Raithatha v Williamson

Factual and Procedural Background

The Respondent was a longstanding shareholder and director of Company A, a quasi-partnership company, alongside another director and shareholder. The relationship between the two directors deteriorated, leading to a petition under s. 994 of the Companies Act 2006 by the other director, alleging unfair and prejudicial conduct by the Respondent and seeking an order for the Respondent to purchase the petitioner's shares. Judgment was given in favor of the petitioner, ordering the Respondent to purchase the shares and pay costs on an indemnity basis.

Following this, a bankruptcy petition was presented against the Respondent in respect of the costs, resulting in a bankruptcy order. The Applicant was appointed as the trustee in bankruptcy. The indebtedness exceeded £1.2 million, primarily owed to the petitioner as a creditor. The trustee has not recovered sufficient funds to discharge the debt. The Respondent was discharged from bankruptcy approximately one year later.

Shortly before discharge, the trustee applied for an Income Payments Order (IPO) under s. 310 of the Insolvency Act 1986 and sought an injunction without notice to restrain the Respondent from exercising rights under his pension scheme. The injunction was granted and later continued by consent pending the substantive application.

The Respondent disclosed pension entitlements estimated between £900,000 and £990,000, mostly within a private pension plan. The Respondent had not elected to take his pension benefits and resisted the trustee's application, arguing no jurisdiction existed for an IPO in respect of unelected pension rights.

Legal Issues Presented

1. Whether pension entitlements which a bankrupt is entitled to receive, but has not yet elected to receive, constitute "payments in the nature of income" under s. 310(7) of the Insolvency Act 1986, thereby permitting the court to make an Income Payments Order in respect of such entitlements.
2. Whether it was appropriate for the trustee to obtain, without notice, an injunction restraining the Respondent from dealing with his pension rights prior to the determination of the IPO application.

Arguments of the Parties

Respondent's Arguments

• The Respondent retains the "bundle of contractual rights," including the right to decide when and how to exercise pension options; these rights remain his property and the trustee cannot interfere.
• Payments must have been received or the right to receive them must have crystallised during bankruptcy to constitute "income" under s. 310; the Respondent has not yet become entitled to payment.
• A bankrupt has no entitlement to payment until an election is made; since no election was made, there is no entitlement.
• The court lacks power under s. 310(3) to compel an election or to make an IPO in the absence of entitlement to payment.
• Any such compulsion would unlawfully interfere with property rights under the European Convention on Human Rights (ECHR), particularly Article 1 of the First Protocol, citing Krasner v Dennison.
• Lump sum payments are not "payments in the nature of income" as they are one-off payments rather than periodic.

Trustee's Arguments

• The Respondent is regarded as having an entitlement to payment under the pension scheme once he qualifies to draw payment and can demand it; thus, the trustee is entitled to apply for an IPO in respect of such pension rights.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first rejected the Respondent’s argument that lump sum payments are not "payments in the nature of income," citing authority that one-off payments can qualify as income for the purposes of s. 310. The court emphasized that the statutory language does not require payments to be periodic.

Regarding the principal issue, the court noted the absence of direct authority and focused on statutory interpretation, concluding that the legislature did not intend to create a distinction between bankrupts who had elected to take pension payments and those who had not. The court reasoned that allowing unelected pension rights to escape the IPO regime would create an unjustifiable anomaly and unfairly prejudice creditors.

The court held that the trustee's interpretation—that a bankrupt is entitled to pension payments once qualified to demand them under scheme rules—is correct. This interpretation aligns with the statutory purpose of s. 310 and the amendments introduced by the Welfare Reform and Pensions Act 1999.

The court also dismissed the Respondent’s human rights arguments, finding no breach of property rights under the ECHR given the legislative intent and the court’s evaluative role in making IPOs.

On the injunction issue, the court found sufficient evidence of a real risk that the Respondent might dissipate pension assets to frustrate the trustee’s application, based on prior adverse findings against the Respondent and suspicious asset dealings. The court concluded that the without-notice injunction was justified and should be continued until the substantive proceedings are resolved unless a satisfactory undertaking is agreed.

Holding and Implications

The court held that pension entitlements which a bankrupt is entitled to receive under the rules of the pension scheme, even if not yet elected by the bankrupt, constitute income for the purposes of s. 310(7) of the Insolvency Act 1986. Accordingly, the court has jurisdiction to make an Income Payments Order in respect of such entitlements.

The court further held that the without-notice injunction restraining the Respondent from dealing with his pension rights was appropriately granted and should remain in force pending final determination, subject to any agreed undertaking.

The direct effect of this decision is to enable trustees in bankruptcy to apply for IPOs over pension entitlements not yet crystallised by election, thereby preventing bankrupts from avoiding claims by delaying pension elections. No broader precedent beyond the parties involved is established.