SUBHASH MOHANLAL PATEL v RODERICK JULIAN JONES [2001] EWCA Civ 779

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL ( CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(BANKRUPTCY)
MR ENGLEHART QC
(SITTING AS A DEPUTY HIGH COURT JUDGE)
[2001] EWCA Civ 779Case No Case No: B3/2000/6284 , B3 2000/0303Venue Royal Courts of Justice, Strand, London, WC2A 2LL, Thursday 24th May 2001
Between
SUBHASH MOHANLAL PATELAppellantRODERICK JULIAN JONESRespondent
Before
Lord Justice AldousLord Justice MummeryLord Justice KayMr Nigel Ley (instructed by Messrs Mahmood & Elahi, DX 2000851, Ilford 4 for the Appellant)Miss Clare Stanley (instructed by Messrs Balsara & Co, DX101, Chancery Lane, London for the Respondent)Date 24 May 2001

LORD JUSTICE MUMMERY:

The

[1]Issue The main issue on the appeal is this: does the entitlement of a local government employee under a statutory occupational pension scheme to basic and discretionary pension benefits vest in his trustee in bankruptcy pursuant to the provisions of section 306 of the Insolvency Act 1986 (the 1986 Act)? The Facts[2]Mr Subhash Patel, the appellant, began his employment with the London Borough of Brent (the Council) on 1 December 1976. He was a senior community development officer. He became a member of the Council's superannuation scheme established by statutory instrument pursuant to powers conferred on the Secretary of State by section 7 of the Superannuation Act 1972 (the 1972 Act). The contributory scheme provided for payment of(a) an annual retirement pension amounting to 1/80th of the employee's final salary, multiplied by the number of years of his membership, and(b) a lump sum equal to 3/80ths of the employee's final year's salary, multiplied by the number of years of his membership of the scheme. Provision was also made for the payment of enhanced benefits at discretion.[3]As well as being a local government employee Mr Patel was a director of a company called Masy Limited. A bankruptcy order was made against him on 9 January 1995. He was then 50 years old. He owed in excess of £700,000. Mr Roderick Jones, the respondent, was appointed trustee of his estate in place of the Official Receiver on 11 June 1997. The bankruptcy was automatically discharged on 9 January 1998 pursuant to section 279 of the 1986 Act, but the discharge did not relieve the trustee of his functions under the 1986 Act. Apart from a few income payments of £150 per month from Mr Patel's salary pursuant to an order of 22 December 1997 made under section 310 of the 1986 Act, the creditors have received virtually nothing in the bankruptcy.[4]Mr Patel was made redundant by the Council on 27 March 1998 at the age of 53. Under the regulations governing the scheme he was entitled to a pension not only on reaching retirement age of 65 (29 September 2009 in Mr Patel's case), but also on ceasing to hold local government employment by reason of redundancy after the age of 50. Soon after he was made redundant Mr Patel received various payments : a basic pension of £6,932.14 pa (index linked) and enhanced discretionary pension benefits; a basic lump sum of £20,796.43 and a discretionary enhanced lump sum; statutory redundancy pay of £12,973.74; and three months pay in lieu of notice amounting to £6,004.38. He had been a member of the scheme for 21... years. As he had been made redundant the income payments under the order of 22 December 1997 were reduced to a nominal 1p per month on 1 July 1998. The Proceedings[5]On 29 July 1998 the trustee issued a summons claiming a declaration that he was entitled to all or some of these sums. The summons was heard on 17 May 1999 by Mr Robert Englehart QC, sitting as a deputy High Court judge of the Chancery Division. It was conceded that the statutory redundancy pay and the pay in lieu of notice did not vest in the trustee. The judge rejected the contention that they should be the subject of a variation to the income payments order and be paid to the trustee. There is no appeal by the trustee against that ruling. Mr Patel appeals with the permission of the Court of Appeal.[6]This appeal by Mr Patel is against the declaration made by the deputy judge on 19 May 1999 that the pension benefits payable to Mr Patel by way of basic pension, pension lump sum and enhanced pension benefits vested in the trustee save for(i) such proportion of the benefits as were attributable to his service after the commencement of his bankruptcy and(ii) that part of the basic annual pension payable after 29 September 2009 which is equivalent in amount to Mr Patel's guaranteed minimum pension, as defined in section 8(2) of the Pension Schemes Act 1993.[7]By a respondent's notice the trustee contends that the deputy judge was wrong in holding that the benefits in paragraph (i) did not vest in him as trustee. The trustee seeks an order declaring that the whole of the pension benefits vested in him pursuant to section 306 of the 1986 Act. The trustee accepts that under section 159(5) of the Pensions Act 1993 the vesting in the trustee does not extend to the "guaranteed minimum pension" receivable when he reaches state pensionable age in 2009. The Statutory Provisions[8]The combined effect of sections 278, 283 and 306 of the 1986 Act is that Mr Patel's estate, which comprised all "property" belonging to or vested in him, became vested by operation of law, first, in the Official Receiver and later in the trustee without any conveyance, assignment or transfer.