REVIEWING AND DEALING WITH A PROPERTY AT REVIEW STAGE – INCLUDING THE OBTAINING OF A CHARGING ORDER

PART 8

April 2013

REVIEWING AND DEALING WITH A PROPERTY AT REVIEW STAGE – INCLUDING THE OBTAINING OF A CHARGING ORDER 

31.3.239 Scope of this Part

This Part gives advice on the review, and subsequent action to deal with, the official receiver’s interest in the family home (see Part 3).  Depending on local priorities, the general principles outlined in this Part (i.e., valuation, offer, sale – but not necessarily the timescales described) may equally be applied to properties that are not the family home, but the official receiver should not seek a charging order over a property that is not the family home (see paragraph 31.3.249).

This Part contains the following guidance: 

 

31.3.240 Reviewing the property – general

(Amended February 2014)

Where it was not possible to deal with the bankrupt’s interest in a property at the initial stages (see Part 5), and the property has been passed to the LTAU, it will be necessary, where the property is a family home (see Part 3) for the official receiver to review the property in good time to ensure that the property interest is not lost due to the re-vesting of the bankrupt’s interest (see paragraph 31.3.80). The review should include a review of the need for any insurance obtained by the official receiver on the property (see paragraph 31.3.60 for further details on when to cancel insurance).

 

31.3.241 When to review the property

The official receiver must review the property two years and three months after: 

  • the date of the bankruptcy order, or 
  • The date that the official receiver, as trustee, first had knowledge of the bankrupt’s interest in a family home (where there was a late notification – see paragraph 31.3.80), 

 unless: 

  • the mortgagee has realised their security in the property, 
  • the bankrupt’s interest in the property has not been otherwise realised by the official receiver or 
  • the bankrupt’s interest in the property has ceased to vest in the official receiver, as trustee.

 

31.3.242 Calculating the bankrupt’s interest in the property

In order to assist in calculating the bankrupt’s interest in the property, the official receiver should obtain: 

  • a valuation of the property, following the guidance in paragraphs of Part 4 
  • statements from the chargeholders showing the current outstanding balance on the account and 
  • details of any third party interest in the property. 

From this information, the official receiver should be able to establish the amount of the bankrupt’s interest in the property.  Any endowment policy (or similar) attached to the mortgage must also be taken into account when calculating the interest.

 

31.3.243 Bankrupt’s interest below £1,000

If the calculation of the bankrupt’s interest in the property shows that the bankrupt’s interest is less than £1,000 (i.e., that the property is a ‘low-value home’ – see Part 6) then the early re-vesting process (see paragraph 31.3.244) should be commenced immediately.

 

31.3.244 Early re-vesting of the bankrupt’s interest

If, after completing the review of the property (see paragraph 31.3.240), the official receiver, as trustee, considers that; 

  • the continued vesting of the property interest in the bankruptcy estate is of no benefit to creditors or 
  • the re-vesting to the bankrupt will facilitate a more efficient administration of the bankrupt’s estate 

[note 1] 

he/she may follow the process for early re-vesting (see paragraph 31.3.87).  Such an act is most likely in the circumstances described in paragraph 31.3.243.

 

31.3.245 Bankrupt’s interest greater than £1,000 – invite offers to purchase

Where the official receiver’s review of the property shows that the bankrupt’s interest is above £1,000, the official receiver should send the standard letter [note 2] to the bankrupt and/or the joint owner inviting offers to purchase the property.  This letter should be sent whether or not an offer letter [note 3] was sent at the initial stages.

 

31.3.246 No offer received for bankrupt’s interest

If no offer is received for the bankrupt’s interest, or if it becomes apparent that a transfer of the interest will not be completed before the property re-vests (see paragraph 31.3.80) then the official receiver should: 

  • apply for a charging order if the interest is less than £10,000 (see paragraph 31.3.249), or 
  • seek the appointment of an insolvency practitioner if the interest is above £10,000 (see paragraph 31.3.248)

 

31.3.247 Offer received for bankrupt’s interest

If an offer is received for the bankrupt’s interest in the property, and the offer is in the interests of the creditors to accept, the official receiver should follow the guidance in paragraphs 31.3.164 to 31.3.180 to deal with the transfer.

