Income

Income (pre 3/12/2013 Provisions)

The Official Assignee can apply to the court for directions regarding the bankrupt’s income. This power applies to earned and unearned income including pensions in payment. The provision in relation to income and pensions were reformed in 2013. The first paragraphs deal with the earlier position and the later paragraphs deal with the reformed position

The court may order the bankrupt to pay part of his salary or income, subject to such conditions in relation to payment and discharge of family responsibility and the bankrupt’s personal situation, as may be appropriate. The bankrupt may enter an agreement with the Official Assignee regarding payment of an agreed part of income.

The court has regard to the bankrupt’s responsibilities, situation and circumstances.  Generally, a bankrupt will be allowed to retain out of earnings, sufficient monies to maintain himself and his family in reasonable comfort. The orders are not intended to make the bankrupt a slave of his creditors.

The court is to have regard to the bankrupt’s family responsibilities and personal situation. The order may be varied from time to time if family responsibilities and circumstances change.

The Court has a general power at all times to make to the bankrupt out of his estate such allowances as the Court thinks proper in the special circumstances of the case.


Bankruptcy Payment Orders

The provisions in relation to the appropriation of income were reformed by the Personal Insolvency Act 2012.  The Court may, on application being made to it by the Official Assignee or the trustee in bankruptcy, make an order requiring a bankrupt to make payments to the Official Assignee or the trustee in bankruptcy from his income or other assets for the benefit of his creditors called bankruptcy payment order.

The court in granting an application may order any person from whom the bankrupt is entitled to receive any salary, income, emolument, pension or other payment to make payments to the Official Assignee or trustee.

An application for a bankruptcy payment order may not be made after the bankrupt has been discharged from bankruptcy. Where an application for such an order is made before the discharge of the bankrupt, the Court may make a bankruptcy payment order after the date of discharge as if the bankrupt had not been so discharged.


Duration

Subject to limited exceptions, a bankruptcy payment shall have effect for no longer than 3 years from the date of the order coming into operation.  A court variation must  not cause the order to have effect for a period of more than 3 years. In any event, any order shall cease to have effect on the 4th anniversary of the date on which the bankrupt was adjudicated bankrupt.

This maximum period of the bankruptcy payment order had been 5 years under the 2012 Act. This was amended to 3 years in 2016. Where a pre-existing bankruptcy payment order would have, but the shortening of the discharge period under the 2015 Act, expired on any day during the period of 6 months after 29th January 2016 the bankruptcy payment order concerned was discharged on that day unless it had otherwise been discharged or annulled.

Where it would have expired at any time after that 6 months period, it is discharged on the later of 6 months after that commencement, or 3 years from the date that bankruptcy payment order was made, unless it has otherwise been discharged or annulled.

Where the Court has made an order extending the discharge date by reason of failure to cooperate or hiding / failing to disclose assets, the bankruptcy payment order shall have effect for no longer than 5 years from the date of that bankruptcy payment order coming into operation. In any event, it shall cease to have effect on the 8th anniversary of the date on which the bankrupt was adjudicated bankrupt.


Personal Circumstances and Variation

In making a bankruptcy payment order, the Court shall have regard to the reasonable living expenses of the bankrupt and his or her dependents. It may also have regard to any guidelines on reasonable living expenses issued by the Insolvency Service under the Personal Insolvency Act or by the Official Assignee.

The Court, on the application of the bankrupt or the Official Assignee or the trustee in bankruptcy, may vary a bankruptcy payment order where there has been a material change in the circumstances of the bankrupt.


Income and Pension Issues

Where a bankrupt is, or may become, entitled to payments under a pension arrangement, the pension fund itself (other than payments already received by the bankrupt, or that the bankrupt was entitled to receive, under the pension arrangement) is not regarded as an asset for the purpose of a bankruptcy payment order.

Social welfare benefits do not vest in the Official Assignee and may not be taken. They may be taken into account when an order is made requiring that the bankrupt pay part of his income to the trustee.

Future income does not automatically vest but may be required to be paid in whole and in part to the Official Assignee or trustee. Future income and after-acquired property can be claimed on foot of a court order made following application in that regard during the bankruptcy period. This is subject to the limitations set out above and below in relation to payment orders and access to pension funds.