[9]Section 436 provides that "property" includes "money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future, vested or contingent, arising out of, or incidental to, property..."[10]As Lord Atkinson said in Hollinshead v. Hazleton [1916] 1 AC 428 at 436 the principle of public policy expressed in the insolvency code is that "....in bankruptcy the entire property of the bankrupt, of whatever kind or nature it be, whether alienable or inalienable, subject to be taken in execution, legal or equitable, or not so subject, shall, with the exception of some compassionate allowances for his maintenance, be appropriated and made available for the payment of his creditors."[11]In Bristol Airport Plc v. Powdrill [1990] Ch 744 at 759D Sir Nicolas Browne-Wilkinson V.-C observed a propos section 436 that "It is hard to think of a wider definition of property."[12]As Aldous LJ pointed out in Ord v. Upton [2000]Ch 352 at 360 "Section 436 is not in truth a definition of the word "property." It only sets out what is included." The Judgment[13]The relevant passages in the judgment of the deputy judge, which was delivered on 19 May 1999 and is reported at [1999] BPIR 509, may be summarised as follows:-[14]At the time he was made bankrupt Mr Patel was entitled to pension rights under the scheme operated by the Council under the Local Government Superannuation Regulations 1986 then in force (SI 1986/24 - the 1986 Regulations). The 1986 Regulations were replaced by the Local Government Pension Scheme Regulations 1995 (SI 1995/1019).[15]The entitlement to the basic pension and the basic lump sum vested in the trustee under section 306 of the 1986 Act. The deputy judge followed the decision of Ferris J in Re Landau [1998] Ch 223, in which it was held that the bundle of rights under a non-assignable revenue approved pension policy was a chose in action. The chose in action was "property" within section 436, even though nothing was immediately payable under it at the commencement of the bankruptcy. The rights under the policy automatically vested in the trustee on his appointment.[16]He rejected the contentions on behalf of Mr Patel that the pension benefits did not vest in the trustee on the grounds that they were expressed in the 1986 Regulations to be unassignable; that they were part of the remuneration package under an employment contract for personal services; and that they had no value at the date of the bankruptcy.[17]The discretionary enhanced pension benefits passed to the trustee in the same way as the basic pension benefits.[18]The trustee was not, however, entitled to that part of the pension benefits attributable to Mr Patel's service and the contributions made by him during his service after the bankruptcy order. Submissions of Mr Patel[19]Mr Nigel Ley, on behalf of Mr Patel, contended that neither the basic pension nor the lump sum benefits vested in the trustee. He made two main points. Inalienability of Pension Rights[20]His principal submission was that, even if, contrary to his alternative case, the pension benefits were "property" within section 436 of the 1986 Act, those benefits were made non-assignable by virtue of an express provision in the 1986 Regulations. Accordingly they could not vest in the trustee.[21]He relied on regulation E32 of the 1986 Regulations ("Benefits not assignable") - "Every benefit - a) is payable to, or in trust for, the person who is entitled to it under these regulations, and b) is not assignable and is not chargeable with that person's debts or other liabilities."[22]That provision was included in the 1986 Regulations pursuant to the regulation making power in section 7 of the 1972 Act. Section 7 (2) (a) provided that, without prejudice to the generality of the power to make regulations under section 7(1), the regulations may include all or any of the provisions referred to in Schedule 3 to the 1972 Act. Paragraph 9 of Schedule 3 refers to the following provisions which were not in fact included in the 1986 Regulations "Provision rendering void any assignment or charge on...any benefit under the regulations, and provision that on the bankruptcy of a person entitled to such a benefit no part thereof shall pass to any trustee..acting on behalf of the creditors....."[23]Mr Ley contended that, as a matter of construction, regulation E 32 prevented the pension benefits from vesting in the trustee. On the clear wording of the regulation the benefits were only payable to, or held in trust for, Mr Patel. They were not, and could not be, payable to or held in trust for his trustee in bankruptcy or his creditors. The pension benefits were protected from the claims of creditors. They could not be assigned or charged with his debts.