Enforcing against a bankrupt’s pension funds

Bacci & Ors v Green [2022] EWCA Civ 1393Can a bankrupt’s pension funds be used to pay creditors defrauded by the bankrupt?

Overview

This appeal considers whether victims of a fraud can enforce a judgment against a pension fund held by a judgment debtor where the debtor was previously bankrupt but the debt survived the debtor’s discharge from bankruptcy.

Background

In 2016-2017, FundingSecure Limited (“FSL”) lent funds to Matthew Green which were secured by various artworks. Mr Green failed to repay and FSL brought proceedings alleging, among other things, that he had not had good title to the artworks. The Court found that Mr Green had no real prospect of defending the deceit claim, and judgment was entered in the sum of £3,233,625.76 plus costs. A bankruptcy order was made against Mr Green in 2019. He was subsequently discharged from bankruptcy, but the FSL debt was not distinguished as it arose from deceit.

Later in 2019, FSL went into administration and in 2020, the joint administrators assigned FSL’s claims against Mr Green to the respondents, Mr David Bacci and others. Under the terms of that agreement, 25% of the recoveries from the proceedings will be paid to FSL and accrue to the benefit of the company’s creditors, who include 1,393 individual investors. The respondents (“the Creditors”) are four of those investors and provided some £811,000 of the money loaned to Mr Green.

Mr Green’s principal asset was his interest as a member of a pension scheme which owned a building valued at about £55 milliom. Once a member of the pension scheme has attained the age of 55 (28 October 2022 for Mr Green), he can ask for his “Accumulated Credit” to be applied in providing pension benefits. Mr Green’s “Accumulated Credit” accounted for some 20.07% (or around £8.5m) of the total fund.

However, Mr Green had claimed enhanced protection to cap the value of the pension benefits that a person may have without incurring tax charges. Were Mr Green to revoke his “enhanced protection”, he could obtain lump sums totalling about £1.6 million after payment of about the same sum in tax. The balance of Mr Green’s “Accumulated Credit” would be used to fund a pension.

The Decision Below

In June 2021, the Creditors applied for relief designed to allow them to recover as much as they could from the pension scheme. To that end, they asked for Mr Green’s “enhanced protection” to be revoked and the maximum possible amount paid out. The Creditors relied on the decision of Blight v Brewster [2012] EWHC 165 (Ch).

In that case, Mr Moss held that the defendant, who had committed a fraud on his creditors, could be compelled to elect to draw down 25% of his pension as a tax-free lump sum for the benefit of the creditors. Mr Moss observed that “the idea that the fraudster and forgerer can enjoy an enhanced standard of living at his retirement instead of paying the judgment debt would be a very unattractive conclusion. The defendant clearly has the means of paying the 25% to the claimants: all he has to do is to give notice to Canada Life.”

The Judge applied the decision in Blight v Brewster and made an order which required Mr Green to delegate to the Creditors’ solicitors his power to notify HMRC that he was revoking his “enhanced protection”, his power to notify HMRC that he was seeking “individual protection” and his power to elect to draw down on his pension under the pension scheme once he has turned 55.

The Court of Appeal Decision

Mr Green challenged the Judge’s decision on three grounds, arguing that: (1) his power to revoke his “enhanced protection” was neither “property” nor “tantamount to ownership” and, hence, that it could not properly be the subject of an order under section 37(1) of the Senior Courts Act 1981 (“the 1981 Act”); (2) the Judge failed to recognise that it was contrary to public policy to exercise section 37(1) of the 1981 Act in such a way as to deprive a person who has become bankrupt of pension rights; and (3) the fact that revocation of “enhanced protection” would occasion large tax liabilities made it inappropriate to make an order providing for such revocation.

The Court of Appeal disagreed. With respect to the first ground, the Court found that Mr Green’s right to revoke his “enhanced protection” did not have to be either property or “tantamount to ownership” for it to have been proper for the Judge to make the order he did. Mr Green’s rights to call for payments of lump sums under the pension scheme could be the subject of a receivership order. The fact that the right was subject to a contingency (the revocation of “enhanced protection”) did not prevent it from being considered property or “tantamount to ownership”, nor from being the subject of the appointment of a receiver.

As an adjunct to such a receivership, the Court could direct Mr Green to revoke his “enhanced protection” or, alternatively, to delegate his power to do so. The Court could also assist creditors by simply granting injunctive relief, without the appointment of a receiver. Therefore, the Court did not accept the contention that an order requiring Mr Green to delegate his power to revoke his “enhanced protection” was not one that could be made under section 37(1) of the 1981 Act. To the contrary, it was open to the Court to make such an order, either as ancillary to an appointment of a receiver or as part of free-standing injunctive relief.

With respect to the second ground, the Court found that the public policy which led Parliament to protect pension rights in bankruptcy will, at most, normally be a factor of very limited significance when a Court is considering whether to grant relief to a creditor in respect of a judgment founded on fraud by the debtor. While Parliament evidently thought it right to provide protection for pension rights in bankruptcy, it is equally clear that its intention has been that debts arising from fraud should survive bankruptcy, and it has nowhere said that the creditor should then be unable to have resort to the debtor’s pension rights in the way that he could have done pre-bankruptcy or a post-bankruptcy creditor could. As the Judge below held, the overriding public policy consideration in this case was that fraudsters should not prosper.

With respect to the third ground, Court found that the Judge clearly had in mind the tax liability which would arise from revoking “enhanced protection”, and he was not obliged to give that fact any greater weight than he did. As Judge Matthews noted, the mere fact that execution of a Court order would occasion a tax charge is not a bar to making it, and, on the facts of the present case, the Judge was amply entitled to conclude that it should not deter him from granting the Creditors relief.

As a result, the Court dismissed the appeal.

Judges: Lord Justice Newey, Lord Justice Males and Lord Justice Arnold

Counsel: Fenner Moeran KC of Wilberforce Chambers (instructed by Michelmores LLP) for the Appellant; Saaman Pourghadiri of 4 New Square Chambers (instructed by CANDEY) for the Respondents