The judge held that, as a
matter of construction, the prohibition against assignment in paragraph 11 did
not extend to transmission by operation of law; in particular the prohibition
did not seek to prevent the vesting of the rights under the policy in a trustee
in bankruptcy pursuant to section 306 IA 1986 - see [1998] Ch 223, 237B-C.
39. The third of the issues for decision in In re Landau was whether, if
the policy vested in the trustee as part of the bankrupt's estate, was it
nevertheless within the scope of section 310 IA 1986 so as to be available to
meet the claims of creditors only if and insofar as an income payments order
were made; an order which, on the facts in In re Landau, the court could
not make. Mr Justice Ferris decided that issue in favour of the trustee. He was
satisfied that "on the ordinary meaning of the language used in section 310"
that section had no application to property or income which has vested in the
trustee in bankruptcy under section 306 IA 1986. I have already indicated,
earlier in this judgment, why I share that view. But, after referring to a
number of authorities on the effect of section 51(2) of the Bankruptcy Act 1914
- which he described as the statutory predecessor of section 310 IA 1986 - and
its predecessors, Mr Justice Ferris posed the question: "whether the decisions
on section 51(2) of the Act of 1914 and its predecessors oblige me to give a
similar effect to section 310, notwithstanding the view I take as to the
ordinary meaning of the words used in section 310." He answered that question
in the negative. He held that the right to payment of the annuity payable under
the policy with which he was concerned vested in the trustee as part of the
bankrupt's estate on his appointment and that section 310 IA 1986 had no
application to it when it became payable.
The issues on these appeals.
40. I have referred to the judgment in In re Landau [1998] Ch 223 at
some length because - as I have already indicated - it is in that judgment that
the reasons for the orders which are the subject of the present appeals are to
be found. The issues raised in the present appeals, as identified in the
notices of appeal lodged on behalf of Mr Dennison and Mr Lesser and summarised
in the skeleton arguments submitted by their respective counsel, are these:
(1) Do the statutory restrictions which restrict assignment of pensions
policies prevent such policies from constituting `property belonging to or
vested in the bankrupt at the commencement of the bankruptcy' so as to form
part of the bankrupt's estate by virtue of section 283(1) IA 1986?
(2) If the policies do vest in the trustee as part of the bankrupt's estate,
are they or the annuities payable under them caught by section 310 IA 1986, so
that (notwithstanding that they have vested in the trustee) the income under
them belongs to the bankrupt and becomes available to the creditors only if an
income payments order is made under that section?
3(i) If the effect of IA 1986 is that pension policies vest in a trustee in
bankruptcy, without the Court having jurisdiction as to whether some or all of
the pension should be paid to the bankrupt, would that constitute a breach of
Schedule 1, Part II of Article 1 of the European Convention of Human Rights
(sic)?
(3)(ii) If the effect of IA 1986 is that the policies in existence as at the
date of the coming into force of that Act vest in the trustee in bankruptcy
without the Court having jurisdiction as to whether some or all of the pension
should be paid to the bankrupt, would that constitute a breach of the said
Article 1?
(3)(iii) In either case (3)(i) or (3)(ii) does IA 1986 admit of any
construction which does not produce this result?
41. The reference in Mr Dennison's skeleton argument to "Schedule 1, Part II of
Article 1 of the European Convention of Human Rights" is to be understood as a
reference to Article 1 of the First Protocol to the European Convention on
Human Rights. The First Protocol to the Convention is incorporated as Part II
of Schedule 1 to the Human Rights Act 1998. The Act does not come into force in
England and Wales until 2 October 2000.
Do the statutory restrictions which restrict assignment of pensions policies
prevent such policies from vesting in the trustee in bankruptcy as part of the
bankrupt's estate?
42. This is, in effect, a re-formulation of the second of the three issues
determined by Mr Justice Ferris in In re Landau [1998] Ch 223. As Mr
Justice Ferris pointed out, the answer lies not in the statutory provisions,
contained in section 226 ICTA 1970 and, now, in Chapter IV, Part XIV ICTA 1988,
but in the terms of the policies themselves and (I would add) in the general
law. The statutory provisions do not restrict the alienation of rights or
benefits under retirement annuity contracts or under personal pension schemes.