[24]Mr Ley cited the judgment of Chadwick LJ in a recent case on retirement annuity contracts and personal pension schemes, in which the relevant restrictions were contractual prohibitions against assignment, Krasner v. Dennison [2001] Ch 76 at 99, 108 - "47. It is, to my mind, unarguable that a mere restriction against alienation in an annuity contract, or in a pensions scheme, can prevent the benefits under that contract or under that scheme, from vesting in a trustee in bankruptcy.48. The need to protect certain classes of pension benefits from the claims of creditors has been recognised by Parliament for at least 130 years. Where it has thought it right to provide such protection, Parliament has enacted that an assignment of pension rights shall be void. Examples are found in the Naval and Marine Pay and Pensions Act 1865..., in the Army Act 1955 and, now, in the Superannuation Act 1972. Section 5(1) of the last named Act provides an illustration of the statutory formula that has traditionally been employed:
" Any assignment (or in Scotland, assignation) of or charge on, and any agreement to assign or charge, any benefit payable under a scheme made under section 1 of this Act shall be void. 49. The courts have given effect to that formula by holding that it precludes vesting in a statutory assignee or trustee in the event of a bankruptcy..." 73. Examination of the historical treatment of pension rights under the law of England, to which I have referred earlier in this judgment, leads to the following conclusions. First, that Parliament has, for a long time, recognised a need to exclude certain pension rights (in particular, rights under public service pensions) from the full operation of the bankruptcy law: see, for example, the Naval and Marine Pay and Pensions Act 1865, the Police Pensions Act 1921, the Army Act 1955 and the Superannuation Act 1972 (and its statutory predecessors)."
[25]Mr Ley emphasised Chadwick LJ's reference to the 1972 Act under which the 1986 Regulations were made.[26]In this case, however, I would point out that there is no provision in the 1986 Regulations expressly avoiding a purported assignment or expressly stating that the benefit of the pension shall not pass to the trustee or forfeiting a pension in the event of bankruptcy.[27]Mr Ley accepted that section 5 (1) of the 1972 Act, which provides that "Any assignment....of or charge on, and any agreement to assign or charge, any benefit payable under a scheme made under section 1 of the Act shall be void" , does not apply to this case. It relates only to civil service superannuation schemes and not to local government service pension schemes, which are governed by section 7 of the 1972 Act. But Mr Ley asserted that the effect of the statutory protection given to pension benefits by regulation E 32 to those in local government service is the same as that provided by section 5(1).[28]In addition Mr Ley cited cases concerning restrictions on the alienation of pay and pension benefits of public servants and of members of the armed services and the impact on the availability of those benefits to satisfy the claims of creditors: Flarty v. Oldlum (1790) 3 T.R. 681; Ex parte Huggins (1882) 21 Ch D 85 ; Lucas v. Harris (1886) 18 QBD 127 at 137-139; Re Saunders [1895] 2 QB 424 at 426; and Re Lupton [1912] 1 KB 107 at 114-115.[29]Mr Ley distinguished the decision of Ferris J in Re Landau [1998] Ch 223, holding that a revenue-approved non-assignable annuity contract was "property" which vested in the trustee in bankruptcy by operation of law, on the ground that the restriction on assignment in that case was contractual. It was well established that an attempt to contract out of the insolvency laws is ineffective being contrary to public policy: see Krasner v. Dennison (supra) at paragraphs 46 and 49. The restriction on assignment in this case is statutory. Mr Ley contended that it cannot infringe that public policy. Definition of Property[30]Mr Ley also submitted that, notwithstanding the very wide inclusive language of section 436 of the 1986 Act, the entitlement to the pension benefits was not "property" of Mr Patel at the date of the bankruptcy order and did not vest in the trustee. He repeated his arguments on the inalienability of the pension benefits. He emphasised that the defining characteristic of property is that it can be transferred by the person entitled to it to another person. The pension benefits were deprived of that character by regulation E32. They could not be assigned either to the trustee or by him. For that reason alone they were not property.[31]Mr Ley cited Kilvert v. Flackett [1998]2 FLR 806, a decision of Mr Peter Scott QC, sitting as a deputy judge of the High Court, as a case in which it was apparently assumed by those representing the trustee and the bankrupt that the annuity benefits only went to the trustee for the period of the bankruptcy and that the lump sum pension benefits received by a dentist under the National Health Service Pension Scheme, which contains similar provisions to Regulation E32, did not vest in the trustee at all and so were available for an income payments order under section 310 of the 1986 Act. Property vested in the trustee would not be so available.