The Official Assignee may enter a voluntary agreement with the bankrupt, in relation to payments from his income for a period, in light of the powers of the court. This is likely to reflect the parameters of a possible bankruptcy payment order. The agreement would appear to continue to be binding after discharge in accordance with ordinary contractual principles.


Pensions and Law Reform

Pensions in payment may be the subject of a bankruptcy payments order as income. ARFs and vested PRSAs funds are beneficially owned assets of the holder and may vest in the Official Assignee under ordinary principles. This was confirmed to be the position in an unreported High Court case.

The position in respect of pension assets which are not yet vested has been reformed by the Personal Insolvency Act 2012 (effective 3rd December 2013). The 2012 Act limits the extent to which pensions which are not yet in payment may vest in the Official Assignee as a bankruptcy asset.

Prior to the 2012 Act, some pension assets were capable of vesting in the trustee or Official Assignee. The position depended on the terms of the relevant pension promise and entitlement. Statutory conditions require it to be a term, that the pension fund may not be made available until the retirement date. Many pension documents go further any seek to protect the pension fund in the event of bankruptcy.


Personal Pensions

The general principle is that pension funds do not vest in the Official Assignee.  The considerations below which were more important prior to the change in the law in 2013 are relevant in the context of the exceptions that apply, where the bankrupt can exercise an option to make the pension available within a certain period. In many cases, the pension by its terms will preclude the exercise of such an option.

In principle, personal pension policies and PRSAs are beneficially owned assets of the bankrupt, which are capable of vesting in the trustee, notwithstanding that they do not become payable until a future date. The pension holder will commonly have options by their terms.

Personal pensions are insurance contracts / policies. PRSAs are contracts with insurers or other providers. The terms of the policy / contract commonly restrict any assignment prior to the pension becoming payable and / or more specifically seek to protect against the effects of bankruptcy.
UK case law on similar legislation has held that a pension policy could be attached in bankruptcy, notwithstanding that the terms of the policy provided that it was not assignable.  The provisions were held to be contrary to bankruptcy legislation principles which render void provisions which attempt to circumvent the bankruptcy code in relation to the vesting and distribution of assets.

Occupational Schemes

Similar issues arise in relation to occupational pension schemes.  Under the scheme trust, it is commonly provided that the benefits cease to be payable to the member on bankruptcy.  The pension trustees may be entitled to pay the pension to another person in such circumstances, usually the member’s spouse or other dependents.

There is likely to be less scope for arguing that divesting is invalid as being contrary to the policy of the Bankruptcy Act. As there is no entitlement to the asset on bankruptcy under the very terms of the trust, the Official Assignee may not be capable of taking an interest in the fund, even if the below exception applies.

Many public-sector pensions do not vest in the Official Assignee under their governing legislation. Social Welfare pensions do not vest. Apart from specific non-vesting legislation, the possibility of benefits or payments under a discretionary statutory scheme may not be enough for, to constitute property for the purpose of the legislation.

The benefit of a pension fund which has vested and is in payment during the retirement may be the subject of a Bankruptcy Payment Order.   A pension that is not yet in payment and which the bankrupt is not entitled to receive, may not be the subject of a Bankruptcy Payment Order.


Pensions in Bankruptcy (post 3rd December 2013).

Where a person is adjudicated bankrupt, and he or she is, or may become entitled to, payments under a pension arrangement, assets relating to the arrangement (other than payments already received by the bankrupt, or that the bankrupt was entitled to receive, under the arrangement) do not vest in the Official Assignee for the benefit of the creditors of the bankrupt. This is the new general principle.

Where a bankrupt has an interest in or entitlement under a pension arrangement which would, if the bankrupt performed an act or exercised an option, cause that debtor to receive from or at the request of the person administering that relevant pension arrangement an income, or other money, that bankrupt is deemed to be in receipt of such income or money, and it vests in the Official Assignee or the trustee in bankruptcy.

The provisions deem the pension arrangement to be available to the bankrupt where

  • the bankrupt is entitled at the date of being adjudicated a bankrupt to perform the act or exercise the option,
  • was entitled at any time before the date of the adjudication, to perform the act or exercise the option, but had not performed the act or exercised the option, or
  • will become entitled within 5 years of the date of the adjudication to perform the act or exercise the option.

In this case, the Official Assignee or the trustee in bankruptcy may where he or she considers that it would be beneficial to the creditors of the bankrupt to do so, perform an act or exercise an option in place of the bankrupt so as to make the pension available.