 

31.3.248 Bankrupt’s interest greater than £10,000 – seek appointment of insolvency practitioner

Where the official receiver’s review of the property shows that the bankrupt’s interest is greater than £10,000 and no offer has been received for the interest (see paragraph 31.3.247), the official receiver should seek the appointment of an insolvency practitioner as trustee (see Chapter 17, paragraph 17.51(i)).  Before doing so, an attempt should be made to contact the bankrupt by telephone to explain that such an appointment is being sought, and to afford the bankrupt one last opportunity to buy out the interest (see paragraph 31.3.245).

If an insolvency practitioner appointment is not possible, after offering the property to at least two practitioners, the official receiver should apply for a charging order against the property (see paragraph 31.3.249).

 

31.3.249 Applying for a charging order – a matter of last resort

A charging order should only be sought in relation to a bankrupt’s qualifying family home and as a matter of last resort, and not until the avenues outlined in paragraphs 31.3.240 to 31.3.248 for dealing with the property have been attempted. 

In summary, this means that the official receiver, as trustee,  should only apply for a charging order where, for whatever reason, it is not possible to realise the bankrupt’s interest in the property.  This is likely to be in the following circumstances: 

  • The interest cannot be sold back to the bankrupt (see paragraph 31.3.245) and is insufficient to attract the appointment of an insolvency practitioner, but is still above the prescribed minimum value of £1,000 (see paragraph 31.3.243), taking into account any secured loans, charges, third party interests and anticipated costs of sale; or 
  • The sale of the interest in the property might be prejudicial to the situation of others with an interest in the property (see paragraph 31.3.186),  such an interest may be the result of co-ownership or occupation; and the associated litigation, and unpredictable costs, may deter sale.

 

31.3.250 Charging orders – general background

A charging order is a order of the court, which has the effect of creating a charge over property in which a debtor has an interest to secure a debt.  The charging order can be enforced by an order for sale of the property (see paragraph 31.3.30 for further information in relation to charging orders).

 

31.3.251 Power of official receiver to obtain a charging order

The process of obtaining a charging order is available to the official receiver, as trustee, under the provisions of the Act [note 4] and the Rules [note 5].  These provisions provide a way in which the trustee can ‘deal’ with the bankrupt’s interest in the family home (by obtaining a charge in relation to that interest) where it has otherwise not been possible to do so within the three year period  allowed (see paragraph 31.3.80).

The legislation [note 6] [note 7] provides that such a charge takes effect as if it were an equitable charge (see paragraph 31.3.30) created by the debtor, enforceable by the same courts and in the same manner as such a charge.

 

31.3.252 Not possible to get charge if no longer family home

The wording of the legislation provides that a qualifying family home (see Part 3) must still be occupied as a family home at the date that the application for the charging order is made, and that the interest in the family home is comprised in the bankrupt’s estate [note 8]. 

If the bankrupt and his/her spouse, former spouse, civil partner or former civil partner have left the property then the official receiver will not therefore be able to obtain a charge.  In such a case, the official receiver should seek to have the period to deal with the property extended (see paragraph 31.3.85).

 

31.3.253 When a charging order should be sought

Assuming that the case has reached the two years and three months point (see paragraph 31.3.241), the bankrupt’s interest in the property is worth at least £1,000 (following the valuation guidance in Part 4), and it is not possible to attract an insolvency practitioner as trustee, or to sell the interest ‘back’ to the bankrupt (see paragraph 31.3.245), the official receiver should seek a charging order following the guidance in this Part. 

If the valuation at that date shows that the bankrupt’s interest is below £1,000 the guidance as regards early re-vesting in paragraphs should be followed.

 

31.3.254 Charging order - timing of application and hearing as regards re-vesting of the bankrupt’s interest

It is necessary that the charging order application is made to the court within the three year period in order to prevent the property interest re-vesting (see paragraph 31.3.80)  It is not necessary for the hearing of the charging order application, or for the notices of the hearing (see paragraph 31.3.255) to be served, within the three year period as once the application is made this effectively ‘stops the clock’.

Since it is The Service policy that, where necessary, the charging order process should be instigated soon after the date two years and three months after the bankruptcy order (see paragraph 31.3.241), it is anticipated that all stages of the charging order process will be competed before the expiration of the period allowed to deal with the family home.