Those provisions do not, and do not purport to, do anything other than
prescribe the conditions which must be satisfied before a retirement annuity
contract or a personal pension scheme can be approved by the Board of Inland
Revenue and so qualify for favourable tax treatment. It is appropriate to have
those provisions in mind when construing the terms of the policies; but, unless
the policies themselves have the effect, on their true construction and having
regard to the general law, that, on the bankruptcy of the policyholder, the
rights and benefits thereunder do not vest in his trustee, the question posed
must be answered in the negative. There is nothing in the provisions in section
226 ICTA 1970 and in Chapter IV, Part XIV ICTA 1988 which leads to a different
conclusion.
43. Section 226 ICTA 1970 was first enacted as section 43 of the Finance Act
1956. That section was enacted in order to give effect to recommendations in
the Report of the Committee on the Taxation Treatment of Provisions for
Retirement (1954, Cmnd. 9063, "the Millard Tucker Report"). The problem to
which section 43(2) of the Finance Act 1956 (re-enacted as section 226(2) ICTA
1970) was addressed is identified at paragraph 201 of the report:
"The object of the requirement suggested in paragraphs 160 and 164 above that,
with certain exceptions, benefits should take the form of non-commutable
pensions is to ensure that they are taxable. That object might be wholly or
partly defeated if the pensioner could assign his pension for a lump sum,
either to somebody liable to a lower rate of tax, or, by way of surrender, to
the person by whom it is paid, or otherwise. We therefore recommend that
pensions should be non-assignable, as well as non-commutable, and that this
should be made a condition of automatic approval. It may not always be
possible, however, to prevent the assignment of a pension when it is required
by operation of law. This might happen, for example, where the Court is making
provision for the maintenance of a divorced wife or the children, or, with some
types of pension, in bankruptcy proceedings. The position depends on the terms
of the particular contract under which the pension is paid. The mere fact
that the pension may be assigned or charged by operation of law, without the
consent of the pensioner, should not disqualify the scheme from automatic
approval." [emphasis as in original text]
44. It is clear, therefore, that the Committee accepted that the
requirement that pensions should be non-assignable - which, as they
recommended, should be a condition of approval for favourable tax treatment -
would not prevent the transfer of rights by operation of law; in particular, by
operation of the bankruptcy legislation. As the Committee recognised "The
position depends on the terms of the particular contract under which the
pension is paid."
45. What, then, is the position under the retirement annuity contracts and
personal pension schemes in the present case? The relevant restriction is
limited to a contractual prohibition against assignment. There is no provision
which seeks to make void a purported assignment. There is no provision which
seeks to forfeit a pension in the event of bankruptcy.
46. The starting point, as it seems to me is the long established principle
that it is contrary to the public interest to allow a party to contract out of
the operation of the bankruptcy code - see Ex parte Mackay, In re
Jeavons (1873) 8 Ch App 643, applied in British Eagle International
Airlines Ltd v Compagnie Nationale Air France [1975] 1WLR 758 (HL). It was
this principle which led Mr Justice Joyce to hold, in In re Fitzgerald
[1903] 1 Ch 933, that a contract by a wife to settle property on an
inalienable trust for her husband (if he survived her) was void and
inoperative. As he put it, at page 940:
"But according to the law of England an inalienable trust cannot be created in
favour of a man even for his maintenance. A mere prohibition of alienation
cannot effectually be imposed except in the case of a married woman's separate
property: Brandon v Robinson (18) Ves. 429; Graves v Dolphin 1
Sim.66; Younghusband v Gisborne (1844) 1 Coll. 400. It is contrary to
the policy of the law in this country that property should be settled so as to
continue in the enjoyment of a bankrupt notwithstanding bankruptcy."
47. It is, to my mind, unarguable that a mere restriction against
alienation in an annuity contract, or in a pensions scheme, can prevent the
benefits under that contract, or under that scheme, from vesting in a trustee
in bankruptcy.
48. The need to protect certain classes of pension benefits from the claims of
creditors has been recognised by Parliament for at least 130 years. Where it
has thought it right to provide such protection, Parliament has enacted that an
assignment of the pension rights shall be void. Examples are found in the Naval
and Marine Pay and Pensions Act 1865, in the Army Act 1955 and, now, in the
Superannuation Act 1972. Section 5(1) of the last named Act provides an
illustration of the statutory formula that has traditionally been employed:
"5(1) Any assignment (or, in Scotland, assignation) of or charge on, and any
agreement to assign or charge, any benefit payable under a scheme made under
section 1 of this Act shall be void."
