Charging orders are a popular remedy but they can be problematic
Which of two creditors will have priority? |
Question I am a landlord of commercial premises and hope to recover rent arrears after a former tenant went into liquidation in 2001. I obtained judgment against the guarantor/director in January 2002. His credit history showed county court judgments and a jointly owned matrimonial home (being registered freehold). I obtained an interim charging order (ICO) against his interest in February 2002, registered a caution and obtained a final charging order in April. The property is now being sold but the net proceeds of sale will be limited. Another creditor (X) obtained an ICO weeks before me, but delayed making it final and had nothing on the register when my caution was entered. Who will be paid first? Answer The charging orders take effect in the same way as equitable charges created by the debtor. Their relative priority is determined by the order in which they were created. X obtained its ICO first and will have priority, regardless of the date of your respective entries on the title. |
Explanation
The question is one of priority between competing interests, rather than one of protection against a third-party purchaser. Charging orders take effect as though they were equitable charges created by the debtor by writing under his hand. Entries on the register in respect of such interests do not determine their priority inter se they are designed to protect the interests against a purchaser of the legal estate or another such registered disposition.
In determining the priority of minor interests, the rule is that the first in time prevails. The charging order is created by the interim order and confirmed by the order made final, so it is the former date that matters for these purposes. Here, X obtained its interim charging order first and will have priority over your interest.
This result is unaffected by the date upon which the creditors registered their interests against the debtor’s title in the form of (what would then have been) cautions against dealings. Such entries would have provided a degree of procedural protection against dispositions, but would not have determined priority between the two interests.
The debtor in the present case was a joint beneficial owner, so the charging orders affected only his beneficial interest, hence the recourse to a caution under the Land Registration Act (LRA) 1925 (post-2003, the creditors could enter a form K restriction). Had the debtor been the sole owner, the charging orders would have taken effect against the legal estate, and the entries would take the form of notices. However, even where notices are entered by the creditors, their priorities inter se would still be governed by the “first in time rule”. (The LRA 2002 provides that notices will protect “the priority of the interest”, but this refers to protection against a disposition of the registered estate and does not affect priority between competing orders.)
An important contrast exists between a charging order, which takes effect as though the debtor had granted an equitable charge, and the interest created under a legal, registered charge. As to the latter, an exception is made to the “first in time rule” by section 29 of the LRA 1925 and section 48 of the LRA 2002, by virtue of which registered charges rank according to the order of their registration, not their creation.
What are the issues to be considered? |
Question Where a judgment debtor has an interest in property, charging orders are often sought as a matter of course, but are there any immediate disadvantages or other difficulties in relying upon a charging order to obtain payment? Answer Provided that the asset over which the charging order is secured has sufficient equity, a charging order may be expected to secure repayment of the debt. It is also a relatively unobtrusive remedy for the debtor, which may put off repayment in full until either it sells the property or an order for sale is granted. However, a charging order is not the appropriate remedy in every case. |
Charging orders have increased in popularity with the housing market boom. A creditor may expect a guaranteed return in respect of the debt, providing that the asset being charged has sufficient equity. Although obtaining a charging order does not procure payment of the debt, interest will continue to accrue on the judgment debt until paid. However, it is essential to consider a falling property market and its likely effect upon the equity available at the time of sale. This is when issues such as priorities will come to the fore.
To obtain payment, the creditor has to apply to the court for an order for sale. Where such an application is made, the court will take into consideration the debtor’s circumstances. For example, in Austin-Fell v Austin-Fell [1990] 3 WLR 33, the court decided that an order for sale should not be granted until the debtor’s children reached the age of 18.
Two other issues have restricted the availability of charging orders, namely where: (i) a debt has been ordered to be paid by instalments and (ii) the debt is unascertained in amount, for example, an order for costs to be assessed. As to the former, a charging order may not be granted until after the debtor defaults in payment of one or more instalments.
However, the Tribunals, Courts and Enforcement Act 2007 will change that position. When the 2007 Act is brought into force, a creditor may obtain a charging order even where there is no default. In relation to the latter, the court will not grant a charging order in respect of an unascertained sum: see A&M Records Inc v Darakdjian [1975] 1 WLR 1610. This position will remain unchanged by the 2007 Act.
A creditor must assess the suitability of a charging order in each case, having regard to the equity available, the debtor’s circumstances and how long it is content to wait for payment without further action.
E-mail your questions to egq&a@enterprisechambers.com and EGQ&A@charlesrussell.co.uk
Kavan Gunaratna is a barrister at Enterprise Chambers and Natalie Deuchar is a solicitor at Charles Russell LLP