[32]Mr Ley contended that there were other reasons for holding that the pension benefits were not "property." At the relevant date (i.e. the date of the bankruptcy order) nothing was due for payment to Mr Patel under the pension scheme. He had not reached the retirement age of 65. He would become entitled to pension benefits, if he was made redundant over the age of 50, but that had not happened and it did not in fact happen until after his discharge from the bankruptcy. At the date of the bankruptcy there was nothing of value to vest in the trustee for him to realise for the benefit of creditors.[33]In addition the pension benefits arose from the provisions of a contract for personal services, namely his contract of employment. It was by virtue of that contract that he became a member of, and made contributions to, the scheme. Such personal contracts for labour are not property and do not vest in the trustee.[34]Even if the basic pension benefits were "property", the enhanced benefits were not property, as there was no legal obligation to pay them. Mr Patel had no legal entitlement to them at any time. They were purely discretionary. There was no right, present or future, vested or contingent, to the enhanced payments. The Legal Position[35]I am unable to accept either of Mr Ley's main points. This appeal should be dismissed. In my judgment, the correct legal position concerning entitlement to the pension benefits on a bankruptcy is reasonably clear . Vesting of choses in action[36]The legal right to the basic pension and to the basic lump sum were vested in Mr Patel before he was made bankrupt. He had a present legal right to compel the payment of scheme benefits in the future and on certain contingencies. That right was a "chose in action" within the very wide description of "property" in section 436 of the 1986 Act. The fact that the occasion for payment of pension benefits did not occur until Mr Patel was made redundant after the bankruptcy is irrelevant to the existence and vesting of the right, as is the fact that the right may have no immediate value (see de Rothschild v. Bell [2000] QB 33.)What matters is that the right to future payment existed at the date of the bankruptcy order. It was "property." It accordingly vested in the trustee. Not contracts of personal service[37]The vesting of choses in action regarding the pension benefits is unaffected by the principle that unexecuted contracts for purely personal services of the bankrupt do not vest in the trustee.Pension schemes provide benefits which are regarded in some contexts as "pay" or as a form of deferred pay for services rendered in the past, but the pension schemes which govern the rights are not themselves unexecuted contracts for personal services. The trustee is entitled to the right to enforce payment of the pension benefits, even though the entitlement to the pension may arise from the term of a contract of service, and even though the amount of the benefits is calculated by reference to the contributions made to the scheme over a number of years of service out of a salary paid under an unassignable, personal contract of employment. See, for example, Performing Right Society v. Rowland [1998] BPIR 128 ( right to distribution of copyright royalties vested in trustee.) Discretionary payments[38]The enhanced benefits also fall within the description of "property" in section 436, even though they are discretionary and not receivable by Mr Patel as of right. "Property" is described as including "...every description of interest....arising out of, or incidental to, property." The enhanced payments were incidental to property in the form of the basic pension benefits to which Mr Patel was legally entitled. It is not necessary that there should be a legal entitlement to the enhanced benefits themselves for them to qualify as an "interest... incidental to property." For instance, it was held by Warner J in Re Rae [1995] BCC 103 at 113 that the non-exhaustive terms of section 436 extend beyond interests in property, in the sense of interests which are capable of being asserted or defended in legal proceedings, to an interest arising,for example, from the exercise of an administrative discretion or from an arrangement which may be unenforceable in any court, as explained by Sir George Jessel MR in Ex parte Huggins (1882) 21 Ch D 85 at 91.