 

31.3.255 Notice to bankrupt of charging order application

Assuming all possible avenues for dealing with the property interest have been tried and exhausted, the official receiver should proceed with the application for a charging order.  This first stage is to issue a letter to put the bankrupt [note 9] on notice that a charging order application is to be made, and provides advice on the nature and effect of the charging order.  This letter also advises the bankrupt of the ‘charged value’ in the property calculated by the official receiver (see paragraph 31.3.257).

The official receiver should wait for a period of seven days after sending this letter before applying to court for the charging order.

 

31.3.256 Format of charging order application to court (amended May 2014)

Any application for a charging order made by the official receiver against land in England and Wales should be made using the standard form [note 10], which includes the information required by the Rules [note 11].  The standard application does not include the reasons why the application is being sought and, where this information is sought by the Court it should, where possible, be supplied verbally at the hearing. This may include the provision of a reason as to why the bankrupt’s interest in the family home has not been realised (see paragraph 31.3.268a).

It is necessary to include in the application the amount of the interest over which the official receiver is seeking the charge (known as the ‘charged value’).  Guidance calculating this figure is available as follows:  

  • Where the bankrupt’s interest is less than total unsecured liabilities – see paragraph 31.3.260
  • Where the bankrupt’s interest is more than the total unsecured liabilities – see paragraph 31.3.262

The standard application form [note 12] has been drafted to reflect the position anticipated in most cases of the bankrupt’s total liabilities and costs and expenses being greater than his/her interest in the property.  If the position is otherwise, the application should be amended accordingly.

 

31.3.257 Charged value of the property

The charged value of the property is, in essence, the amount of the bankrupt’s interest which has vested in the official receiver, as trustee, and over which a  charge is therefore sought. This information is required for the charging order application (see paragraph 31.3.256).  Paragraphs 31.3.259 to 31.3.263 given guidance on how this figure is to be calculated.

The intention of the provisions [note 13] [note 14] [note 15] in this regard is that any increase in the bankrupt’s interest in the property over time should be to the benefit of the bankrupt.

 

31.3.258 Inability to change charged value once charging order obtained

The charged value (see paragraph 31.3.257), as set out in the charging order application, is fixed at the date of the order imposing the charge [note 16] [note 17] [note 18] [note 19] [note 20].  It is unlikely that this can be circumvented by an application under the general power of the court to review an order [note 21], although this may be possible, and appropriate, where the official receiver is seeking to reduce a charged value obtained in error.

 

31.3.259 Calculate whether the amount due to creditors and costs is greater than bankrupt’s interest (amended February 2014)

For the reasons given in paragraph 31.3.256, it will be necessary to calculate whether the bankrupt’s interest in the property is greater than the amount due to creditors and costs.  The calculation to establish the amount of the unsecured creditors and costs is as follows:  

 

Unsecured creditors total (£)

Plus (+)

Interest at (currently) 8% [note 22] to the date of the application

Plus (+)

Official receiver’s costs – including Secretary of State fees, administrative costs, distribution costs

Plus (+)

Petition costs

Equals (=)

Total creditors and costs (£a)

This figure should be compared with the amount of the bankrupt’s interest (figure £y in paragraph 31.3.260) to establish whether or not the bankrupt’s interest is greater than the total unsecured creditors and costs (figure £a in paragraph 31.3.259).  It will not be necessary to undertake this calculation if one figure is clearly higher than the other. 

If the bankrupt’s interest is greater than the unsecured creditors and costs, the advice at paragraph 31.3.262 should be followed to arrive at the charged value.  Otherwise, the calculation in paragraph 31.3.260 should be used for the charged

 

31.3.260 Calculation of bankrupt’s interest or ‘charged value’ in the property (amended February 2014)

The Rules [note 23] provide how the charged value (see paragraph 31.3.257) is to be calculated.  Legal advice has been obtained on the order of deduction, as follows: 

 

Value of property (£x) (see paragraph 31.3.97)

Minus (-)

Costs of sale (currently estimated at 3% of £x – see paragraph 31.3.263)

Minus (-)

Loans or other charges secured on property including those obtained post-bankruptcy for post-bankruptcy debts (see paragraph 31.3.279)

Minus (-)

Value of third party interests (see Part 4)

Equals(=)

Value of bankrupt’s interest at the date of the charging order (£y) – to which interest and costs should be added to calculate total due under charge (see paragraph 31.3.261)

This calculation should form part of the application for the charging order (see paragraph 31.3.256), to which should be added a calculation for interest and charges (see paragraph 31.3.261).  There is a different calculation to be used where the bankrupt’s interest is greater than the unsecured creditors and costs (see paragraph 31.3.262).

