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Welfare Reform and Pensions Act 1999

Pension sharing and bankruptcy

Paragraph 69 of Schedule 12 inserts new sections 36D to 36F into the Bankruptcy (Scotland) Act 1985. Paragraph 69 provides for situations where both pension sharing and bankruptcy are involved: where in the run-up to a person’s bankruptcy, his pension rights were the subject of a pension sharing order or agreement.

These circumstances may arise where a couple divorce and share the pension, and subsequently the scheme member becomes bankrupt. If a court rules that his pension rights are based on excessive contributions, the pension share awarded to his former spouse, or a portion of it, may in limited circumstances be available to his permanent trustee in bankruptcy.

  • The term “excessive contributions” is properly used only in relation to the bankrupt. Once pension rights are transferred to the former spouse it is no longer correct to use the term “excessive contributions”. Instead the legislation refers to rights which are the fruits of “the unfair contributions”, that is, contributions that have unfairly prejudiced the bankrupt’s creditors.

Scottish insolvency law provides that, subject to certain time limits, financial settlements made by the bankrupt, including divorce settlements, can be reopened. The permanent trustee can apply to the court to seek recovery of property or funds if these are a gratuitous alienation or an unfair preference (sections 34 and 36 respectively of the Bankruptcy (Scotland) Act 1985).

  • Gratuitous alienations mean transfers of assets at undervalue that unfairly attempt to deprive creditors.

  • Unfair preferences are transactions that give preference to one creditor over another.

In addition, the permanent trustee can apply to a court to recover for the bankrupt’s estate any capital sum or property transferred to the bankrupt’s former spouse by an order made under section 8(2) of the Family Law (Scotland) Act 1985. This provision is contained in section 35 of the Bankruptcy (Scotland) Act 1985. (Paragraph 68 of Schedule 12 extends the provisions in section 35(1) of the Bankruptcy (Scotland) Act 1985 to include pension sharing orders.)

The policy linkages between pension sharing and bankruptcy build on the existing legislation. The pension sharing order or agreement will only be able to be unpicked if:

  • it can be shown to a court that the pension sharing order or agreement had the effect of defeating creditors (e.g. it was a gratuitous alienation or an unfair preference); and

  • the pension rights transferred to the former spouse could not have been made without including the fruits of unfair contributions; and

  • even when the unfair contributions are treated as being used in the first instance to produce the bankrupt’s share of the pension, some of the former spouse’s share of the pension is derived from the unfair contributions.

If all of these conditions are satisfied, there will be a balance of unfair contributions contained in the former spouse’s pension share and an application can be made to the court to unpick the pension sharing order or agreement.

In practice, on an application by the permanent trustee under section 36A(1), the court will examine the contribution history of the bankrupt and will come to a view about the value of the excessive contributions. Because of pension sharing, the value of the bankrupt’s remaining pension rights may not be sufficient to enable the full amount of the excessive contributions to be recovered from his remaining pension rights. In such a case, the permanent trustee might look to the former spouse’s pension share, and make an application to the court under sections 36D(1)-(3) for an order for recovery. The court would be able to exercise the powers available to it in respect of gratuitous alienations, unfair preferences, and orders for the payment of a capital sum on divorce, to the extent that any amount transferred by those means represents unfair contributions.

If the court finds in favour of the permanent trustee, it will be able to order that that part of the former spouse’s pension share should be passed to the permanent trustee.

The new section 36D sets out the conditions the court has to consider in determining whether the pension share awarded to the former spouse is recoverable as unfair contributions under these provisions.

  • Subsections (1), (2) and (3) of the new section 36D define pension sharing transactions for the purposes of sections 34, 35 and 36 of the Bankruptcy (Scotland) Act and require that these sections shall only have effect to the extent of that part of the pension share that is recoverable.

  • By virtue of subsections (4) to (9), the court must consider how much of the pension share is derived from unfair contributions. (“Unfair contributions” are defined as contributions made to the bankrupt’s pension that unfairly prejudiced his creditors.) These subsections then prescribe how the court is to decide what is actually recoverable.

    Firstly, if the part of the bankrupt’s pension not derived from unfair contributions was sufficient to fund the share that passed to the former spouse, then no recovery can be made from the former spouse’s share. But if any of the share assigned to the former spouse could not have been made other than from the fruits of unfair contributions, that amount is recoverable by the bankrupt’s permanent trustee.

Section 36E sets out conditions to be met for these purposes by orders under sections 34, 35 or 36.

  • Subsection (1) defines the term “recovery order” as meaning a decree granted under section 34(4) of the Bankruptcy (Scotland) Act 1985, an order made under section 35(2) of that Act or a decree granted under section 36(5) of that Act.

  • Subsection (2) details the matters which a court may include in a recovery order. For example the order may require the pension scheme to pay an amount to the permanent trustee. The matters listed are additional to those which can generally be included in an order remedying an unfair preference etc.

  • Subsection (4) limits the amount which a pension scheme can be required to pay to the permanent trustee to the smallest of:

    • the amount of the former spouse’s pension share which represents unfair contributions and is recoverable;

    • so much (if any) of the unfair contributions as is not recoverable out of the bankrupt’s share by way of an order under section 36A of the Bankruptcy (Scotland) Act 1985 requiring the person responsible for the pension arrangement to pay an amount to the permanent trustee; and

    • the value of the former spouse’s pension share.

  • Subsections (5) and (6) provide that where an order is made for the pension scheme to pay an amount to the permanent trustee, the order must provide for a corresponding reduction in the former spouse’s rights under the scheme.

  • Subsection (7) provides that an order or decree under section 34, 35 or 36 is binding on the trustees or managers of the pension scheme concerned, and override the scheme rules so far as is necessary.

Section 36F contains additional requirements in respect of the making of recovery orders.

  • Subsection (1) requires the trustees or managers of the scheme to provide the permanent trustee with information about the former spouse’s pension arrangement, and if appropriate, the bankrupt’s pension arrangement, for the purposes of making an application for a recovery order.

  • Subsection (2) provides that provisions or enactments which prevent assignation of pension rights, do not apply to a court making a recovery order.

  • Subsections (3) and (4) provide for regulations and guidance concerning the calculation of the value of the former spouse’s pension share and the calculation of any subsequent reduction in scheme liabilities in respect of the former spouse’s pension share.

Paragraph 71 of Schedule 12 inserts sections 342D-F into the Insolvency Act 1986. These sections apply to England and Wales, and make parallel provision to the requirements that apply to Scotland (contained in paragraph 69).

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