The issue raised in this appeal was whether, and in what circumstances, the court should exercise it’s power of discretion to discharge a charging order in a case where the debtor had been adjudged bankrupt  but the charging order had been made before the commencement of the bankruptcy.

The appeal was brought by Nationwide Building Society, which had obtained a charging order over Mr Wright’s share in a property. The charging order had been made to secure a judgment obtained by Nationwide in respect of a credit card debt. The interim charging order was made before the presentation of the bankruptcy petition against Mr Wright. The final order was made after presentation of the petition but before the making of the bankruptcy order. Neither Nationwide nor the court which made the charging order knew of the pending petition. Mr Wright’s trustee in bankruptcy applied to discharge the order under section 3(5) of the Charging Orders Act 1979, which gives the court which makes a charging order discretion to discharge or vary it. The district judge held that since the court did not know of the pending bankruptcy petition the final charging order was properly made, but that as a matter of discretion it was right to discharge the order. The county court judge upheld that decision. Nationwide submitted that the effect of sections 346(1) and 346(5)(b) of the insolvency act 1986 was that, notwithstanding  section 3(5) of the 1979 Act, a creditor was entitled to retain the benefit of a charging order of overland comprised in the bankrupt’s estate where the charging order pre-dated the commencement of the bankruptcy.

Section 3(5) of the Charging Orders Act 1979 says:
  
“The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.”

 Sections 346(1) and (5) (b) of the Insolvency Act 1986 provide as follows:

(1) Subject to section 285 in chapter II (restrictions on proceedings and remedies) and to the following provisions of this section, where the creditor of any person who is adjudged bankrupt has, before the commencement of the bankruptcy –
(a) Issued execution against the goods or land of that person, or (b) Attached to a debt due to that person from another person, that creditor is not entitled, as against the official receiver or trustee of the bankrupt’s estate, to retain the benefit of the execution or attachment, or any sums paid to avoid it, unless the execution or attachment was completed, or the sums were paid, before the commencement of the bankruptcy.

…

(5) For the purposes of this section – (b) an execution against land is completed by seizure, by the appointment of a receiver or by the making of a charging order under [section 1 of the Charging Orders Act 1979].

The Court of Appeal allowed the appeal.

Before the coming into force of 1986 Act the commencement of the bankruptcy was related back to the commission of the act of bankruptcy on which the receiving order was made. The 1986 Act provided that the bankruptcy commenced when the bankruptcy order was made. Save to the extent permitted by section 284 of the 1986 Act (restrictions of dispositions of property), there was no relation back under that Act to a date before the making of the bankruptcy order. It appeared that legislature intended to alter the position in bankruptcy in respect of charging orders from that which had proceeded the 1986 Act and intended that, under the 1986 Act, the position in bankruptcy in respect of charging orders should differ from the position in corporate insolvency (where a creditor is not entitled to retain the benefit of execution or attachment unless completed before the presentation of the winding-up petition).
The principle lay behind both the restriction in section 346(1) of the Insolvency Act and the limitation to that restriction. A creditor who had issued execution against the land of a person who was adjudged bankrupt was not entitled, as against the trustee in bankruptcy, to retain the benefit of that execution unless the execution was completed before the commencement of the bankruptcy, which was when the bankruptcy order was made. That was not to say that a creditor who had completed execution before the commencement of the bankruptcy would, in all circumstances, be entitled to retain the benefit of that execution. There was no express limitation on the general power to discharge or vary a charging order under section 3(5) of the Charging Order Act.
However it was clearly the intention of the legislature that a creditor who had completed execution before the bankruptcy order was made was not to be deprived of his security by reason of the bankruptcy order alone; some additional feature as needed before it could be appropriate to exercise the general power under section 3(5).
It followed that the courts below had been in error in failing to recognise, and give weight to, the legislative policy underlying section 346(1) of the Insolvency Act, and were wrong to discharge the charging order.
Nationwide Building Society v Wright and Anor, [2009] EWCA Civ 811, [2009] BPIR1047.
The full texture of the judgement is also available on the British and Irish Legal information Institute web site at;
http://www.bailii.org/ew/cases/EWCA/Civ/2009/811.html
Comment
It should be noted that an applicant for a charging order absolute is under a positive obligation to notify the court of the existence of any other creditors together with their names and addresses (Paragraph 1.2(5) of the Practice Direction to Part 73 of the Civil Procedure Rule 1998), and it has been suggested that this can and should extend to the court requiring a bankruptcy search to demonstrate that there are no such proceedings.

