Maximising recoveries from ‘bad books’ is important to the financial health of motor finance companies. Having secured a judgment against an individual who defaults on a motor finance agreement, a finance company will want to ensure either that payment of the judgment debt is made, or, if that is not possible, the debt is secured against an asset of the debtor for future enforcement. Charging orders have long been one of the main tools in judgment creditors’ armoury to enable them to secure judgment debts.
Charging orders can be granted over land and other securities. Those made over land, often residential property where individuals are concerned, provide the creditor with the equivalent of a mortgage over the property charged. The creditor becomes a secured creditor, subject to any prior mortgages or charges affecting the property.
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The charging order can be obtained even when the property is owned jointly. It then ranks as a charge on the debtor’s beneficial interest in the property, rather than as a charge against the property as such.
Further, since October 2012, even where a debtor is making payments under an order for payment of a debt by instalments, Part 4 of the Tribunals, Courts and Enforcement Act 2007 (amending the Charging Order Act 1979), enables a charging order to be made to provide additional security.
There are, however, some safeguards for debtors, which finance companies need to be aware of.
One such safeguard is that enforcement of the charging order securing a debt payable by instalments, as referred to above, can only be enforced following default under the instalment payments.
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By GlobalDataA further safeguard came into effect on 6 April 2013, when the Charging Orders (Order for Sale: Financial Thresholds) Regulations 2013 came into force. These regulations confirm the financial threshold for enforcing charging orders by way of an order for sale in cases where the charging order was made to secure the payment of money owed under a regulated agreement under the Consumer Credit Act 1974. The threshold is set at £1,000. A charging order in such a case may not be enforced by way of an order for sale where the amount owing (including interest but not including any fees or charges of the application to enforce) is less than £1,000.
These regulations and the threshold referred to have been deemed necessary by the government in order to provide some protection to consumers against unreasonable charging orders.
The aim is to ensure that charging orders are not used as a method of securing payment of unsecured, disproportionately small judgment debts and that repossession is always the last resort.
Comment
These regulations do not have retrospective effect. Therefore, a charge imposed by a charging order can still be enforced by way of an order for sale to recover a sum which is less than £1,000 if the application for an order for sale was made before 6 April 2013. Charging orders will continue to be an effective means of long-term recovery for many finance companies, but a rethink may be required in respect of smaller balance accounts.
Greg Standing is a partner in Wragge & Co’s motor finance litigation team
