It's a matter of timing

23.09.09

 

This article was written by Greg Standing, partner in Wragge & Co LLP's finance, insolvency, recoveries and sales team and published in the September issue of Motor Finance.

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-up 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.

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 v 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. Nationwide 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.

For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Redding on +44 (0)121 685 2708 or Rebecca Lum on +44 (0)121 260 9973

This published article may contain information of general interest about current legal issues, but does not give legal advice.