Intervening bankruptcy fails to thwart charging order

20.03.09

 

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

When an individual is made bankrupt or a company is wound up, any dissipation of assets, or enforcement proceedings completed after the date of the presentation of the petition are liable to be set aside (s 346 Insolvency Act 1986 (IA)).

The reason for this is to ensure that the assets of the company or individual remain available for the benefit of creditors. The court does however have a discretion not to set aside such transactions if it considers that substantial unfairness will be suffered by an individual creditor - s346(6) IA.

In Tagore Investments SA v Official Receiver, the claimant obtained an interim charging order over the debtor's property. The charging order was made final one day after the debtor was made bankrupt on his own petition which was presented that same day. The claimant had not known of the debtor's petition for bankruptcy when applying for the charging order. The debtor however knew of the charging order.

The claimant alleged that the debtor's decision to petition for bankruptcy had been made in a deliberate attempt to frustrate the charge.

It relied on the debtor's conduct before and during the litigation and the judge's findings as to the debtor's dishonest behaviour in support of the application for relief from the provisions of s346 IA.

The court found that the debtor's conduct before and during the litigation led to the conclusion his decision to petition was deliberate and intended to disadvantage the claimant.

He had not given notice of his intention to present the petition and had no pressing creditors apart from the claimant and hardly any unsecured creditors.

It was unlikely the decision to petition had been taken for the benefit of his creditors, or to relieve himself of a debt burden, but more likely to manipulate the situation and frustrate the charging order. On the other hand, the claimant had acted properly and timeously.

The court's discretion can only be exercised in exceptional cases and with great caution where the applicant can show there would otherwise be unfairness sufficient to justify an exception.

The court found that the appropriate degree of unfairness had been established in this case. The final charging order was allowed to stand and the claimant would be a secured creditor in the debtor's bankruptcy, thereby having some degree of priority.

Comment

Cases where enforcement will be allowed to stand, notwithstanding the intervening bankruptcy, will be exceptional and each case will depend upon its own facts.

However, if the debtor's actions throughout the period of dispute, particularly following a judgment that has been obtained against him, can be seen as a cynical attempt to avoid enforcement and thwart a creditor's security, then an application should be considered.

This is particularly so where there are a number of unsecured creditors and the bankrupt's assets available for distribution are unlikely to be substantial.

For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Amie Ryalls on +44 (0)121 213 2360 or Rebecca Davies on +44 (0)121 213 2396

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