 

31.3.261 Interest to be added to ‘charged value’

To arrive at the final amount due under the charge, interest and charges need to be added to the ‘charged value’ (see paragraph 31.3.260).  The interest is only calculated when the charge is realised; nevertheless the application for the charging order should include details as follows: 

 

Value of bankrupt’s interest at the date of the charging order (£y)

Plus (+)

Simple interest on that amount at the rate of (currently) 8% per annum [note 24].

Plus (+)

The costs of making the application (such as Land Registry fees, court application fee, travel costs for attending the hearing)

 

31.3.262 Calculation of bankrupt’s interest or ‘charged value’ in the property – value of charge more than unsecured liabilities (amended February 2014)

The legislation provides that the charging order should be limited to the amount of the unsecured debts, plus interest and charges [note 25].  The calculation for the ‘charged interest’ (see paragraph 31.3.257) where the amount of the bankrupt’s interest exceeds the unsecured liabilities (see paragraph 31.3.259) is as follows: 

 

£x being the amount owing to unsecured creditors at the date of the application

Plus (+)

All other amounts which are payable otherwise than to the bankrupt out of the estate (such as the bankruptcy expenses and statutory interest)

Plus (+)

Simple interest on that amount at the rate of (currently) 8% per annum [note 26].

Plus (+)

The costs of making the application (such as Land Registry fees, court application fee, travel costs for attending the hearing)

Equals (=)

The charged interest (£z)

 

31.3.263 Allowance for sale costs (amended February 2014)

The calculations to establish the charged interest in the property (see paragraphs 31.3.259 to 31.3.262) requires the inclusion of a figure representing the estimated cost of realising the property [note 27].  Indications are that in matrimonial and similar proceedings, courts allow 3% of the property value for the costs of sale.  That figure should be used in making the application, where required.  It is open to the court to apply a different figure if it deems it appropriate.

 

31.3.264 Filing of the application for a charging order

The application for the charging order (see paragraph 31.3.256) should be filed at court together with sufficient additional copies (to be sealed and returned by the court) for each of the parties on whom the application is to be served (see paragraph 31.3.265) and a copy for the official receiver’s (electronic) file.  The court will notify the official receiver of the hearing date (see paragraph 31.3.268).

 

31.3.265 Service of a charging order application

The sealed copy of the charging order application (see paragraph 31.3.264) should be served on the following [note 28], using the standard covering letter [note 29]: 

  • Any spouse or former spouse or civil partner or former civil partner of the bankrupt having or claiming to have an interest in the property; 
  • any other person appearing to have an interest in the property; and 
  • such other persons as the court may direct,

A certificate of service [note 30] should be completed and filed at court for every party who has been served the application (see paragraph 31.3.267).

 

31.3.266 Notice of a charging order application – time limit

The notice of the application for a charging order (see paragraph 31.3.265) should be served a minimum of 14 days before the hearing [note 31].

 

31.3.267 Notice of a charging order application – certificate of service

A certificate of service (court form N215 - http://hmctscourtfinder.justice.gov.uk/courtfinder/forms/n215-eng.pdf) should be completed for every party who has been served with the application for the charging order (see paragraph 31.3.265).  Form N215 is available for use by the official receiver as a standard form [note 32].  One the certificate of service has been completed, a copy should be filed at court.

 

31.3.268 Attendance at hearing of application for charging order

In the vast majority of cases, it will be a representative of the official receiver that is attached to the court (rather than the LTAU) who will have to attend the hearing of the application for the charging order. 

Once the application has been issued (see paragraph 31.3.264) and served (see paragraph 31.3.265) by the LTAU, the local official receiver should be notified of the hearing date and asked to access the relevant papers in the ISCIS fileplan.