Pension Covered

The provisions apply to almost all times of pensions. The following are including

  • an approved retirement benefits scheme,
  • an approved annuity contract or a trust scheme;
  • a PRSA contract,
  • a qualifying (under Taxes Act) overseas pension plan;
  • a public service pension scheme;
  • another statutory scheme,
  • such other pension arrangement as may be prescribed

Excessive Pension Contributions.

Where, on application by the Official Assignee or the trustee in bankruptcy, the Court is satisfied that the bankrupt, or a person on his behalf, has within the 3 years prior to the adjudication made excessive pension  contributions to a pension arrangement under which he is, or may become entitled to, payments, the Court may make such order  as it considers appropriate to vest the excessive contributions in the Official Assignee or the trustee in bankruptcy for distribution to the creditors.

The court may act where the contributions were excessive in view of the bankrupt’s financial circumstances when those contributions were made, and where had the effect of materially contributing to the bankrupt’s inability to pay his or her debts, or substantially reducing the sum available for distribution to the creditors.


Factors in Judging Contributions Excessive

In considering an application and in determining whether or not the contributions made by the bankrupt to a relevant pension arrangement were excessive the Court may have regard to all the financial circumstances of the bankrupt and in particular:

  • whether the bankrupt made payments to his or her creditors in respect of debts due to those creditors on a timely basis at or about the time when the bankrupt made the contribution concerned;
  • whether the bankrupt was obliged to make contributions of the amount or percentage of income as the payments actually made under his or her terms and conditions of employment and if so obliged, whether the bankrupt or a person who as respects the bankrupt is a relative could have materially influenced the creation of such obligation;
  • the amount of the contributions paid, including the percentage of total income of the bankrupt in each tax year concerned which such contributions represent;
  • the amount of the contributions paid, in each of the 6 years prior to the making of the adjudication including the percentage of total income of the bankrupt which such contributions represent in each of those years;
  • the age of the bankrupt at the relevant times;
  • the percentage limits which applied to the bankrupt in relation to relief from income tax for the purposes of making contributions to a relevant pension arrangement in each of the 6 years prior to the adjudication; and
  • the extent of provision made by the bankrupt in relation to any relevant pension arrangement prior to the making of the contributions concerned.

A “relative” means a brother, sister, parent, spouse or civil partner of the person or a child of the person or of the spouse or civil partner.


References and Sources

Irish Books

Burke & Comyn Personal Insolvency Law               2014

Bracken Practioner’s Personal Insolvency Handbook 2013

Law Society (Wright)       Insolvency Law                  2009

Sanfey & Holohan            Bankruptcy Law & Practice2nd Ed             2010

Farry, Holohan  Consolidated Bankruptcy & Personal Insolvency Legislation2013

Forde, Kennedy & Simms              Company Insolvency                      2015

Forde & Simms Bankruptcy Law 2nd Ed 2009

UK Books

Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)

V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017

RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)

A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)

Marsh Bankruptcy Insolvency and the Law 2016

WW McBryde, Bankruptcy 2nd Ed, 1995

Butterworths Insolvency Law Handbook 14th Ed 2012

Core Statutes on Insolvency Law and Corporate Rescue (annual editions)

Legislation

Bankruptcy Act 1988

Bankruptcy (Amendment) Act 2015

Personal Insolvency Act 2012

Personal Insolvency (Amendment) Act 2015

Bankruptcy Act 1988 (Commencement) Order 1988, S.I. No. 348 of 1988

Bankruptcy Act, 1988 (Alteration of Monetary Limits) Order 2001, S.I. No. 595 of 2001

Bankruptcy Act 1988 (Official Assignee Accounts and Related Matters) Regulations 2013, S.I. No. 464 of 2013

Bankruptcy (Amendment) Act 2015 (Commencement) Order2016, S.I. No. 34 of 2016

Rules of the Superior Courts (Bankruptcy) 2013, S.I. No. 461 of 2013

Rules of the Superior Courts (Bankruptcy) 2016, S.I. No. 232 of 2016

Rules of the Superior Courts (Bankruptcy) 2012, S.I. No. 120 of 2012

Bankruptcy (Amendment) Act 2015 (Commencement) (No. 2) Order 2016, S.I. No. 253 of 2016