Charging orders and bankruptcy: is your debt secured?

Charging Orders are a useful enforcement tool where a creditor is able to secure sums due under a judgment or order of the court against the debtor’s interest in a property.  A charging order is an equitable charge over the debtor’s property (if they own the entirety of it) or their beneficial interest in jointly owned property.

Assuming that the debtor has an interest in property, once a judgment debt becomes due and enforceable, a creditor can apply for a charging order.  The court will initially grant an interim charging order which the creditor should then register against the debtor’s property by way of charge or restriction so as to ensure that the judgment debt is secured. Once the debtor has been served with the interim charging order and assuming that there are no valid objections to the continuation of the charging order, a court will grant a final charging order.

But what happens if a bankruptcy order is made against the debtor? Would a creditor with the benefit of a final charging order still be a secured creditor? This scenario was considered in Nationwide Building Society v Wright and another [2009] EWCA Civ 811. Here the Court of Appeal held that a creditor who had obtained a final charging order prior to the making of a bankruptcy order could not be deprived of the benefit of his security.

In Nationwide Building Society, an interim charging order was obtained prior to a bankruptcy petition being presented against the debtor. However, prior to the final charging order being obtained, a bankruptcy petition was presented against the debtor. Once the bankruptcy order was made, the trustee in bankruptcy applied to discharge the charging order on the basis of the debtor’s insolvency.

The creditor appealed this decision and the Court of Appeal, in allowing the appeal, held that as the final charging order was obtained prior to the making of a bankruptcy order, the creditor should not be deprived of the benefit of it. Therefore the creditor’s interest in the property remained secured by virtue of the charging order.

This decision highlights that in considering whether a creditor should retain the benefit of their security, timing is of paramount importance. Even if a bankruptcy petition is presented prior to a final charging order being obtained, this should not prevent the creditor from preserving their interest as a secured creditor by virtue of the bankruptcy alone. Conversely, if a bankruptcy order is made before the granting of a final charging order, then the security will be lost so it is important to not only complete all necessary due diligence steps before taking enforcement action, but also ensuring that any such action is undertaken promptly.

If you require advice and/or representation in respect of a debt or security, contact one of our specialist commercial litigation solicitors by sending us an email, completing our online enquiry form or calling on 020 3811 1904