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First past the post for payment ? obtaining a charging order

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Debtors will often argue that it is unfair that one creditor should gain an advantage over other creditors by having the security of a charging order particularly where other creditors may have been accepting payments by instalments.  However, in the case of Nationwide Building Society v Wright [2009] the Court of Appeal confirms that this argument should not succeed.

A charging order is an Order of the Court placing a "charge" on the property of a Judgment debtor such as a house or a piece of land for the amount owed under the Judgment.  The charging order will not normally get the creditor his money immediately as a separate Order for sale is required, but it may safeguard the money for the future.  Charging orders are therefore a very useful tool to obtain payment for a creditor with a Judgment in its favour.

Section 1(5) of the Charging Orders Act 1979 provides that:

"In deciding whether to make a charging order the court shall consider all the circumstances of the case, in particular, any evidence before it as to (a) the personal circumstances of the debtor, and (b) whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order."

It is not a question of protecting the interests of the creditors as a group rather than favouring one creditor who has obtained a charging order.  Equal treatment of creditors before a formal insolvency (i.e. before a bankruptcy order has been made) is not a ground for the Court to refuse to make a charging order final.  It is "first past the post" and the diligent creditor who acts first before there is a formal insolvency should not be penalised.

In this case the first Judge considering the final charging order did not know of the pending bankruptcy and in a strange twist which may give rise to arbitrary outcomes in future cases, the Court of Appeal accepted that if the Judge considering the final charging order had known of the pending bankruptcy, he would have been right to refuse a final Order

The implication of the case is that creditors should look to pursue claims and thereafter obtain and enforce Judgment quickly, particularly if they have a charging order in mind as a method of enforcement and particularly if there is a risk of the debtor's future insolvency.  The creditor who delays, even to accept payment by instalments without the security of a charging order, runs a significant risk that other creditors will secure the debtor's assets first. 

If you would like any advice regarding charging orders or recovery of debts, please contact John Mackle - a member of our Commercial Litigation Department on 0113 336 3336 or at j.mackle@clarionsolicitors.com 

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