Enforcing judgment against a debtor’s pension pot: the recent decision in Manolete v White

When it comes to satisfying judgment debts in the context of breach of fiduciary duties, the private pension assets of company directors can be a tempting target for judgment creditors. This is not least because the courts are often willing and more than capable of crafting a remedy to meet the facts of the relevant case.

Indeed, in the recent decision of Manolete Partners Plc v White [2023] EWHC 567 (Ch), the issue of whether a defaulting director could be forced to draw down his pension pot to satisfy a substantial judgment debt was considered by the High Court. They decided in favour of the applicant, an insolvency litigation funder – and therefore, indirectly, the company’s creditors.

The facts of the case

The applicant was a specialist insolvency litigation funder and the assignee of claims asserted on behalf of Lloyds British Testing Limited (“the company”) and its liquidators against the respondent, Mr White. The respondent had been a director of the company since its inception in 2002, up until the company entered into administration towards the end of 2016 and then into creditors’ voluntary liquidation a year later. Prior to its insolvency, the company had grown to be a prominent provider of inspection, testing and repair services of lifting equipment.

The core issue raised before His Honour Judge Hodge KC, sitting as a judge of the High Court, was as follows: whether the court could, and should, compel the respondent to draw down his benefits under an occupational pension scheme in order to satisfy an outstanding judgment debt in favour of the assignee of claims for breach of director’s duties.

These claims had been brought following the insolvent administration and voluntary liquidation of the employer company. By this point the total judgment debt, of which the respondent had not paid a penny, stood at almost £1m.

The findings of the court

In applying the principles of Blight v Brewster [2012] EWHC 165 (Ch), the judge was satisfied that in circumstances where the judgment debt was a result of the respondent’s misfeasance and breaches of fiduciary duty while acting as the company’s controlling director and shareholder, it would be unfair for the respondent to retain his pension – itself derived entirely from funds provided by the company – while the judgment debt entered against him in favour of that company’s assignee remained wholly unsatisfied.

By ordering the respondent to draw down on his pension pot, this would enable him to satisfy, at least in substantial part, his liability under the judgment debt.

In Blight v Brewster, the claimants, who had been defrauded by the defendant, had obtained summary judgment against him. Among the defendant’s assets was a fund in a pension scheme, 25% of which he could elect to draw down as a tax-free lump sum.

In allowing an appeal from a decision refusing an order compelling the defendant to make that choice, the deputy High Court judge said that there was a strong principle and policy of justice that debtors should not be allowed to hide assets away in a pension fund which they had a right to withdraw and were needed to pay creditors.

As such, in determining the scope of the jurisdiction under s.37 (1) of the Senior Courts Act 1981 — under which the High Court may grant injunctive relief in any case in which it is just and convenient to do so — the judge in Blight held that this power could be used in aid of a third party debt order when justice so required.

Unlike bankruptcy cases, where special statutory protections for pensions apply, if a debtor chooses the advantage of not being bankrupt because he considers himself to be solvent, he must pay his debts. This means that his assets, including contingent assets subject to some act on his part, will be amenable to the enforcement of judgments by individual creditors. If the debtor refuses to make a written election, the court can also make an order under s.39 of the 1981 Act that solicitors acting for the judgment creditor can make it on his behalf.

The key factors to be considered

Importantly, the principles in Blight are not limited to fraud cases, where ordering a defendant to drawdown his pension pot is potentially available to enforce any kind of judgment debt. This is because there is no principled distinction to draw here between different kinds of liability i.e. between fraud and non-fraud cases.

The relevant conduct in considering whether to grant the injunction is not what causes the liability, but rather the use of pension funds to prevent creditors being paid. The right of election in Blight also only related to the defendant’s 25% tax-free lump sum. However, following legislative reforms in 2015, the whole of a debtor’s pension pot is now vulnerable, where a court can enforce against the entire pension fund, not just the tax-free amount.

As such, in the case of Manolete v White, the respondent’s only legal argument in resisting a Blight v Brewster order was on the basis that it would be in breach of the prohibition relating to occupational pensions in s.91(2) of the Pensions Act 1995, where the relevant pension in Blight was not an occupational pension.

This section provides that where a person’s entitlement under an occupational pension scheme cannot be assigned, no order can be made if the effect of this results in that person being restrained from receiving that pension.

However, by making an order in Manolete that did no more than require the respondent to give written notice to the pension scheme trustees asking for all of his remaining pension fund to be designated as a drawdown pension fund, and directing payment to a nominated UK bank account in the name of the respondent, the order would not stop Mr White from receiving the monies.

On the contrary, this would ensure that payment of that pension pot was made to the respondent, rather than remaining within the scheme wrapper. It was said to make no difference whatsoever that the order was designed to apply that pot in satisfaction of a pre-existing judgment debt owed to the applicant by the respondent. Section 91(2) of the 1995 Act was therefore held by HHJ Hodge to present no bar to the making of a Blight v Brewster order.