EXECUTION OF A JUDGEMENT OVER LAND.
One in 192 active companies entered insolvent liquidation between 1st April 2022 and 30th June 2023 at a rate of 52 per 10'000 active companies. This was an increase from 43.9 per 10'000 in the 12 months ending 30th June 2022. As for individual bankruptcies, these increased by 11% during the same timeframe with a 4% gain against 2023 Q1.
While it is expected that debtors will work with their creditors to avoid the ignominious stigma of insolvency, there remains a reckless minority to whom failure is no stranger. This article looks at how a Judgement may be enforced over a Judgement Debtor's assets without providing them with insolvency protection.
WHAT ARE CHARGING ORDERS?
In the simplest of terms, a Charging Order is a private mortgage over a Judgement Debtor's property that once granted, gives the Judgement Creditor a right to apply for an order for sale. In the case of an occupied residential or commercial property, the order will be for vacant possession and sale. Should the property be sold prior to an order for sale, then providing the Charging Order has been registered at the H.M. Land Registry, the proceeds of the sale will go to satisfying the Judgement Debt.
Charging Orders are useful method of enforcement as interest continues to accrue at the judgement rate of 8% p/a, up to the date of sale. This means, that should the court make a Charging Order for e.g. £100'000 and the property is sold 1 year later, the Judgement Creditor will receive £108'000.
Furthermore, should the Judgement Debtor subsequently apply to make themselves insolvent, the Judgement Creditor has security. This means that the debt together with interest survives the bankruptcy.
THE LAW & PROCESS
The application for a Charging Order is essentially, a 2-Stage Process. First the court should grant an 'Interim Charging Order' which is usually (and should) be made without notice to the Judgement Debtor. Thereafter, the Interim Charging Order is served and the court should make a 'Final Charging Order' a.k.a the Order Absolute.
The Court has the power to make a Charging Order over a Judgement Debtor’s property pursuant to section 1(1) Charging Orders Act 1979.
An application for a Charging Order must be made in the prescribed form pursuant to CPR r.73.3(5) i.e. Form N379 if the application relates to land and Form N380 for a security.
Where the judgement concerned is a County Court judgement (as opposed to a division of the High Court) or the amount is <£5001, the application must be made in the County Court i.e. the County Court Money Claims Centre (CCMCC). For all other claims, the application is made to the court that ordered the Judgement Debt to be paid.
On receipt of a Charging Order, the Judgement Creditor must within 21 days from the date of the Order serve those individuals listed in CPR r.73.7(7). This includes the Judgement Debtor, any co-owner of the land, the Judgement Debtor's spouse or civil partner (if known) and any other known creditor or person the court directs in the Order. Thereafter;
The Judgement Creditor must within 28 days file at court the Certificates of Service (Form N215) for every person served together with a 'Statement of Amount Due'. There is no prescribed form for the Statement, but it is essentially a breakdown of the monies owed and the amount of interest due.
Once served, the Judgement Debtor or any other person wishing to object, has 28 days to file and serve a written objection. The objections are referred to a District Judge and the usual order is that the matter will be transferred to the debtor's home court for a hearing to decide if the order should be made absolute. However, for County Court Cases, should no objection be received the court will automatically make a Final Charging Order.
At least 7 days prior to the hearing, anybody wishing to give evidence must file and serve the written evidence i.e. a witness statement, that they wish to rely upon. Then a that hearing the court may make 1 of the following orders:
The Interim Charging Order Final/Absolute with or without modification.
Dismiss the Interim Charging Order.
Order a trial or make any other order as it considers relevant.
CHALLENGING A CHARGING ORDER
The criteria for challenging a Charging Order is divided between the common law and statute.
The general principles governing the exercise of the court's discretion at both stages were set out in Roberts Petroleum Ltd -v- Bernard Kenny Ltd [1981] EWCA Civ 10. Those principles that have survived various appeals are as follows:
The court has discretion as to whether or not make a Charging Order. - This means that the court is not obliged to make a Charging Order and it is for the Judgement Creditor to prove that it is just.
The court has both the right and the duty to take into account all circumstances of any particular case, whether such circumstances arose before or after the making of the Interim Charging Order. - This means that the courts will look at the conduct of the debtor. For example, a debtor in an honest dispute whom has put forward payment proposals which have not been considered is more likely to defeat a Charging Order than a fraudster who has since been arrested from criminal harassment of his creditors.
The court should exercise it's discretion as far as possible equitably, in respect of all various parties involved (the creditor, the debtor and all other unsecured creditors). - This is relevant when another creditor objects to the Charging Order and argues that such an order would be unfair to them. There is no specific criteria for this.
Statute, is (regretfully) more forgiving of the debtor and is of greater assistance to other creditors.
Section 1(5) Charging Orders Act 1979 requires the court to:
Consider the likelihood that a Charging Order will cause undue prejudice to other creditors.
Consider the personal circumstances of the debtor.
However, every applicant should bear in mind Harman v Glencross [1986] Fam 81 which states that the courts should take into account, the hardship that will be suffered by the Judgement Creditor should the Charging Order not be granted.
In reality, the court is only likely to reject an application for a Charging Order if there is insufficient proof of the debt, ownership or negative equity in the Property.
PROS & CONS OF A CHARGING ORDER
A Charging Order is a method of execution i.e. enforcing a judgement and not a form of insolvency such as bankruptcy or corporate liquidation. This means that it can be used solely or in conjunction with other means of execution such as the instruction of bailiffs or High Court Enforcement Officers.
