The court can allow an interim charging order to be made final despite an existing bankruptcy order.
Summary
The High Court allowed an application by a bankrupt's creditor to make a final charging order on the basis that the debtor's bankruptcy application was intended to frustrate the judgment creditor's enforcement.
Background
Mr Shergill was a director of two companies: Stacks Living Ltd, and Staffs Furniture Ltd. The companies failed to pay non-domestic rates, VAT, income tax and National Insurance and were placed into compulsory liquidation.
In a previous case the High Court found that Shergill had engaged in fraudulent trading and was therefore held personally liable for the companies' debts. The liquidators obtained judgment for £567,000 and an interim charging order against Shergill's interest in a property.
Shergill declared himself bankrupt before the interim charging order was made final. The liquidators applied to make the interim charging order final despite the existence of the bankruptcy order.
Application for final charging order
Under s.346(1) Insolvency Act 1986, creditors are normally prohibited from continuing enforcement that was not completed before the bankruptcy. Enforcement includes obtaining a final charging order.
The restriction ensures all unsecured creditors benefit from equal shares in the bankrupt's estate and prevents one creditor from gaining an unfair advantage. Section 346(6) IA 86 grants the court discretion to allow a creditor to continue to enforce in exceptional circumstances.
The liquidator applied under s.346(6) IA 86 for an order to make the interim order final, despite the bankruptcy order.
The court's decision
The court allowed the application to make the interim charging order final.
It cited Tagore Investments SA v Official Receiver [2008] EWHC 3495 (Ch), which established the principles the court must consider when exercising this discretion. They include the debtor's conduct before and after judgment, and how quickly the creditor applied to continue with enforcement.
The court held that the circumstances were exceptional. It inferred that Shergill's motivation to apply for bankruptcy was cynical and likely designed to frustrate the creditor's enforcement attempts.
Shergill's pre judgment conduct was relevant. His fraudulent trading involved running up debts and then taking last minute steps to defeat the interests of local authority creditors.
The court also concluded that the creditor's application to make the charging order final had been made promptly.
Allowing enforcement would not unduly upset the bankruptcy principle of equal treatment of creditors. The debts owed to Stacks Living and Staffs Furnishing represented 96 percent of the outstanding sums. The other creditors were unlikely to receive a dividend even if the charging order application were to fail.
Comments
Clients might be considering bankruptcy at a time when a creditor is in the process of applying for a charging order. Advisers should make them aware that bankruptcy might not stop an interim charging order being made final. A court can allow it to proceed in exceptional circumstances.