 

31.3.268a Action to take where court questions reason for charging order (inserted May 2014)

Where a judge enquires into the decision to pursue a charging order over an order for sale the explanation provided verbally at the hearing should include the following:

  • Proceedings for the possession and sale of a family home are costly in as much as they likely to be defended. In cases in which the OR is seeking a low value charging order there are insufficient funds, or the prospect of funds, in the bankruptcy estate to warrant such action to be in the creditors’ best interests (see paragraph 31.3.249)
  • The vesting property interest has previously been offered for sale to persons connected with the property, who have declined to act on the matter or are unable to do so (to the official receiver’s satisfaction).
  • Therefore, obtaining a charging order is the only remaining way of securing the trustee’s interest in the property (see paragraph 31.3.249).

Where the official receiver is seeking a charging order in a case with significant equity, which should be rare, such that a possession and sale might be economic, there are usually other reasons for not doing so specific to the case and these will be addressed on an individual basis in the report or briefing note (see paragraph 31.3.268).

If it is considered that the facts of the application merit such an explanation, and one is not provided, then the official receiver should raise this with the National Charging Order team at the LTADT.

 

31.3.269 Actions after obtaining the charging order – registration

The attainment of the charging order is, on its own, insufficient to protect the creditors’ interest in the property, as some form of registration is necessary to give notice to potential purchasers that the charge must be dealt with.  In effect this will ensure that a party is unable to deal with the property without first discharging the debt to the bankruptcy estate secured by the charge.

The process for this differs depending on whether the property is: 

 

31.3.270  Registration of charging orders in relation to registered land (amended May 2013)

Registration of the charge at the Land Registry is achieved by submission of form RX1 (www.landregistry.gov.uk/.../FONT>) for a jointly owned property or form AN1 (www.landregistry.gov.uk/.../FONT>) for a solely owned property.

The fee for the registration depends on the charged value (see paragraph 31.3.257), as follows:  

Value or amount of charge (£)

Fee (£)

0 – 100,000

40

100,001 – 200,000

60

200,001 – 500,000

80

500,001 – 1,000,000

120

1,000,001 and over

250

 

31.3.271 Actions after obtaining the charging order (amended May 2013)

The official receiver should make application to the Land Registry, on form RX4 (jointly-owned) or RX3 (solely-owned) for the withdrawal of the bankruptcy restriction (see Chapter 50, Part 2).  The RX4 or RX3 should be accompanied by a certified copy of the charging order and certified copies of the bankruptcy order and evidence of the trustee’s appointment.  There is no fee for such applications.

Additionally, If the official receiver had previously placed a caution on the property, this should be withdrawn when the charge is registered.  This is achieved by submission of form WCT (www.landregistry.gov.uk/.../FONT>). 

The fee for the withdrawal of a caution is £40.

 

31.3.271a Actions after obtaining charging order – cancellation of insurance (added February 2014)

After obtaining the charging order the official receiver should ensure that any insurance (including public liability insurance) over the bankrupt’s interest in the property is cancelled (see paragraph 49.27B).

 

31.3.272 Registration of charging orders in relation to unregistered land – solely owned

On the making of a charging order against solely owned unregistered land, the official receiver, as trustee, should lodge an application to the Land Charges Department for the entry of the charging order in the Register of Writs and Orders [note 33].  This is achieved by submission of form K4 - http://www.landregistry.gov.uk/_media/downloads/forms/k4.pdf.

This registration will last for five years, but should be renewed for successive periods of five years [note 34], using form K7 (http://www.landregistry.gov.uk/_media/downloads/forms/k7.pdf), as appropriate.

The fee for each of these forms is £1 per name against which the charge is to be registered.

In addition to registering the charge in this way, the official receiver, as trustee, should write to any mortgagee or chargeholder who has possession of the deeds asking that the deeds be endorsed with details of the charging order.

 

31.3.273 Registration of charging orders in relation to unregistered land – jointly owned

Where a jointly owned property is unregistered it will not be possible to protect the charging order by registration (see paragraph 31.3.270) [note 35].  This is because the charge is against the bankrupt’s beneficial interest in the land, and not the land itself.    

Instead, a copy of the charging order should be sent to all interested parties (especially any chargeholder holding the deeds) with a request that the official receiver’s interest in the unregistered land is noted and acknowledged.