49. The courts have given effect to that formula by holding that it precludes
vesting in a statutory assignee or trustee in the event of bankruptcy. In the
light of that legislative history, I would not, myself, adopt the reasoning of
Mr Justice Ferris in In re Landau [1998] Ch 223, at page 237B-C, in so
far as he accepted the argument of counsel for the trustee that the relevant
restriction against assignment in the policy which he had to consider did not
purport to extend to vesting in a trustee in bankruptcy by operation of law. I
would prefer to base my conclusion on the principle - which Mr Justice Ferris
treated as an additional ground for his decision on this issue - that an
attempt to provide, by contract, that benefits will be inalienable on a
bankruptcy must fail on grounds of public policy.
50. An early example of a more explicit prohibition against vesting in the
trustee on bankruptcy can be found in section 14(1) of the Police Pensions Act
1921, which was before the court in In re Garrett [1930] 2 Ch 137. That
section provided not only that any assignment of the pension payable under the
Act should be void, but (in express terms) that, on the pensioner's bankruptcy,
the pension should not pass to "any trustee or other person". It is that
formula which has been adopted in more recent legislation. Examples are to be
found in sections 48(1) and (2) of the Social Security Pensions Act 1975 (in
respect of a guaranteed minimum pension) and in sections 2(7) and (8) of the
Social Security Act 1986 (in respect of payments to give effect to protected
rights). The latter provisions are in these terms :
"2(7) Every assignment of or charge on and every agreement to assign protected
rights or payments giving effect to protected rights shall be void.
2(8) On the bankruptcy of a person who is entitled to protected rights or a
payment giving effect to protected rights, any protected rights or payment the
assignment of which is or would be made void by subsection (7) above shall not
pass to any trustee or person acting on behalf of his creditors."
51. The provisions in sections 48(1) and (2) of the Social Security
Pensions Act 1975 and in sections 2(7) and (8) of the Social Security Act 1986
were re-enacted as sections 159(4) and (5) of the Pension Schemes Act 1993; and
the same protection from creditors was extended to other rights under an
occupational pension scheme by section 91 of the Pensions Act 1995 - see, in
particular, section 91(5):
"91(5) Where a bankruptcy order is made against a person, any entitlement or
right of his which by virtue of this section cannot . . . be assigned is
excluded from his estate for the purposes of Parts VIII to XI of the Insolvency
Act 1986 . . ."
52. The position, therefore, is that Parliament knows well how to provide,
when it thinks fit, that the general public interest that a restriction on
alienation shall not be enforceable against creditors in a bankruptcy should
yield to some more specific element of public policy requiring the protection
of pension rights. It has done so, over many years, in relation to what may be
described, generically, as public service pensions. It did so, in 1975, in
relation to guaranteed minimum pensions provided by an occupational pension
scheme. It extended that protection in 1986 to protected rights under an
occupational pension scheme; and, in 1995, to rights generally under an
occupational pensions scheme. It did not think fit to do so, in relation to
retirement annuity contracts or personal pension schemes, until the enactment
of section 11 of the Welfare Reform and Pensions Act 1999. In particular, it
did not think fit to do so when it enacted (or re-enacted) the provisions which
first appeared in section 43 of the Finance Act 1956. That must, I think, be
taken to have been a deliberate legislative choice. It is not, in my view, to
be circumvented by giving a strained construction to the definition of property
in section 436 IA 1986; or in refusing to give effect to the clear words of
sections 283(1) and 306 of that Act.
53. For those reasons I would decide the first issue of the issues raised
on these appeals in the negative.
If the policies do vest in the trustee as part of the bankrupt's estate, are
they or the annuities payable under them caught by section 310 IA 1986, so that
(notwithstanding that they have vested in the trustee) the income under them
belongs to the bankrupt and becomes available to the creditors only if an
income payments order is made under that section?
54. For the purposes of section 310 IA 1986 "the income of the bankrupt"
comprises "every payment in the nature of income which is from time to time
made to him or to which he from time to time becomes entitled, including any
payment in respect of the carrying on of any business or in respect of any
office or employment and any payment under a pension scheme . . ." - see
section 310(7). The words which I have emphasised were added by section 122 of,
and paragraph 15 in schedule 3 to, the Pensions Act 1995. Strictly, perhaps,
they do not assist in the interpretation of section 310 IA 1986 as it was at
the date of the bankruptcy orders made in respect of Mr Dennison and Mr Lesser.
But it would, I think, be artificial to ignore them.
55. I have already explained why I take the view that section 310 IA 1986 can
have no application to income which the bankrupt would have been entitled to
receive by virtue of some right to which he was entitled at the date of the
bankruptcy order. In such case the right, and the income received by virtue of
that right, forms part of the bankrupt's estate under the provisions of section
283(1)(a) IA 1986. The property to which section 310 applies ("income of the
bankrupt") is not property within section 283(1)(a) IA 1986 ("property
belonging to or vested in the bankrupt at the commencement of the bankruptcy").