ADVANTAGES OF CHARGING ORDERS | DISADVANTAGES OF CHARGING ORDERS |
A Charging Order may be obtained over any property/asset in which the debt has an interest. | But you will not receive your money without the sale of the asset. |
A Charging Order can be obtained against a debtor even where the debtor is paying by instalments and has not defaulted in those repayments. | However, should a debtor be paying by instalments and is not in default, the creditor cannot apply for an ORDER FOR SALE pursuant to s.34(c) Charging Orders Act 1979 without a default. |
The debt is secured and so in not vulnerable should the debtor be adjudged bankrupt i.e. in the event the asset is sold, the Trustee in Bankruptcy will release the funds to you. | Secured Creditors may decide to take action upon receipt of the Interim Charging Order and before the Judgement Creditor has security. For example, a bank may decide to proceed with the sale of the debtor's property before the Charging Order is registered at the H.M. Land Registry. |
Interest continues to accrue for an unpaid judgement debt secured by a Charging Order at the judgement rate of 8%. This means that when sold, the accrued interest will be added to the Charging Order. | Negative equity is a risk to firstly the court granting a Charging Order and secondly, interest may accrue to such a point it cannot be recovered from the sale should there be a delay. E.G. Interest is accruing at £1500 p/m and the court delays the sale until a minor has been found alternative accommodation. |
Certain costs incurred are added to judgement debt. E.g. Interim Court Orders and the costs of bailiff enforcement. | |
May result in a realistic repayment arrangement. | |
Gives the Judgement Creditor the right to apply for an order for sale. | |
FURTHER CONSIDERATIONS
The following considerations should be in the minds of the creditor both before and during the process:
A Debt Relief Order or other Insolvency Protection will Defeat a Charging Order: - Should the Debtor have applied for a Debt Relief Order or has another insolvency order i.e. an Individual Voluntary Arrangement or a Bankruptcy Order, then the court will not make a Charging Order due to the moratorium over the debtor.
The Debt Should be Due: - Unless there is firm evidence that the debtor will not pay the debt before it falls due, it is unlikely that the court will exercise its discretion when the debtor still has time to pay. Do not jump the gun.
There needs to be proof of debt and ownership: - As obvious as it may sound, the application should enclose a copy of the court order giving rise to the judgement debt and the title register from the H.M. Land Registry. It is not sufficient to just include a statutory demand or other document. As for ownership, make sure that the name on the Court Order matches that recorded at the H.M. Land Registry 'exactly'. It is not uncommon for the courts to return applications for a Charging Order because the court has not recorded a middle name on the Judgement while the H.M. Land Registry has. E.G. "Please confirm that John Smith recorded on the Order is the same as John James Smith as recorded on the Title Register."
A Charging Order is an Equitable Remedy: - This means that the Judgement Creditor will rank behind any other equitable charge secured prior to the Charging Order. E.G. should the land be valued at £300'000. A bank has secured a Charge for £250'000 and the Judgement Creditor holds a debt of £100'000, In the unlikely event that the court even makes a Charging Order, at the time of sale the Creditor will only get £50'000 as their equitable charge ranks behind the bank.
The Charge Can be Over the Land Itself or the Debtor's Interest: - This means that when the land itself is charged or is in the sole name of the debtor, it is irrelevant whoever else may hold an interest in the land. However;
In the event that the land is held jointly and only 1 owner has the debt, then the starting point is that they each own a 50% equitable share in the property and so only the debtors interest may be charged i.e. the 50% must be able to satisfy the debt or otherwise, there is little point in the Charging Order.
If the debtor does not own any property, but is the spouse of someone whom does and has a right to reside in that property, then their beneficial interest can be charged. Calculating this interest will be difficult and unless the property is of considerable value, the beneficial interest is unlikely to satisfy the debt.
The Sham-Divorce: - Like the plague, there used to be an epidemic of reckless debtors whom owned land absolutely but mysteriously, all found themselves in divorce proceedings soon after judgement. As if that were not enough, these unfortunate souls were all burdened by hastily scribbled scraps of paper recalling conversations from 20 years ago that they had always seen their spouse as the sole legal and beneficial owner despite never even sharing a bank account. Sadly, the sorry debtors felt 'honor bound' to admit to the veracity of these events and so on the face of it, they had nothing.
Fortunately, the courts are not stupid and the guiding principle in the Sham-Divorce situations is that equity follows the law i.e. should the debtor be the sole legal owner then they are the sole beneficial owner as well.
The courts do not start chopping up the debtor's Property based on the siren song of the spouse and at a hearing for a Charging Order, the courts will instead charge the debtor's interest in the property the default position being 100%. It is then for the spouse to show a beneficial interest at the date of sale but without evidence of a real financial contribution they should expect a minimal amount if anything.
In all circumstances, it is always better for a debtor to cooperate with their creditors rather than be lured to the rocks by a screaming harpy.
HOW WE CAN HELP Unlike most law firms, our standard retainer includes a commitment to support our clients past judgement and through enforcement. Our job is not complete until you have your money, not just a paper judgement. Prior to commencing any litigation, we undertake a detailed search of your opponents' assets in order to ensure the cost of litigation never outweighs its benefits. Thereafter, we maintain a watchful vigil over these resources so you can be secure in the knowledge that you will receive your due judgment. Gavin Renwick has successfully dealt with fraudulent debtors many of whom have supplied false information to county court bailiffs, High Court Enforcement Officers and/or made false representations in the Insolvency Courts in a bid to frustrate enforcement, hinder judgement and inflict further financial pain on their creditors. We are intimately familiar with matters concerning the conduct of the spouse and cases where the debtor has attempted to hide assets in faux-companies, family run business or through sham-divorces and fake addresses. We have successfully advised and appeared for creditors at hearings for Charging Orders and are one of the few legal practices to secure a Charging Order over a bankrupt's property following the bankruptcy order.
Should you require legal advice whether as a debtor or creditor then contact us today.
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