Summary
In the recent Court of Appeal decision Bacci v Green [2022] EWCA Civ 1393 the Court, upholding the decision of the High Court, held that a judgment debtor can be ordered to delegate authority to elect to draw pension including authority to waive valuable tax protection, thereby incurring substantial tax, where doing so would enable the debtor (and through him his creditors) to receive greater lump sum payments immediately upon the pension being put into payment.
The Facts
In 2017, Matthew Green, son of established Mayfair art dealer Richard Green, sought almost £3M of financing from peer-to-peer lender, FundingSecure. The security Mr Green provided for the loan was mortgages over artworks he claimed to own. After the loan was made it transpired that Mr Green either did not own the artworks or that when he offered them as security he had already pledged or sold them to a third party. In short Mr Green obtained the loan by deceit and dishonesty.
Because he did not own the artworks the mortgages intended to provide security were ineffective. FundingSecure was therefore obliged to go after Mr Green personally which it did and successfully obtained judgment for c. £3M plus costs. After FundingSecure went into administration, the four largest contributors to the loan to Mr Green took an assignment of the judgment debt and continued the fight against him.
Mr Green was declared bankrupt with the result that most of his assets fell into his bankrupt estate to be realised to pay his creditors. But, pursuant to section 11 of the Welfare Reform and Pensions Act 1999 (“WRPA”) his right to a pension from an occupational pension scheme set up by his father’s business (the Richard Green (Fine Paintings) Executive Pension Scheme) was excluded from falling into his bankrupt estate.
Mr Green’s interest in the scheme was a 20.7% share of the freehold of 33 New Bond Street, London, one of two properties his father’s fine art business operates from. This prime Mayfair property was last valued in 2019 at £55M. Under a pensions sharing order, Mr Green’s wife was entitled to 56% of his interest in the scheme but even after allowing for this the value of Mr Green’s pension was well in excess of the judgment debt.
The issue for his creditors was how to extract what they were owed from Mr Green’s present right to draw a pension from age 55 in light of various statutory protections which appeared to favour the rights of debtors over those of creditors as well as an unhelpful case from the Court of Appeal.
In particular the creditors needed to overcome (1) section 91 Pensions Act 1995, which prohibits assignment of occupational pension rights, (2) sections 342A – 342C Insolvency Act 1986, which is limited to recovery of excessive contributions to a pension scheme not to primary scheme benefits and (3) the decision of the Court of Appeal in Horton v Henry in which the court reversed the earlier pro-creditor decision of Raithatha v Williamson by concluding that the present right to elect to draw a pension in the future is not income to which the debtor “from time to time becomes entitled” within the meaning of section 310(7) Insolvency Act 1986.
After a failed attempt to obtain a charging order over Mr Green’s interest in the pension scheme, the creditors then sought to enforce their judgment by obtaining the directions of the Court under section 37(1) of the Senior Courts Act 1981 in what is becoming known as a Blight v Brewster order. Section 37(1) is concerned with equitable execution and provides that the High Court may grant an injunction or appoint a receiver where it appears just and convenient to do so.
The specific orders sought by the creditors were for Mr Green to delegate to their solicitors:
- his right to instruct the Scheme trustees to put his pension into payment and to provide him with a Pension Commencement Lump Sum, and;
- his power to notify HMRC that he wished to revoke Enhanced Protection from the Lifetime Allowance charge and draw a Lifetime Allowance Excess Lump Sum (“LAELS”).
The intention was that the two lump sums and pension payments would be paid into one of Mr Green’s UK bank accounts as nominated by the creditors at which stage they would enforce their judgment in the normal way via a third party debt order requiring the bank to pay the sums in the account to the creditors.
What was novel about this approach was the request that the Court order Mr Green to delegate authority to revoke Enhanced Protection in order to increase the size of the lump sums Mr Green could obtain from the pension scheme. Enhanced protection is one of the original forms of protection pension scheme members could elect to take if the value of their pension benefits on 6 April 2006 exceeded, or were likely to exceed, the Lifetime Allowance of £1.5M introduced for the tax year 2006/7 by the Finance Act 2004.
Enhanced Protection is, as the name suggests, a form of protection. Electing to take Enhanced Protection has the effect of exempting the holder from paying the Lifetime Allowance charges (but not the Lifetime Allowance itself) introduced as part of the “A-Day” tax regime for pensions with effect from 6 April 2006. Enhanced Protection can be lost by breaching its terms, or surrendered by simply notifying HMRC of the wish to do so.
