charging order

A charging order is a form of security (a court order) available to a judgment creditor to enforce a judgment obtained in the UK. They are available over specific forms of property, mainly commercial and domestic premises, but also securities and other limited forms of assets. Such orders do not realise assets to discharge a debt; they simply secure an interest over the subject property. This form of enforcement creates a secured interest for the benefit of the judgment creditor over the asset charged for the sum of the charge, and gives priority to the creditor over unsecured creditors to the extent of the charge and the value of the debtor’s interest in the asset charged.

They may be used to secure a judgment or order, which includes assessed costs; a court only has jurisdiction to make orders for a liquidated sums, rather than some unascertained debt. The order will serve to secure interest on a debt, as well as the capital sum and the costs incurred by the judgment creditor obtaining the order. Orders may be obtained for an entire debt, notwithstanding that the court has ordered payments by instalments, and those payments have not fallen into arrears. This is a matter that would be considered upon the exercise of the court’s discretion to make the award.

Benefits of Charging Orders

Furthermore, any person served with a charging order must not (1) permit any transfer of the property, or (2) if shares or similar asset, pay any dividend or interest in relation to the shares. Where a third party does so, it will be directly liable to the judgment creditor for the value passed.

Where a judgment debtor disposes of property after being properly served with a charging order, the transfer of the property is nor effective as against the judgment creditor. Where a judgment debtor disposes of property after being properly served with a charging order, the transfer of the property is nor effective as against the judgment creditor.

Applications for charging orders must be made using an Application Notice and be supported by evidence of the assets over which the judgment creditor seeks a charge.

Assets Available for Charging Orders

Interests that the debtor has in any land, shares of a company incorporated in England, shares of a company whereby the register for the stock is kept in England, unit trusts, trust property or funds paid into court are available to secure a debt. Where shares have been charged, the order may be made to extend to the dividends payable upon such stocks. Orders may also extend to accruing interest generated by the asset.

Procedure to obtain Charging Orders

Charging orders may be granted in the first instance on interim applications without notice to the judgment debtor. Once the court makes the order, the court will re-list the application for a final hearing, which usually not be within 21 days of the application. The purpose of these interim orders is so that the judgment debtor is not able to frustrate the purpose of the application by disposing of the asset by having notice of the interim application.

At the final hearing the court will decide whether the interim order should be final, or whether it should be discharged. If the judgment debt remains outstanding, the court (although retaining a discretion to make the order or not) will almost certainly grant the order, unless the judgment creditor has engaged in some form of disentitling conduct. Such conduct would be typified by unfair or oppressive conduct against the debtor. If issues have arisen in respect to the interim order that should be determined, the court may determine those issues at the hearing or order a trial for determination. Any person may object to the making of a final order, and must give the grounds upon which the objections are made.

When exercise of the discretion to make an order, the court must consider (1) all the circumstances of the case, (2) the personal circumstances of the debtor, (3) whether any other creditor would be unduly prejudiced by the making of the order. It is for the debtor to show why the order should not be made at the final hearing.

Effect of a Charging Order

The order operates as an equitable charge over the assets of the debtor that are ‘charged’. The creditor’s interest is thus secured. As the chargor’s interest is secured, they are free to leave the charge in place or commence fresh proceedings under CPR Part 8 for an order for sale of the asset for so long as the asset remains charged. The chargor remains at liberty to apply to wind up the judgment debtor company or bankrupt an individual debtor.

The effectiveness of such orders relies upon the extent of the equity that the debtor owns in the subject property. For instance, simply because a debtor is recorded on the Office Copy Land Registry entry as the owner of property, it does not necessarily follow that they have adequate equity in the property to discharge any given judgment debt. As well as this, jointly owned property may be charged cannot be secured unless the judgment debtors jointly own the particular property.