Greg Standing
Whether a finance company can collect on a finance
agreement debt may depend on whether the debtor is insolvent and,
if not, how quickly it can take enforcement action.
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Where a judgment has been obtained
and the debtor becomes insolvent, the general rule is that all
non-secured creditors are treated on a pari passu basis,
that is, they are treated equally where there are funds to
distribute. Where there is no insolvency, the general principle of
‘first past the post’ applies, unless that would result in
prejudice.
In British Arab Commercial Bank
PLC and others v Algosaibi and Brothers Company and others, a
number of banks claimed against the defendants. The court ordered
the claims be heard together. One of the banks (H) obtained interim
charging orders against the defendants’ properties. The other banks
then also applied for interim charging orders over those
properties.
When H applied to make the charging
orders final, the other banks objected on the basis the proceeds of
enforcement should be shared equally.
The banks argued that:
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By GlobalData- They had all agreed to
co-operate to obtain their various judgments against the
defendants. - The banks and H had all met
to discuss enforcement issues and H had suggested they would
continue co-operating with the other banks, when in fact they were
about to take enforcement steps to protect their own
judgment.
H argued the first creditor to
obtain a charging order should take priority. The court confirmed
that where there is no insolvency, creditors will generally be
treated on a ‘first past the post’ basis. However, the court has a
discretion whether to make the charging order absolute and can
refuse to do so if the creditor’s conduct, or other exceptional
circumstances, justified a departure from the general rule.
This would only occur if the other
creditor(s) would be unduly prejudiced. The judge found no undue
prejudice.
H had not obtained an unfair
advantage. There was no litigation-sharing between the banks. The
co-operation only arose out of court case management.
There was no obligation to share
any settlement monies. Nothing relating to enforcement was agreed
between the banks and H when they met, and H had not misled the
other banks.
Things to
consider
Where a debtor has multiple
creditors, unless a formal agreement has been entered into to
co-operate in enforcement proceedings or distribution of assets,
each creditor is entitled to look after its own interests.
However, a creditor’s best interest
is not always served by getting involved in a race.
In our experience, the opposite can
be true. A collaborative approach, where risk and reward are shared
appropriately among creditors, can minimise the erosion of the
‘pot’ through multiple legal costs and consequently increase
returns in real terms.
The author is a partner in
Wragge & Co’s finance litigation team
