There is inevitably a tension when a creditor seeks a charging order against a debtor’s assets (usually but not necessarily his or her home) at about the same time that the debtor goes into bankruptcy.
The key issue is this – should the creditor be permitted to retain the benefit of the charging order, or should the charging order be discharged so that any available equity in the asset passes to the debtor’s trustee in bankruptcy?
The Court of Appeal addressed this issue in the recent case of Nationwide Building Society -v- Wright. The Society obtained a final charging order against the debtor’s home (having first obtained an interim charging order), although (unknown to both the Society and the Court at the time that the charging order was made final) a bankruptcy petition was presented against the debtor 12 days after the interim charging order was made, with the bankruptcy order made at a separate hearing just over 2 weeks after the final charging order hearing.
Although the final charging order was made before the commencement of the bankruptcy (i.e. – the date on which the bankruptcy order was made), the trustee applied to discharge the charging order, arguing that the Court should exercise its discretion to do so under section 3(5) of the Charging Orders Act 1979.
Had the bankruptcy order been made prior to the final charging order, then section 346(1) of the Insolvency Act 1986 would have prevented the Society from retaining the benefit of the charging order as against the trustee.
Although the trustee was successful before the lower courts, the Court of Appeal found in favour of the Society and upheld the charging order, finding that “the legislative intention which underlies section 346(1) is that a judgment creditor who has obtained a final charging order before the making of a bankruptcy order before the making of the bankruptcy order is not to be deprived of the benefit of his security by reason of the bankruptcy alone”. In the absence of special circumstances, the Court should not exercise its discretion to discharge or vary the charging order.
This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.