Reference: R3 Technical Bulletin Issue Nunmber 89 December 2009 Article 89.11

The High Court has clarified how the set-off provisions which come into play when an administrator makes a distribution to creditors are to be applied.

In Kaupthing singer & Friedlander Ltd (in Administration) [2009] EWHC 2308 (Ch) the High Court gave guidance on how the set-off provisions contained in Rules 2.85-2.88 of the Insolvency Rules 1986 should be applied where an administrator makes a distribution to creditors.

Kaupthing Singer & Friedlander was an insolvent bank which went into administration. The bank’s main assets were the funds that it held for depositors. Some of the bank’s depositors had also borrowed money from the bank. The amount owed to the bank by those depositors substantially exceeded the amount which the bank owed to them in the form of deposits. A number of loans advanced by the bank were not repayable until some time in the future. The depositors had no proprietary interest in the funds held by the bank, and as a result were unsecured creditors.

The administrators obtained the court’s permission to distribute the funds held by the bank to the depositors, and gave notice of the intention to make a distribution to creditors in accordance with rule 2.95. The administrators applied to the court for directions on how the set-off provisions were to apply. The court held as follows:

• Future debts – For the purpose of set-off, a sum is regarded as due to or from the company whether it is payable at present or in the future. In the case of a distribution in administration, a debt is ‘future’ if it is not due for payment at the date of the notice intention to make distribution. This is a date at which the account of mutual dealings is struck and on which it has to be determined what was due from and to each party. Future debts are subject to the further proviso that they must be discounted, but this only applies to debts payable after the date of the actual distribution. Therefore, for the set-off purposes, future debts payable before the date of distribution are to be taken at full value, while debts payable after the date of distribution are to be discounted in accordance with the formula set out in Rule 2.105. This applies both to sums due from the company and sums due to the company.

• Sums payable in a foreign currency and payments of a periodic nature – Rule 2.85(6) provides that Rules 2.86-2.88 shall apply for purposes of set-off in relation to any sums due to the company which are payable in a foreign currency, are payments of a periodic nature or bear interest. With regard to the first two categories, the court held that, although the rules are only expressed in terms of sums due to the company, the effect of the rules read as a whole is to make the same valuation principles apply on each side of the account. Accordingly, they applied as much to sums due from the company as they did to sums due to the company.

• Interest – For the purpose of trying to ascertain the balance arising from the mutual dealings between creditor and company, post-administration interest is ignored on each side, but the company can claim interest on the resulting balance from the date of administration.

• Interest-bearing future debts – in striking the balance on insolvency set-off in relation to interest-bearing debts which are also future debts, the discount formula is applied to the debt (ascertained in accordance with the other provisions of Rule 2.85) as it stands at the date of the notice of distribution, and the company cannot add in interest arising between that date and the maturity date of the loan.

The full text of the decision is available on the British and Irish Legal Information Institute web site at:

http://www.bailii.org/ew/cases/EWHC/Ch/2009/2308.html

It is understood that the administrators have lodged an appeal against the decision in the respect of interest-bearing future debts (the fourth of the items enumerated above) as the decision would produce anomalous commercial results to the detriment of the estate. The appeal is on the basis that the formula in Rule 2.105 should only apply to so much of the debt owed by the bank as to extinguish the borrower’s debt to the bank.

Reference: R3 Technical Bulletin Issue Nunmber 89 December 2009 Article 89.6