[39]That approach to the scope of section 436 is consistent with the promotion of the statutory objective of the provisions of the 1986 Act that, subject to certain specific exceptions, all a debtor's property capable of realisation should be vested in the trustee for him to realise and distribute the proceeds among the creditors. Non-assignment point[40]The provision in regulation E32 that pension benefits payable to the member are not assignable or chargeable does not prevent the automatic statutory vesting in the trustee in bankruptcy of rights to pension benefits. If, as is my view, entitlement to the pension benefits is "property", section 306 applies to those benefits. The distinction between, on the one hand, regulations against voluntary assignment or charging of pension benefits, which do not prevent statutory vesting in the trustee in bankruptcy, and, on the other hand, regulations expressly providing that pension benefits shall not pass to a trustee in bankruptcy, was recognised by Parliament in paragraph 9 of Schedule 3 to the 1972 Act, as referred to in section 7(2) (a) in the context of superannuation of persons employed in the local government service. No such express provision was included in the 1986 Regulations. This is to be contrasted with section 5(1) relating to benefits under civil service superannuation schemes, and to other regulations made under the 1972 Act where, in addition to an express prohibition against assignment and charging such as was made in E 32 of the 1986 Regulations, an additional express provision has been made that pension benefits should not pass to the trustee in bankruptcy or other person acting on behalf of the creditors: see Regulation 32 (3) of the Teachers' Superannuation (Consolidation) Regulations 1988 (SI 1988/1652).[41]I should add that I prefer to rest my decision on this point than on the obiter dicta in paragraphs 48 and 73 of Krasner v. Dennison (supra) referring to the effect in bankruptcy of an express provision (which was not in any event present in the 1986 Regulations) that an assignment or charge of a pension benefit under a scheme shall be void. It appears from the decision of this court in Lucas v. Harris (supra) at 139 (a case on execution) that the effect of such an avoidance provision in section 141 of the Army Act 1881 was left open in the case of bankruptcy. Post bankruptcy pension contributions[42]There is a cross appeal by the trustee challenging the decision of the deputy judge to apportion the pension benefits between the estate and Mr Patel on the basis of the proportion of the contributions to the scheme made before and after the commencement of the bankruptcy. It is true, as submitted by Miss Stanley for the trustee, that the post-bankruptcy contributions by Mr Patel did not change the quality of the contingent rights, which had ceased to be vested in him and became vested in the Official Receiver and then in the trustee. The payments by Mr Patel did not create new statutory rights or new contracts to which he was entitled or which would entitle him to a share of the pension. See, for example, D'Avigdor-Goldsmid v. IRC [1953] AC 347 at 361, 364, 368, 376 and 378. The effect of the contributions was to lengthen the period of Mr Patel's membership of the scheme and to increase the value of the existing right, which had vested in the trustee, by increasing the multiplier.[43]The deputy judge held that the trustee was not entitled to the amount of the pension attributable to Mr Patel's post-bankruptcy service and contributions. Although he did not explain the basis on which he made that exclusion, the deputy judge was, in my view, entitled to achieve that result by application of the principle in Ex parte James (1874) LR 9 Ch App 609 that the court will not allow the trustee, as an officer of the court, to retain monies for distribution among creditors where it would be contrary to just dealing to do so e.g. where a voluntary payment has been made to the trustee under a mistake of law. See also Ex parte Tyler [1907] 1 KB 865 . The effect of Mr Patel's contributions after the bankruptcy by way of the Council's continuing deductions from his salary was to make more valuable the pension rights vested in the hands of the trustee. The contributions continued to be made by Mr Patel in the mistaken belief that the pension rights remained vested in him, whereas they had already vested in the trustee. In those circumstances the court is entitled to take the view that it is inequitable of the trustee to retain the benefit of the increase in value of the pension benefits attributable to the post-bankruptcy contributions which were made in the course of his continuing service with the Council in a mistaken belief as to the entitlement to the pension benefits. The Future[44]It should be mentioned for completeness that in the Welfare Reform and Pensions Act 1999, which received the Royal Assent on 11 November 1999, provision is made in section 11 for pension rights under approved pension arrangements to be excluded from a bankrupt's estate in cases where the bankruptcy order is made on a petition presented after the coming into force of the section. The relevant parts of the section were brought into force on 29 May 2000 by SI 2000 No 1382. Result[45]The appeal should be dismissed.

LORD JUSTICE KAY:

[46]I agree

LORD JUSTICE ALDOUS:

[47]I also agree.

ORDER

Appeal dismissed with costs, not to be enforced without leave of the court; cross-appeal dismissed, with no order for costs; detailed assessment; the court indicated that it saw no reason why it is not just and equitable for the Legal Services Commission to shoulder the burden of costs; permission to appeal to the House of Lords refused. (Order does not form part of approved Judgment)

Cited in 9 later judgments