The words "including . . . any payment under a pension scheme" have to be read
in the context of the bankruptcy legislation as a whole. In that context it is
clear that those words refer to pension payments the right to receive which do
not vest in the trustee on the making of the bankruptcy order - for example,
payments made under a public service pension scheme to which section 5(1) of
the Superannuation Act 1972 applies.
56. I find support for that view in the circumstances in which the words
"including . . . any payment under a pension scheme . . ." were introduced by
the Pensions Act 1995. That Act, as I have already pointed out, extended the
protection against the claims of creditors in a bankruptcy, previously afforded
by section 159(5) of the Pension Schemes Act 1993 to "protected rights" and
"guaranteed minimum pension" payable under an occupational pension scheme, to
all accrued rights under such a scheme. But, at the same time, the Act provided
for the court to have power, on the application of the trustee in bankruptcy,
to redress the position if satisfied that those rights had been obtained by the
making of excessive contributions to the scheme - see section 95 of the
Pensions Act 1995. Further, the Act gave additional protection to "protected
rights" and "guaranteed minimum pension" - see paragraph 41 in schedule 3,
which introduces a new subsection, subsection (4A), into section 159 of the
Pension Schemes Act 1993. The new subsection 159(4A) of the 1993 Act required
that no order should be made by any court the effect of which would be that a
person entitled to receive payments in respect of protected rights or
guaranteed minimum pension would be restrained from receiving "anything the
assignment of which would be made void" by sections 159(1) or (4). In effect,
therefore, the power of the court to make an income payments order under
section 310(1) IA 1986 in respect of payments of that description - payments
which, plainly, could not form part of the bankrupt's estate but which would,
prima facie, comprise "income of the bankrupt" within sections 310(1)
and (7) IA 1986 - was curtailed. The legislative intention was reinforced by
the amendment made to section 310(7) IA 1986 by paragraph 15 in schedule 3 to
the Pensions Act 1995. That amendment introduced the additional words "and any
payment under a pension scheme" into section 310(7) IA 1986; but qualified
those words by excluding any payment to which subsection (8) applies. Section
310(8) - introduced by the same amending provision - applied to payments in
respect of protected rights and guaranteed minimum pension under an
occupational pension scheme. It is clear, therefore, that when Parliament
amended section 310(7) IA 1986 so as to include an express reference to
payments under a pension scheme it did so in the context of the changes it was
making to the protection from the claims of creditors in a bankruptcy of rights
under occupational pension schemes - rights which it had decided should not
form part of the bankrupt's estate. There is no reason to think that the
introduction of the additional words "any payment under a pension scheme" into
section 310(7) IA 1986 reflected any legislative concern to reverse what would
otherwise be the plain meaning of the section as originally enacted; namely
that payments the right to receive which did form part of the bankrupt's estate
were outside the scope of section 310 IA 1986 altogether.
57. The 1995 pension law reforms followed the Report of the Pension Law
Review Committee (Cm 2342-1), under the chairmanship of Professor Roy Goode (as
he then was). It is, I think, interesting to note the views expressed by the
Goode Committee at paragraphs 4.14.33 to 4.14.35 under the general heading
"Attachment of Pension Rights". It must be kept in mind that, in expressing
those views, the Committee was directing its observations to occupational
pension schemes. The Committee was not concerned, in those paragraphs, with
personal pension schemes - see paragraph 2.5.8 of the Report. [Note: The
distinction between occupational pension schemes and personal pension schemes
is made in section 1 of the Pension Schemes Act 1993.] The relevant
paragraphs in the Report are these:
"4.14.33 As noted above, future pension rights are in principle an asset of
the scheme member and as such are available to be taken in execution to satisfy
a judgment debt and to be distributable among creditors in the scheme member's
bankruptcy. But since scheme rules nearly always provide for rights of pensions
not in payment to cease on levy of execution, attachment of earnings or
bankruptcy there is in practice no asset or pension income capable of being
attached or otherwise being made available to creditors. Accordingly the same
factor that precludes assignment renders the asset represented by future
pension entitlements immune from the claims of a member's creditors. The
position is otherwise, of course, where the scheme has come into payment, as
regards sums that have been paid over by the trustees to the beneficiary or
have become due for payment. These are income in the hands of the scheme member
and do not enjoy any greater protection from creditors than any other income of
the scheme member.