With Enhanced Protection in place Mr Green was entitled to a Pension Commencement Lump Sum (free of tax) of £375,000 and a pension (subject to income tax). In those circumstances the creditors would need to wait some years to recover their judgment debt of over £3M. If Mr Green surrendered Enhanced Protection his entitlement to a Pension Commencement Lump Sum would drop slightly to £312,500 but, crucially, he would then also be entitled to a Lifetime Allowance Excess Lump Sum of £1.3M and regular payments of pension. In total Mr Green would be entitled to over £1.6M immediately plus an annual pension.
The creditors would still need to wait some years to recover their debt, but would recover it far more swiftly via this approach. The sting in the tail for Mr Green, not his creditors, was that the £1.3M would be subject to tax at 55% - that is he would need to pay over £700,000 of tax, which would reduce the value of his pension to about £1M.
The decision of the High Court and the Court of Appeal
The High Court granted the orders sought by the creditors. Mr Green appealed the decision and the Court of Appeal dismissed the appeal.
The following three issues were considered by both the High Court and the Court of Appeal.
1. The Court’s jurisdiction
Both the High Court and Court of Appeal considered in some depth the extent of the Court’s power to grant an injunction under section 37(1).
- Mr Green noted that the creditors were seeking two things (1) revocation of enhanced protection, followed by (2) the election to draw a lump sum. Mr Green argued that the former, the power to revoke, was not “property” or a “power to appoint” and so cannot properly be the subject of an order under section 37(1).
- The creditors disagreed, arguing that both steps were an integral part of a process by which the creditors were able to access Mr Green’s property.
- The High Court agreed with the creditors - finding that the two-stages had to be considered as being one exercise to access Mr Green’s assets.
- Mr Green appealed, again arguing that the power to revoke was not "property" nor "tantamount to ownership". He argued the creditors were going beyond trying to protect existing property and were trying to force him to create property - and that this was no more permissible than an order requiring a person to generate earnings.
- The Court of Appeal held that the power to revoke did not have to be “property” or “tantamount to ownership” in order to grant the creditors the orders they sought, and that there were in fact a number of ways the Court could grant the relief, including:
a) Appointing a receiver over either (i) Mr Green’s right to give the Scheme's trustees instructions, or (ii) Mr Green’s right to claim a LAELS (even if that right was contingent).
b) Giving a direction for Mr Green to exercise or delegate his power to revoke his enhanced protection.
c) Granting injunctive relief to force Mr Green to exercise or delegate his power to revoke his enhanced protection and his right to instruct the Scheme trustees to provide him with a LAELS.
- The Court of Appeal held that it is no bar to injunctive relief that it may be unprecedented in nature as the power to grant injunctions can develop incrementally.
2. Tax liabilities
Mr Green argued that revoking enhanced protection and claiming the LAELS would trigger a substantial additional tax charge.
The Court of Appeal (agreeing with the High Court) held that this tax charge was not a bar to granting the creditor’s relief.
3. Public policy
In the High Court, Mr Green argued that the creditors were trying to circumvent the public policy which underpins section 11 of WRPA i.e. that pension rights should be protected in bankruptcy.
The High Court disagreed and instead found the overriding public policy consideration was that fraudsters should not prosper.
The Court of Appeal agreed with the High Court, holding that the policy that pension rights should be protected in bankruptcy had limited significance in this case i.e. where the judgment was founded on the fraud by the debtor.
Takeaways
Fraudsters should be under no illusions that they will be able to cling on to valuable pension benefits as this decision demonstrates just how wide the Court considers its jurisdiction under section 37(1) to be.
The Court of Appeal was unwilling to find that (1) the two-staged process required to access the LAELS, (2) the tax liabilities arising from doing so or (3) the unprecedented nature of exercising its powers in this way should be a bar to allowing a judgment creditor to enforce debts from a fraudulent debtor’s pension rights. So long as the Court considers that a creditor has an evident interest which merits protection, and there is a principled basis to exercise its section 37(1) jurisdiction, it appears the Court is willing to be creative when doing so.
This creative approach may come to favour liquidators who are struggling to recover assets, as it suggests there is scope for looking beyond assets in the debtor’s control and to assets that the debtor may be entitled to in future.