Securing judgments by way of charging orders over
property is a popular way for finance companies to enforce against
debtors. Often, this process is a race against time before a
bankruptcy or winding-p order is made. Therefore, it is important
to know when a bankruptcy order, or winding-up petition, comes into
force.
In relation to company insolvency, the winding-up
order is backdated to the date of the presentation of the petition
and any transactions undertaken since that date can be set aside by
the liquidator. In relation to individual bankruptcy, the
bankruptcy commences when the order for bankruptcy is made by the
court. There is no backdating.
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This distinction is crucial because where the
creditor of a bankrupt has, before the commencement of the
bankruptcy, issued execution against goods or land of that person,
the creditor is not entitled to retain the benefit of the execution
unless the execution was completed before the commencement of the
bankruptcy. Execution includes seizing goods, appointing a receiver
or obtaining a charging order.
This issue arose in Nationwide Building Society
vs Wright & Anor, where Nationwide obtained an interim
charging order to secure a judgment against the defendant in
relation to a credit card debt.
The interim order was obtained before the
presentation of a bankruptcy petition against the defendant. The
final order was made after the presentation of the petition but
before the making of the bankruptcy order itself. Neither
Nationwide nor the district judge who granted the order were aware
of the petition. The trustee in bankruptcy obtained an order
setting the charging order aside.
The court held that, as there had been no knowledge
of the pending petition, the charging order was properly made, but
that it should exercise its discretion under the Charging Order Act
1979 to discharge it, given the limited number of assets available
for distribution to the defendant’s numerous creditors.
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By GlobalDataNationwide appealed on the basis it was entitled to
the benefit of the charging order as it pre-dated the commencement
of the bankruptcy.
The Court of Appeal agreed with Nationwide. Under
the Insolvency Act 1986, a bankruptcy commences only when the order
for bankruptcy is made. Persons who receive property from a
bankrupt, or obtain a final charging order, before the commencement
of the bankruptcy in good faith, for value and without notice of
the petition will not be deprived of the benefit of the charging
order or property by reason of the bankruptcy order alone.
A charging order obtained in such circumstances
can, in the absence of facts justifying a departure from this
principle, be upheld as against the trustee. The charging order was
reinstated.
Things to consider
In a bankruptcy situation, timing and knowledge are
everything.
Notice of the petition (and therefore the
possibility of a bankruptcy order) would defeat the charging order
in such circumstances, as would failure to act in good faith, or
lack of value.
Greg Standing, a
partner in Wragge & Co LLP’s Finance, Insolvency, Recoveries
and Sales team