4.14.34 It may be thought unfair to creditors that the asset represented by
future pension rights should not be attachable. But it has to be remembered
that employers do not establish schemes in order to benefit creditors of scheme
members, nor is substantial tax relief given for that purpose. To allow future
pension payments to be attached by execution creditors or made a bankruptcy
asset would be to frustrate that fundamental purpose. The evidence submitted to
us shows a broad consensus in favour of exempting future pension entitlements
from the claims of creditors.
4.14.35 We therefore consider that the immunity currently granted by the
Social Security Pensions Act 1975 to [guaranteed minimum payments] and
entitlements to protected rights payments should be extended to cover all
pension entitlements. This would not preclude execution creditors from
attaching money in the hand paid to the scheme member, nor would it prevent
trustees in bankruptcy from exercising their normal statutory right to apply
for an income payments order requiring the bankrupt to pay over income in
excess of what is necessary for meeting the reasonable domestic needs of his
family. Except as provided by statute there is no reason why pension payments
made or due to a scheme member should be treated differently from other income
in the scheme member's hands or enjoy any special immunity. But exemption of
the asset represented by the future pension rights would give statutory effect
to the protective trust provisions so widely adopted in scheme documents,
enabling trustees to pay future benefits to a spouse or other dependant instead
of to the scheme member."
58. Those paragraphs bring out the points: (i) that, in principle, future
pension rights are an asset which will pass to the trustee in bankruptcy; (ii)
that, in the case of an occupational pension scheme, that result can be avoided
by provisions in the scheme rules analogous to protective trusts; (iii) that
the immunity granted to guaranteed minimum pensions and protected rights
payments - that is to say, exclusion from the bankrupt's estate - should be
extended to all pension entitlements under occupational pension schemes; and
(iv) that it is to income from pension entitlements which enjoy that immunity
that the provisions of section 310 IA 1986 - enabling the court to make income
payments orders - are intended to apply.
59. The foundation of the appellants' argument on this second issue is the
decision of the Court of Appeal in Ex parte Huggins, In re Huggins
(1882) 21 ChD 85. The bankrupt had been Chief Justice of Sierra Leone. On
his retirement in 1879 he was granted a pension. He returned to England and, as
Sir George Jessel, Master of the Rolls, put it, at page 89 . . . "was induced
to enter into a bottle washing speculation, and the result was, what might have
been expected, it has brought him to ruin and bankruptcy". The Master of the
Rolls identified as "the only question" . . . "whether his creditors in the
bottle washing-business are entitled to take the pension which he has so hardly
earned to pay the debts which he has contracted with them". The trustee
applied for, and obtained, an order that the pension had vested in him as part
of the property of the bankrupt, and for a direction what proportion of that
pension should be set aside for payment of the creditors and what proportion
for the bankrupt's maintenance. The importance which the appellants attach to
the decision lies in the fact that the Court of Appeal was willing to treat as
"income" for the purposes of section 90 of the Bankruptcy Act 1869 income
derived from property (the pension rights) which, as the court held, had vested
in the trustee under section 17 of that Act.
60. Sections 89 and 90 of the Bankruptcy Act 1869 were in these terms:
"89. Where a bankrupt is or has been an officer of the army or navy, or an
officer or clerk or otherwise employed or engaged in the civil service of the
Crown, or is in the enjoyment of any pension or compensation granted by the
Treasury, the trustee during the bankruptcy, and the registrar after the close
of the bankruptcy, shall receive for distribution amongst the creditors so much
of the bankrupt's pay, half-pay, salary, emolument or pension as the court,
upon the application of the trustee, thinks just and reasonable, to be paid in
such manner and at such times as the court, with the consent in writing of the
chief officer of the department under which the pay, half-pay, salary,
emolument, pension, or compensation is enjoyed, directs.
90. Where a bankrupt is in the receipt of a salary or income other than as
aforesaid, the court upon the application of the trustee shall from time to
time make such order as it thinks just for the payment of such salary or
income, or of any part thereof, to the trustee during the bankruptcy, and to
the registrar if necessary after the close of the bankruptcy, to be applied by
him in such manner as the court may direct."
61. Those sections were subsequently re-enacted as sections 53(1) and (2)
of the Bankruptcy Act 1883; and as sections 51(1) and (2) of the Bankruptcy Act
1914. They may properly be regarded as the fore-runner of what is now section
310 IA 1986. The appellants submit that, in the circumstances that the Court of
Appeal was prepared to hold, in 1882, that pension payments could be income
within section 90 of the Bankruptcy Act 1869 notwithstanding that the rights to
those payments had vested in the trustee in bankruptcy under section 17 of that
Act, so, now, it should be held that pension payments are "income" within
section 310 IA 1986, notwithstanding that the rights to those payments have
vested in the trustee under section 306 IA 1986.
