Charging orders… what can go wrong?

Introduction:  Your client wins at trial. You obtain a final charging order. You know that it is secured on valuable real property, and there is at least some equity in it. What can possibly go wrong? Well, nothing, in this case, as it happens! But there are issues and problems to watch out for.

Banwaitt v Dewji & Dewji [2015] EWHC 3441 (Ch)

Download the official transcript here: UKT_2015_11_37705635

Facts:  B obtained judgment against D1 following trial for ~£1.5 million, representing damages for fraudulent misrepresentation. B obtained a charging order over D1’s beneficial interest in Ds’ jointly-owned matrimonial home.

In 2014, Ds transferred the property into the sole name of D2 by way of a transfer on form TR1. The amount of consideration (some £13,500 it seems) was purportedly calculated by reference to the value of D1’s beneficial interest in the home at that time. D2 applied to the Land Registry to remove the standard-form restriction against the title. The Land Registry refused. B sought an order for sale.

Issues:  This was a trial of a preliminary issue. Was B’s equitable charge overreached by the transaction, such that B’s claim now lay against the proceeds of sale of D1’s interest? Or did B’s charge remain intact, because there was no overreaching and only a sale of D1’s beneficial interest and a bare transfer of legal title?

Decision:  Master Matthews accepted B’s argument that, in order to decide the issue, the Court must look to the parties’ intentions (a question of fact), before categorising the transaction (a question of law), and considering public policy if relevant.

The documents, including the TR1 and correspondence, suggested that the arrangement was one whereby D2 bought D1’s beneficial interest in the property. D2 did not become the purchaser of the legal estate within the meaning of section 2 Law of Property Act 1925. D2 bought D1’s beneficial interest subject to the charge.

In any event, the purchase price had not been paid to both Ds (i.e. to the “trustees” within the meaning of section 27 Law of Property Act 1925) but to D2 alone. Thus, there could be no overreaching.

Comment:  There is a commendable clarity about this short judgment, which makes it a very good read for the nuts and bolts of the circumstances in which a charging order attaches to (and continues to affect) beneficial interest in property. The reasoning is sound, although it must be said that the case was decided on its particular facts and contemporaneous evidence (or the lack of it) regarding the nature of the transaction.

Of most interest is what is said about overreaching, and in turn what this says about the precarious nature of an equitable charge against a beneficial interest (as opposed to an equitable charge against the legal estate, which would have been possible had the judgment for ~£1.5 million been against both Ds).

1.  The assessment of the context of the transaction is all well and good, but focus on the parties’ intentions has its own difficulties. The judge correctly states that the fact that overreaching would occur only if the legal and beneficial interest were transferred by Ds does not mean that this is what Ds must have intended. But a focus on intention, without any corresponding protection for creditors if the transaction is a sham or at an undervalue and designed to defeat creditors, has its risks.

2.  A sale of the entire legal estate of the Ds to D2 alone, or to X, would have resulted in B’s interest being overreached. The subsequent registration of X as proprietor would have meant that B’s charge would have lost all protection (under sections 27 & 29 Land Registration Act 2002).

But what if X bought with knowledge of the charge or was otherwise not a bona fide purchaser? Could the charge bind X, at least in equity, on the basis that a final charging order operates as an equitable charge? Or does this import principles which are anathema to the scheme of Land Registration Act 2002?

3.  It is unclear whether the Form K restriction was complied with, since it remained to be proved that notice of the disposition was given to B before registration. What is the remedy for a breach of a restriction? A Form K restriction is flimsy protection as it is; there is every reason for a judgment creditor to seek a non-standard restriction when obtaining a final charging order, so that the person with the benefit of the charge is given adequate time to prevent registration if the charge is not first satisfied. Yet, there does not appear to be any obvious mechanism for enforcing a breach of the wording of a restriction. Of course, a restriction is not a legal right but an indicator on the register of title that rights and obligations may exist.

