Leasing companies
will often consider obtaining a charging order over a debtor’s
property to secure a judgment obtained when a customer defaults.
Although generally a good form of security, subject to equity being
available, it is not perfect, as this case shows.
In Hughmans Solicitors
v Central Stream Services Ltd (in liquidation) (CSS), Hughmans had
acted for a client in litigation with CSS which was settled
pursuant to a Tomlin (consent) order. The order provided that the
client’s property would be sold with the proceeds of sale firstly
discharging the mortgage on it, with the next £100,000 going to
CSS. The remainder would be used to pay off other debts, including
Hughmans’ fees and disbursements incurred in that
action.
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Hughmans obtained a
judgment against its client for those fees which it secured by way
of a charging order registered against the property through a
unilateral notice.
When the property was
eventually sold, the net proceeds after redemption of the mortgage
were far less than £100,000. Hughmans applied for an order that the
sum secured by its charging order should be deducted from the
balance of the proceeds of sale. CSS claimed a prior, secured right
to the whole of the net proceeds by virtue of the contractual terms
of the Tomlin order.
Did the Tomlin order
confer on CSS a proprietary interest in the property, or did
obtaining and registering the charging order at the Land Registry
give priority over any such interest to Hughmans?
The court held that
the schedule to the Tomlin order, when reviewed as a whole, showed
a clear intention to confer a proprietary interest in the property
on CSS. The client had settled the claim with CSS by, in effect,
agreeing to give CSS, in lieu of its monetary claim in the
proceedings, the whole of his own beneficial interest in the
property. CSS therefore had a beneficial interest in the property
by way of trust.
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By GlobalDataThe basic rule as to
priority between competing equitable interests in registered land
is laid down in the Land Registration Act 2002. This provides that,
in essence, to obtain priority over CSS’s earlier, unregistered
interest, Hughmans would have had to show its charging order was
made for valuable consideration. However, the court held that a
charging order made under the Charging Orders Act 1979 is not
created for valuable consideration, the debtor receiving no
consideration from the creditor at the time the charge is created.
It did not therefore gain priority over CSS’s earlier created
beneficial interest.
Many clients consider obtaining
a charging order as ‘job done’. This judgment shows that it does
not guarantee the securing of a judgment, even where there is no
evidence of any prior beneficial interest in the property charged.
Additional security should be considered and preferably a repayment
plan.
Greg Standing,
partner in Wragge & Co LLP’s finance litigation
team