 

31.3.274 Charging orders and limitation

The legislation [note 36] provides that no action can be taken to recover a sum of money after the expiration of 12 years from the date at which the right to receive the money accrued.

The court has considered the effect of this provision as regards charging orders obtained under the Act [note 37] and has held that the ‘right to receive’ the money does not accrue until there is an order for the sale of the property [note 38].  It is therefore irrelevant how much time passes after the charge is obtained before it is realised; the twelve year period begins with an order for sale of the property (which may, of course, be obtained by one of the other chargeholders).

It is reasonable to assume that the principle that monies must be recovered within 12 years of an order for sale would apply to properties sold voluntarily – i.e., where there is no ‘order’ for sale, as such.

 

31.3.275 Dealing with notice received from Land Registry of attempts to deal with property

Whenever the official receiver, as trustee, receives notice from the Land Registry that attempts are being made to deal with a property subject to a charging order, the official receiver should, as a matter of urgency, contact all parties concerned to ensure that they are informed (or reminded) of the amount required to satisfy the charging order.

The official receiver should ensure that in all cases where a charging order has been obtained he/she takes steps to deal with the bankrupt’s interest as soon as any change (such as an imminent sale or repossession) occurs.

The official receiver should be particularly concerned to establish if: 

  • Another chargeholder has obtained an order for sale, or 
  • the legal owners of the property (the former bankrupt and/or joint owners) have sold the property, 

as these events would trigger the commencement of the 12 year period to recover the monies under the charge (see paragraph 31.3.274).

 

31.3.276 Reviewing unregistered property after charge placed

Where a property is unregistered, the official receiver will not be afforded the luxury of being notified in advance of any dealings in the property, as with a registered property.

The official receiver should therefore review an unregistered property at least once every five years to verify that there have been no dealings in relation to it. 

The official receiver should be particularly concerned to establish if: 

  • Another chargeholder has obtained an order for sale, or 
  • the legal owners of the property (the former bankrupt and/or joint owners) have sold the property. 

as these events would trigger the commencement of the 12 year period to recover the monies under the charge (see paragraph 31.3.274).

 

31.3.277 Applications to vary or discharge the charging order

Any person interested (that is having a proprietary interest) in any property to which a charging order relates is able, at any time, to apply for an order discharging or varying the charging order [note 39].  Any such application should be resisted by the official receiver, as trustee, in as much as it seeks to discharge the charging order without any commensurate payment into the estate, or similar.  The court does not have the power to vary the charged value [note 40] (see paragraph 31.3.258).

 

31.3.278 Charging order against a charge obtained by bankrupt

In certain limited circumstances (such as where the official receiver needs to obtain his/her release as trustee – see paragraph 31.3.84), it may be necessary to apply for a charge over a charge obtained by the bankrupt (see paragraph 31.3.93 for example where this might arise).  In such a case, the application to court (see paragraph 31.3.256) should be that the (family court, for example) legal charge stand charged for the benefit of the bankrupt’s estate in the sum of £x plus interest at the prescribed rate (see paragraph 31.3.261 for calculation).

For clarification, the charging order obtained by the official receiver will not put him/her in any better position than exists already and the conditions that applied to the existing charge obtained by the bankrupt (that a child of the marriage reach a certain age, for example) will still apply.

 

31.3.279 Creditor obtaining a charging order post bankruptcy prior to the official receiver obtaining a charging order

Where a post bankruptcy creditor obtains a charge over the official receiver’s unprotected (see Part 2) interest in a jointly owned property before the official receiver has placed his/her own charge, that creditor will rank higher than the official receiver in the order of payment of funds from the realisation of the property.

In these circumstances, when establishing the value of the interest to be charged (see paragraph 31.3.257), that value would be net of the bankrupt’s interest in the property at the date that the charging order is sought – that is, net of the amount due to the new (earlier chargeholder).

If the new charge relates to a provable debt, it should be challenged under the provisions of the Act [note 41] which prohibit a creditor taking action against the property of a bankrupt.

 

[Back to Part 7 – Dealing with property with leaseholders] [On to Part 9 – Matrimonial or civil partnership proceedings – bankruptcy only]