Summary
The recent judgment handed down by the High Court in Manolete v White [2023] EWHC 567 (Ch) reinforces the Court’s power to order a judgment debtor to exercise a right to draw down on their pension for the benefit of creditors as recently seen in Bacci v Green.
The Facts
For over a decade, Ian White served as a director of Lloyds British Testing Limited before it became insolvent, and Liquidators were appointed. The Liquidators, PwC, estimated creditors were owed over £3,306,000 . After investigating the company’s affairs, the Liquidators sued Mr White for breach of fiduciary duty to the Company by causing it to make payments towards luxury cars and holidays before it collapsed. The Liquidators’ claims were successful, and judgment was awarded against Mr White for just under £1 million. Mr White failed to satisfy the judgment or make any contribution toward it. Knowing that Mr White had benefitted handsomely from the Company pension scheme, the Liquidators pursued him in relation to his substantial pension entitlement.
In 2006, Mr White caused the Company to make a substantial contribution to the trustees of the Lloyds British Small Self-Administered Pension Scheme (a registered occupational pension scheme) in order that the trustees (of which he was one) could purchase a property in Swansea. The property, valued at £800,000, was the only substantial asset of the Scheme and, via a lease, it generated an income of £60,000 per annum. As sole beneficiary of the Scheme, Mr White was entitled to a residual pension after a pension commencement lump sum, funded from the £60,000 annual income from the property.
To avoid the injustice of the Company’s creditors not being paid whilst Mr White enjoyed a generous pension, the Liquidators sought an order under Section 37(1) of the Senior Courts Act 1981 requiring Mr White to delegate authority to the Liquidator’s solicitor to draw down the remaining funds to which he was entitled under the Scheme, draw his pension and pay it into a bank account nominated by the solicitor. The Liquidators argued that Mr White plainly had the power to draw funds from the Scheme given he had already taken his tax-free cash sum, commenced drawing pension from it and was sole beneficiary of the Scheme. The Liquidators maintained that such an order (or injunction) would not conflict with Section 91 of the Pensions Act 1995 (which prohibits the assignment, commutation or surrender of a person’s rights under an occupational pension scheme) as Mr White’s right to receive his pension funds remained, albeit he would be compelled to apply those funds in discharge of the judgment debt. The Liquidators stressed that the statutory objective of Section 91 was not to enable debtors to escape their obligations to creditors by keeping assets out of reach under a registered pension scheme when they would otherwise be entitled to access them. Because the Company had funded Mr White’s pension and Mr White had been found to have breached his fiduciary duties to the Company, it would be unjust to allow him to retain the pension. Mr White opposed the application maintaining that to grant it would amount to a breach of Section 91.
The Decision of the High Court
The Court granted the Liquidators’ application finding that it had the jurisdiction to require Mr White to delegate authority in the way described following the earlier decision in Bacci v Green (see our article Bacci v Green). On the issue of Section 91, the Court accepted that there was nothing in the section to prevent such an order, as the order the Liquidators sought would not restrain Mr White from receiving funds from his pension. On the contrary, it ensured that those funds would be paid to him, and the fact that the purpose of the order was to make the pension funds available to discharge the judgment debt was irrelevant. The Court also considered that an important consideration was that the assets comprising the pension benefits had been funded in their entirety by the Company. The judgment debt was the result of Mr White’s misfeasance and breaches of fiduciary duty as director of the Company. The Court held that it would not be just, convenient nor equitable for him to retain pension benefits derived from money provided by the Company whilst the judgment debt (of which the Company was a beneficiary) remained unsatisfied. That said, the judgment also notes (citing Brake v Guy [2022] EWHC 1746 (Ch)) that fraud and malfeasance need not exist for this kind of order to be made: whether or not a debt arose from any wrongdoing, an order may be made where a debtor has access to rights under an occupational pension scheme which would be capable of settling obligations to their creditors, whether in whole or in part.
Importantly, the Court made clear that the rights conferred on the Liquidators by the order “are limited to those rights which the respondent already has, or is entitled to exercise, under the [Scheme] Rules, and does not purport to confer any right to receive any lump sum or pension to which the respondent would not otherwise be entitled under the Rules.” In other words, an order of this kind can only be made in respect of the pension rights that have already arisen in respect of the debtor, or which they are entitled to exercise. Therefore, the Court’s jurisdiction was limited to ordering Mr White to exercise the rights he had under the Scheme’s Rules to draw down his pension pot which then, in turn, must be used to benefit his creditors.
Takeaways
The High Court’s decision is part of a rapidly developing body of case law (see also our recent analysis of Bacci v Green) which favours Liquidators who are struggling to recover assets. It has long been thought that Section 91 would prevent occupational pensions being accessed in this way, but this decision (and Bacci) shows that Section 91 has been misunderstood. Some may argue that this leaves Section 91 devoid of meaning but we do not think that is correct. Section 91 continues to operate to prevent the assignment, commutation or surrender of rights under occupational pension schemes, as it has always done. What this decision (and that in Bacci) does make clear is that ordering an individual to access their pension benefits where they have a right to do so is not an assignment of those rights. Whilst the outcome of the order will be that funds deriving from Mr White’s pension will be paid to the Liquidators for the benefit of his creditors, this will happen by way of Mr White receiving the funds from his pension and then being directed as to what he must do with them. In effect, Mr White was being compelled to exercise his right under the Scheme Rules to draw down the entirety of his pension fund: arguably the only reason for him not otherwise exercising this right would be to frustrate the claims of his creditors. Having exercised his right to draw down the fund, he would then be directed to apply it for the benefit of his creditors rather than for his own use. Unless a similar case reaches the Court of Appeal, it seems we have now reached the stage where an individual (whether fraud has been committed) can be compelled to exercise their rights to benefits under a scheme.
If you have any questions in relation to the issues raised above, please contact the author, Justin Briggs, or your usual member of our Disputes Resolution team. This update was written with assistance from Simon Lellouche.