62. Ex parte Huggins was followed - albeit, latterly, with some
reluctance - over the period of one hundred years or more prior to the
enactment of the new bankruptcy code now found in IA 1986. In In re Garrett
[1930] 2 Ch 137 - a case in which the pension payable under the Police
Pensions Act 1921 did not vest in the trustee - Mr Justice Farwell held that
section 51(2) of the Bankruptcy Act 1914 applied "both to property that vests
in the trustee under s. 18, sub-s. 1, and also to property not so vesting".
That decision was approved by the Court of Appeal in In re Landau
[1934] Ch 549. In In re Tennant's Application [1956] 1 WLR 874 the
Court of Appeal did not find it necessary to decide whether the right to
payments made by a husband to a former wife under covenant did or did not vest
in the wife's trustee in bankruptcy because, as Lord Evershed, Master of the
Rolls, put it at page 882:
". . . the monthly sums with which we are here concerned constitute income
within section 51(2) [of the Bankruptcy Act 1914], and if the property in those
sums did vest in the trustee (as I do not decide) then the effect of the
vesting is controlled and qualified by section 51(2), so that the trustee's
rights and powers in regard to them are limited to those stated in that
subsection."
63. Both Lord Evershed, Master of the Rolls, (at page 878) and Lord Justice
Jenkins (at page 884) expressed the view, in In re Tennant's Application,
that, but for the earlier decisions which were binding upon them, they
would have held that section 51(2) of the Bankruptcy Act 1914 applied only to
cases where the right to receive the salary or income did not vest in the
trustee under the general vesting provisions of that Act. Lord Evershed, Master
of the Rolls, reiterated that view in In re Cohen [1961] Ch 246, at
page 260. He indicated, at page 266, that the position in relation to income
the right to receive which had vested in the trustee merited reconsideration by
Parliament - or by the House of Lords in its judicial capacity. Lord Justice
Upjohn, who had himself doubted Ex parte Huggins when sitting at first
instance in In re Tennant's Application, agreed with the views expressed
by the Master of the Rolls in In re Cohen - see page 267.
64. It may be said, therefore, that the position under the bankruptcy law in
this country, as it stood up to the enactment of the new code in 1985, was that
the "income" of a bankrupt fell to be dealt with under section 51(2) of the
Bankruptcy Act 1914 notwithstanding that it was income the right to receive
which had vested in the trustee in bankruptcy under section 53 of that Act. The
reason, as explained by Lord Justice Jenkins in In re Tennant's
Application, at page 883, was that it had been held in Ex parte
Huggins (1882) 21 ChD 85 that the section "controlled and qualified
the operation of the vesting provisions of the Act with respect to any
income to which the section applied". But it must also be said that the Court
of Appeal had expressed a strong view, in 1956 and in 1961, that the matter
required reconsideration.
65. The question, therefore, is whether this court is obliged to follow Ex
parte Huggins, notwithstanding the changes which have been made in the new
bankruptcy legislation; or whether it may properly take the view that those
changes reflect an intention, upon the reconsideration by Parliament of the
position, that the law as expressed in Ex parte Huggins should be
altered. I have no doubt that the changes reflect an intention to alter the
law. It is important to have in mind that the treatment of after-acquired
property - that is to say, property which did not belong to or was not vested
in the bankrupt at the commencement of the bankruptcy - has been altered by the
new legislation. The position under the 1914 Act and its predecessors was that
property which was acquired by or devolved on the bankrupt after the
commencement of his bankruptcy but before his discharge was part of the
"property of the bankrupt divisible amongst his creditors" for the purposes of
section 38 of the Bankruptcy Act 1914; and so vested automatically in the
trustee - see section 38(a) and section 53(1) of the Act, and their statutory
predecessors, sections 15(3) and 17 of the Bankruptcy Act 1869. The effect,
therefore, was that any payment, whether by way of salary or income or
otherwise, would, when received by the bankrupt and in the absence of some
other provision, become part of the property of the bankrupt divisible amongst
his creditors. It would, plainly, be oppressive and unworkable if every payment
of salary received by the bankrupt in the course of his bankruptcy were
immediately to become property divisible amongst his creditors and had to be
treated as if it had vested in the trustee. In those circumstances it is easy
to see why, as Lord Justice Jenkins pointed out in In re Tennant's
Application [1956] 1 WLR 874, at page 883, section 51(2) of the 1914 Act
was thought to have the role of controlling and qualifying the vesting
provisions of that Act. The section was needed for that purpose.
