01/08/2009

Quick to the Plunder

The decision of the Court of Appeal in Nationwide Building Society v Wright [2009] EWCA Civ 811 confirms that a court need not set aside a final charging order merely because the order was made at a time when the owner of the property was insolvent but had not yet been declared bankrupt.

Section 346 of the Involvency Act 1986 states:

346(1) Subject to section 285 in Chapter II (restrictions on proceedings and remedies) and to the following provisions of this section, where the creditor of any person who is adjudged bankrupt has, before the commencement of the bankruptcy –

(a) issued execution against the goods or land of that person, or

(b) attached to a debt due to that person from another person, that creditor is not entitled, as against the official receiver or trustee of the bankrupt’s estate, to retain the benefit of the execution or attachment, or any sums paid to avoid it, unless the execution or attachment was completed, or the sums were paid, before the commencement of the bankruptcy.

. . .

The definition of “completion” in respect of charging orders is to be found in subsection (5):

(5) For the purposes of this section – . . .

(b) an execution against land is completed by seizure, by the appointment of a receiver or by the making of a charging order under section 1 of the Charging Orders Act 1979 . . .”

Thus if a creditor has managed to obtain a charging order, they are not required to give up that order as a result of s.346, but s.346 is not the only factor that could deprive a creditor of their charge.

For example where an interim order has been made, the fact that a winding up order had been made against the defendant company would normally result in a final charging order being refused and an interim order being discharged (Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] AC 192 (HL).

Even a final order can be discharged on an application to the court under Section 3(5) of the Charging Orders Act 1979:

“3(5) The Court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.”

Should an order under s.3(5) normally be made where the judgment debtor has been declared bankrupt shortly after the making of the final order? The facts of Wright case provided a perfect test case for the question — which is why a second appeal was permitted.

Judgment (£10,000) 7 April 2006
Interim charging order 5 May 2006
Petition presented 17 May 2006
Final order 26 June 2006
Bankruptcy 12 July 2006

The building society had not known that the bankruptcy petition pending, nor did the District Judge. In November 2007 an application was made by the trustee in bankruptcy under S.3(5) to discharge the final charging order. The Deputy District Judge held that the Final order would not have been made if the District Judge had known of the pending bankruptcy petition. He held that as no right to have the order set aside, it being entirely a matter of the court’s discretion. He found that:

Mr Wright was in a hopelessly insolvent position in the spring of 2006. Nationwide Building Society was only one of [his] 32 creditors. They took steps, perfectly validly and in good faith to protect their interest, but given the balance of interest and the nature of the assets available in this case for distribution to creditors, I think it is appropriate for me to exercise my discretion in favour of the trustee in bankruptcy and discharge the Charging Order.

The Circuit Judge dismissed the appeal. A second appeal was granted on the ground that the matter raised was an important point of principle.

The Court of Appeal allowed the appeal and the final charging order was reinstated. The Court thought that s.346 did provide evidence that this was the correct approach:

it is, in my view, clear that the legislature did intend that a creditor who had completed execution before the bankruptcy order was made was not to be deprived of his security by reason of the bankruptcy order alone. Some additional feature was needed before it could be appropriate to exercise the general power under section 3(5) of the 1979 Act.

The wording of s346(5)(b) putting the matter beyond doubt.

In Roberts Petroleum Lord Brightman’s observation had clearly assumed that if the court had made a final order by the time of the winding up petition it would not have been revoked (absent special circumstances). An earlier decision of the High Court had also obiter assumed that a final order would not normally be discharged merely on the ground of the judgment debtor’s bankruptcy (Banque Nationale de Paris plc v Montman Ltd and others [2000] 1 BCLC 576) although in that case the order was refused because the application had been made by an unsecured creditor who lacked standing.

The court noted a contrasting situation where a s.3(5) order was made. In C & W Berry Limited v Neil Armstrong-Moakes [2007] EWHC 2101 (QB) the judgment creditor had proved in the bankruptcy without giving a valuation for its charging order (which was sufficient to cover the entirety of the judgment debt). The court found that was a reason to discharge the order.

Conclusion

Not a particularly surprising result given the trend in the authorities cited, but it does mean that a judgment debtor is well advised to be quick to obtain their final charging order. One thing that slightly puzzles me is that the bankruptcy petition was moved by the supervisor of an IVA – would the IVA not have prevented the making of the interim order?

3 Comments

  1. Liadnan

    Court when making the charging order didn’t know about the IVA either, nor did Nationwide.
    (The district judge who granted the charging order was the same one who made the bankruptcy order, oddly enough.)

    Reply
  2. Liadnan

    .. and the moratorium under section 252 (assuming there was one in effect) allows for leave to be given retrospectively by the court and doesn’t make a subsequent charging order made without leave a nullity, see Clarke v Coutts at para 42.

    Reply
    • Francis Davey

      Yes, I was aware of that. Sadly whenever its been me involved the court has known about the IVA.

      Some district judges are surprisingly good at remembering these things, but I expect for most they see hundreds of charging order and bankruptcy petition cases and simply can’t remember them. The fact that the same old lawyer faces appear in many of them can’t help.

      Reply

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