CREDITOR APPLYING FOR OR ENFORCING A CHARGING ORDER IN RELATION TO THE INSOLVENT’S PROPERTY
This Part of the chapter provides guidance and advice for official receivers when dealing with a creditor who is attempting to obtain or enforce a charge over the insolvent’s property. In particular, this Part provides guidance and information relation to the obtaining of charges in satisfaction of a judgment.
Further guidance regarding charges can be found elsewhere in the Technical Manual, as follows:
The legislation allows a judgment creditor to obtain a charge over property of the judgment debtor [note 1]. The procedure is that the court will consider the application for a charging order, taking into account the financial position of the debtor and will discretionally make an interim charging order (formerly known as a charging order nisi). This is a paper exercise by the court.
Assuming the interim charging order is made, the court will set a date for a hearing to make the charging order final. This will generally be a few weeks after the making of the interim charging order. The court will consider the circumstances of the debtor and whether any other party (other creditors, for example) will be unduly prejudiced by the making of the order. If satisfied, the court will make the charging order final.
Prior to the making of an insolvency order, a solicitor can make an application for a charging order under the common law or statute [note 2] over a debtor’s property.
A solicitor will also have the right to a charge over property in the hands of the liquidator or trustee where the solicitor’s work led to the property coming into the estate, even if he/she did not apply for a charge prior to the insolvency order. The charge may be for an amount relating to his/her costs in obtaining the property either before or after the order [note 3]. The official receiver should therefore treat costs incurred by a solicitor in recovering property as a first charge upon the property and pay the costs irrespective of whether or not a charge was obtained prior to the insolvency order. If the official receiver, as liquidator or trustee, considers the costs to be unreasonable, he/she may request detailed assessment of the costs (see Chapter 39).
Provided a charge was made final (‘absolute’) prior to the commencement of the liquidation (presentation of petition) or bankruptcy (making of the order), a creditor would normally be entitled to retain the benefit of the charge [note 4] [note 5] [note 6]. This is subject to the charge being valid (see Chapter 31.4B, Part 3) and not being a preference (see Chapter 31.4A, Part 2).
It has been held that the liquidation or ‘incipient’ liquidation (which would generally be taken to mean the presentation of a petition) of a company would be sufficient grounds for the court not to make a charging order and, where an interim charging order has already been made, to discharge that order [note 7]. This principle would apply equally in bankruptcy.
It has also been held that, in considering an application for a final charging order in circumstances where it is aware of the insolvency proceedings, the correct course of action for the court would be to adjourn the application pending the outcome of the petition, following which it is likely that the application will be stayed indefinitely [note 8] [note 9]. In this, it should be noted that the applicant is under a positive obligation to bring the existence of other creditors to the attention of the court [note 10].
For this principle to be applied effectively it is, of course necessary for the applicant and court to have knowledge of the insolvency proceedings (see paragraph 9.129).
It has been held that, in exceptional circumstances, a creditor may obtain the benefit of a final charging order made after the commencement of insolvency. An example of these exceptional circumstances would be where the court and the applicant were unaware of the insolvency proceedings [note 11] [note 12].
It is vitally important therefore that, where the official receiver becomes aware of an interim order made in favour of a creditor, he/she makes the court aware of the insolvency (see paragraph 9.129).
As outlined in paragraph 9.127, where the official receiver, as liquidator or trustee is aware that an interim charging order has been made, he/she should notify the court of the insolvency proceedings.
When notifying the court of the insolvency proceedings, the official receiver should exercise care that he/she is not deemed to have entered into the legal proceedings. When dealing with a liquidation the official receiver may, when informing the court of the insolvency proceedings, refer to the decision outlined in paragraph 9.127 in Re Roberts Petroleum Ltd v Bernard Kenny Ltd (in liquidation)  1 All ER 564 HL. For bankruptcy cases, the official receiver may refer to section 285(3) of the Act and the decision in Nationwide Building Society v Wright  BPIR 1047 [note 13].
If the official receiver follows this advice, it is not likely that he/she will be considered to have entered into the proceedings.
A post-bankruptcy creditor should not be able to obtain a charging order against property once it has vested in the trustee as the legislation provides that a charging order may only be obtained against the debtor’s beneficial interest, which will have vested in the trustee, and therefore no longer be the debtor’s [note 14] [note 15].
Steps taken by the official receiver, as trustee, following the guidance in Chapter 31.3, Part 2, and Chapter 50, to protect the property at the Land Registry should be sufficient to bring the bankruptcy to the notice of post-bankruptcy creditors.
Where the insolvent’s property has been repossessed by the chargeholder but has not yet been sold, the mortgagee should be put on notice of the official receiver’s interest in any surplus sale proceeds, using the standard letter [note 16].
When the chargeholder obtains possession the official receiver should cancel any insurance he/she has obtained on the property in accordance with paragraph 49.27B. The official receiver should inform the charge-holder that his/her insurance has been cancelled.
Where the property has been taken into possession and sold, the official receiver should obtain a copy of the completion statement from the chargeholder and should claim the insolvent’s share of any surplus following sale.
It is possible for the official receiver, as liquidator or trustee, to apply to court to stop the sale of a property by a chargeholder, but this should not be considered unless there is compelling evidence that the sale is being conducted significantly under market value. The permission of Professional Standards (see paragraph 1.10g) would be required for such an application.
In this, it should be noted that there is an accepted view that a sale of a property in possession will achieve a lower sum than a sale of the same property through ‘normal’ channels, and the bar to be cleared to challenge an apparently under-value sale by a chargeholder is high [note 20].
If the official receiver, as liquidator or trustee, is requested by a secured creditor (or a receiver appointed by a secured creditor) to transfer or convey a property, he/she should charge the appropriate remuneration on a time and rate basis (see paragraph 36.43) and instruct solicitors to act in the sale. The official receiver should ensure that the chargeholder gives a written indemnity (and, if possible, a cash deposit) to cover all the expenses in connection with the sale.