Background

Charging Orders are a useful way of securing a judgment debt against a Debtor, particularly where their financial situation appears perilous. Where a judgment debt has been obtained, the Creditor can apply to the court for a Charging Order over the Debtor’s property in the sum of the judgment debt.  When the property is sold, the charge has to be paid first before any proceeds of sale are given to the Debtor.  The limitation with Charging Orders is that an order does not compel the Debtor to sell the property so it may be some time before the order takes effect.  In addition, if there is an existing charge on the property, such as a mortgage, this will be repaid before the Charging Order debt.

Facts of Nationwide v Wright

Nationwide v Wright was a Court of Appeal ruling which overturned a previous decision to set aside a Charging Order following the insolvency of the Debtor.

Under the Charging Orders Act 1979 (“COA”), the courts may make a Charging Order against the property of a person against whom there is a judgment debt in order to secure payment of that debt.  The Debtor, or any other party interested in the property, can apply to the court to discharge or vary the Charging Order.

In Nationwide v Wright, the Building Society obtained an interim Charging Order against property owned by Mr Wright and his wife to secure a judgment for £10,000 made in respect of a credit card debt.  Unknown to the Building Society or the Court, a Bankruptcy Petition was then presented against Mr Wright.  He was declared bankrupt and his estate was vested in the Trustee in Bankruptcy. The court, with no knowledge of the bankruptcy, made the Charging Order absolute.

The Trustee in Bankruptcy applied to have the Charging Order set aside due to the Debtor’s insolvency. The Court at first instance agreed to set the Charging Order aside. The Building Society made an appeal to the County Court Judge which was dismissed.  The Building Society then further appealed to the Court of Appeal, who upheld the appeal.

The Court of Appeal commented that it was an underlying principle of the Insolvency Act 1986 that a person who deals with a party in good faith before a Bankruptcy Petition is made, and who has received no notice of that petition, is entitled to retain the property which they have acquired.

Where a Creditor has completed execution of a Charging Order before a Bankruptcy Petition is made, they are not to be deprived of their security due to the Bankruptcy Order alone, some additional evidence is required before the court will set the Charging Order aside.

If the Court has notice of a Bankruptcy Petition when it makes a Final Charging Order, the Charging Order will not have been executed before the Bankruptcy Order and the Creditor will be deemed to have notice of the Bankruptcy Petition. However, if the Court makes an Interim Charging Order and then a final Charging Order without knowledge of the Bankruptcy Petition, the Charging Order will have been executed before the Bankruptcy Order. This will be the case even if the Final Charging Order is not made until after the Bankruptcy Order.

Comment

The Nationwide decision should provide comfort to Creditors who obtain Charging Orders over a Debtor’s property in the face of the Debtor’s potential insolvency.  As long as the Charging Order was deemed executed prior to the Bankruptcy Order, a Creditor shall not be deprived of their security due to the individual’s bankruptcy. In practical terms, the decision highlights the importance of acting quickly, as a Creditor, to ensure that not only do you obtain judgment for the debt owed, but also that you obtain security for the judgment and register your Charging Order at the Land Registry quickly.  In this way, you stand the best possible chance of recovering the monies owed to you.

For further information please contact Georgina Squire or the Partner with whom you usually deal