66. There is no need for section 310 IA 1986 to fulfil that role in the new
legislation. After-acquired property does not automatically form part of the
bankrupt's estate - see section 283(1)(a) IA 1986. It does so only if a notice
is served by the trustee in bankruptcy under section 307(1) IA 1986. But
after-acquired property which, as part of the bankrupt's income, could be the
subject of an income payments order under section 310 IA 1986, cannot be the
subject of a notice under section 307(1) - see section 307(5) IA 1986. Section
310 provides a separate regime in relation to after- acquired property which is
in the nature of income. Such property does not form part of the bankrupt's
estate unless it is received by the trustee under an income payments order.
Section 310 does not control and qualify the vesting provisions in sections 306
or 307 IA 1986; it supplements those provisions. It applies to property which
would not otherwise fall within those provisions. There is no need, and no
justification, for construing section 310 IA 1986 as having any application to
property which has vested in the trustee on his appointment under section
306(1).
67. For those reasons I would answer the second issue raised by these appeals,
also, in the negative.
Does the vesting of the pension policies (including those in force prior to
1986) in the trustee in bankruptcy, in circumstances in which the Court has no
jurisdiction to direct that some or all of the pension should be paid to the
bankrupt, constitute a breach of Article 1 of the First Protocol to the
Convention?
68. Article 1 of the First Protocol to the European Convention on Human Rights
is in these terms:
"Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the public
interest and subject to the conditions provided for by law and by the general
principles of international law.
The preceding provisions shall not, however, in any way impair the right of a
State to enforce such laws as it deems necessary to control the use of property
in accordance with the general interest or to secure the payment of taxes or
other contributions or penalties."
69. The appellants accept, of course, that the Article does not yet have the
force of law in England and Wales. Nor is the court yet required, or entitled,
to give effect to section 3(1) of the Human Rights Act 1998; which requires
that, so far as it is possible to do so, primary and secondary legislation must
be read and given effect in a way which is compatible with Convention rights.
But the appellants submit, correctly, that, in construing the relevant
provisions of IA 1986 the court should follow the approach indicated by
Lord Diplock in Garland v British Rail Engineering Ltd [1983] 2 AC 751,
at page 755A-B, and construe the words of the statute, if they are reasonably
capable of bearing such a meaning, as intended to carry out an international
obligation which the United Kingdom has assumed under a treaty or convention
and not so as to be inconsistent with that obligation.
70. In order to achieve the result for which the appellants contend it would be
necessary either (i) to construe the words in section 436 IA 1986 which define
"property" in such a way as to exclude rights under retirement annuity
contracts and personal pension schemes, or (ii) to construe the words in
section 283(1)(a) IA 1986 (which define the bankrupt's estate for the purposes
of Part IX of the Act) in such a way as to exclude such rights where the
contract or scheme contains a restriction on alienation, or (iii) to construe
the words in section 306 IA 1986 (which provide for the vesting of the
bankrupt's estate in the trustee in bankruptcy immediately on his appointment)
in such a way as to exclude such rights where the contract or scheme contains a
restriction on alienation, or (iv) to construe section 310 IA 1986 so as to
apply to income of, or derived from, property which has vested in the trustee
in bankruptcy under section 306 IA 1986. We were not, I think, asked to attempt
the tasks set under (i) or (ii) of that analysis. The appellants recognise,
perhaps, that that would be to attempt the impossible. Nor do I think that it
is possible to achieve the result for which the appellants contend - the
exclusion from the vesting provisions in section 306 IA 1986 of rights under a
contract or scheme which contains a restriction on alienation - by any process
which can be described as the construction of section 306 itself. The
submission, as I understand it (and it would not, I think, be unfair to take
the view that it was not advanced with the same display of confidence or
enthusiasm as the submissions under the first and second issues raised by these
appeals), was that we were bound to construe section 310 IA 1986 in accordance
with proposition (iv) in order to avoid an inconsistency between the
legislation enacted in 1986 and the United Kingdom's obligations under the
Convention.
71. For that submission to succeed it would be necessary to be persuaded of two
matters: first, that what I have held to be the true construction of section
310 IA 1986 (without regard to the convention obligations imposed on the United
Kingdom by Article 1 of the First Protocol) is inconsistent with those
obligations; and second, that the words used in the statute are reasonably
capable of bearing the meaning for which the appellants contend. I am not
persuaded of either of those matters.