Conclusion:  The arguments raised in this case, and the obiter comments of the judge, rather than the decision itself, are revealing. They demonstrate that a charging order can have very limited utility, particularly where it is made only against a co-owner’s beneficial interest in land. It may well be that D1’s beneficial interest was not much more than £13,500, so B is unlikely to recover anywhere near as much as ~£1.5 million by enforcing the charge.

A judgment creditor should always consider alternative methods of enforcement as well. If a charging order is the best option, it pays to ensure that the restriction is tightly worded and a close eye is kept on a judgment debtor’s dispositions of property.

Ten tips on enforcing your judgment

I recently co–presented a seminar at the Tanfield Chambers Junior Landlord & Tenant Conference on “Enforcement: making your judgment count”. Here are 10 pointers on the enforcement of judgments.

1. KYD

Know Your Debtor. It should not be difficult to find out whether the debtor has the funds or assets to satisfy any judgment. It is possible to check the Register of Judgments, Orders, and Fines for only £4 with details of the debtor’s name and address, to see if there are countless CCJs which would suggest difficulties in enforcing. A credit check, bankruptcy search, or Land Registry enquiry could also be useful.

2. Start early… but on time

There is no good reason for failing to establish whether or not to even bring proceedings against a potential defendant who is a man of straw. At the same time, be sure that the time for compliance has passed, the judgment or part of it remains unsatisfied, there is no stay on enforcement, and the judgment is not statute–barred.

3. Transfer up wisely

The equity jurisdiction of the County Court has been increased to £150,000 from £30,000. It is no longer necessary to transfer proceedings for most charging orders to the High Court. However, it remains possible to transfer a judgment for enforcement by writ of control (formerly writ of fieri facias) whilst still being able to seek a charging order or third party debt order in the County Court.

4. Use CPR but not just in an emergency

Part 71 of the Civil Procedure Rules can be an effective tool for obtaining information from a debtor. You can discover more about the debtor’s assets and ability to pay. If the debtor does not comply with orders requiring him or her to attend Court to give information, you can seek an order for committal.

5. Get better protection for your charge

It is widely thought that the wording of the Form K standard restriction, which is placed against the title following the registration of a charging order, is inadequate. In truth, very few purchasers of land will complete without an undertaking that any charges on the register are first discharged by the vendor. However, the system may be abused by a judgment debtor by disposition to an acquaintance or associate. Use a modified draft final order on Form N87 to seek a non–standard restriction pursuant to section 46 Land Registration Act 2002.

6. Insolvency proceedings are an option, but be wary

This is not strictly a method of enforcement but may have the same effect. It can be costly, there may be some delay, and it may prove counter–productive if the debtor has other (and secured) creditors whose claims will outrank your client’s.

7. Take control (of goods)

The new Regulations incentivise enforcement agents and simplify the procedure for what was previously known as ‘executing against goods’. If the debtor has assets but no cash, this may be an extremely effective method of enforcement. It is also relatively risk–free, since the enforcement agent takes responsibility for enforcement.

8. Keep interest

Interest is not available automatically for sums under £5,000, but it may be available under contract or statute (e.g. Late Payment of Commercial Debts (Interest) Act 1998). It is also possible to obtain an order for a higher rate than the judgment rate of 8%, and for interest to run from earlier than the date of judgment. Always claim and state it clearly.

9. Call the cops sheriffs!

It is possible to enforce a possession order in the High Court, and not just an order made against trespassers. The sheriffs (or High Court Enforcement Officers to call them by their correct names) are accessible and effective. You will need an order transferring the judgment up to the High Court and additional fees are payable.

10. KYC

Perhaps it goes without saying… Know Your Creditor. The recovery costs of most enforcement methods are fixed. Recovery can never be guaranteed. If your client does not have the funds to obtain orders in aid of execution, or if the sums in dispute are disproportionate to the costs, then as difficult as this may sound, it may be better not to bring proceedings at all. A well–timed pre­–action letter or statutory demand may be the best bet at securing payment.