72. The relevant prohibition in Article 1 of the First Protocol is against
deprivation of possessions "except in the public interest and subject to the
conditions provided for by law". The reference to "the general principles of
international law" in the latter part of the second sentence has no application
to the taking by a State of the property of its own nationals - see paragraph
66 in the judgment of the European Court of Human Rights in James v United
Kingdom (1986) 8 EHRR 123, at page 151. Further, it can hardly be said that
a deprivation of property effected under the relevant provisions of the
bankruptcy legislation - in the present case, by section 306 IA 1986, read in
conjunction with sections 283(1)(a) and 436 IA 1986 - was not in accordance
with "the conditions provided for by law". The relevant question, as it seems
to me, is whether the vesting in the trustee in bankruptcy of the bankrupt's
rights under retirement annuity contracts and personal pension schemes, in
circumstances which exclude the power of the court to make an income payment
order under section 310 IA 1986, is in the public interest. In that context it
is relevant to have in mind that national authority is, in principle, better
placed than the international judge to appreciate what is in the "public
interest"; and so must be allowed a certain margin of appreciation - see the
observations of the European Court of Human Rights in James v United Kingdom
at paragraph 46 (8 EHRR 123 142):
". . . the decision to enact laws expropriating property will commonly involve
considerations of political, economic and social issues on which opinions
within a democratic society may differ widely. The Court, finding it natural
that the margin of appreciation available to the legislature in implementing
social and economic policies should be a wide one, will respect the
legislature's judgment as to what is `in the public interest' unless that
judgment be manifestly without reasonable foundation."
73. Examination of the historical treatment of pension rights under the law of
England, to which I have referred earlier in this judgment, leads to the
following conclusions. First, that Parliament has, for a long time, recognised
a need to exclude certain pension rights (in particular, rights under public
service pensions) from the full operation of the bankruptcy law - see, for
example, the Naval and Marine Pay and Pensions Act 1865, the Police Pensions
Act 1921, the Army Act 1955 and the Superannuation Act 1972 (and its statutory
predecessors). Second, that, when this has been done, the courts have had power
to make income payment orders in respect of the payments to be made in respect
of those pension rights - see sections 89 and 90 of the Bankruptcy Act 1869,
sections 51(1) and (2) of the Bankruptcy Act 1914 and, now section 310 IA 1986.
Third, that, more recently, Parliament has thought it right to extend that
regime, first, to protected rights and rights to minimum guaranteed pension
under occupational pension schemes - see sections 48(1) and (2) of the Social
Security Pensions Act 1975, sections 2(7) and (8) of the Social Security Act
1986 and sections 159(4) and (5) of the Pension Schemes Act 1993 - and,
latterly, to rights generally under an occupational pension scheme - see
section 91 of the Pensions Act 1995. Fourth, that, even more recently,
Parliament has extended the regime to rights under retirement annuity contracts
and personal pension schemes - see section 11 of the Welfare Reform and
Pensions Act 1999. Fifth, that the extension to pension rights generally,
whether under occupational pension schemes or under personal pension schemes,
is to be made subject to the safeguards against abuse that were enacted, in the
Pensions Act 1995, as sections 342A to 342C IA 1986 and re-enacted (in a
revised form) in section 15 of the Welfare Reform and Pensions Act 1999.
74. This, then, cannot be said to be an area in which Parliament has been
inactive over the past twenty five years. Clearly, Parliament has been
responding to a perception of what the public interest requires in this field.
It has done so against a background of judicial decisions, over very many
years, that the public interest requires, generally, that a bankrupt's property
should be available to answer the claims of his creditors. In my view it would
be quite impossible to hold that Parliament did not take full account of what,
in its view, the public interest required when, in 1986, it enacted section 310
IA 1986 in the form in which it did; or that, for Parliament to have failed to
provide that the courts should have power to make income payments orders in
respect of income derived from property which had vested in the trustee in
bankruptcy would have been inconsistent with the United Kingdom's obligations
under Article 1 of the First Protocol of the Convention.
75. That conclusion makes it unnecessary to consider, at any length, whether
the words used in the statute are reasonably capable of bearing the meaning for
which the appellants contend. But, for the reasons which I have already given,
I am not persuaded that the words used are reasonably capable of bearing that
meaning.
76. It follows that I would answer the third issue raised by these appeals in
the negative; and that, accordingly, I would dismiss these appeals.
LORD JUSTICE MAY:
77. I agree that these appeals should be dismissed for the reasons
given by Lord Justice Chadwick.
LORD JUSTICE KENNEDY:
78. I agree.