If a creditor is worried that an unsecured debt is not being repaid by a particular debtor as it falls due, one option that the creditor may consider is to seek to change the nature or status of the debt from being unsecured to being secured. In other words the creditor may take legal steps to have a lawful claim on the debtor’s assets up to the value of the unpaid and unsecured debt. This process involves asking the Court to make a Charging Order against the debtor’s property. Such property is frequently the debtor’s home but it could be any of the debtor’s assets.
How does the creditor go about this process? The creditor has to satisfy the court that the debtor has not repaid a valid unsecured debt to the creditor as it fell due. The creditor asks the Court to make a Charging Order against the debtor’s property. If the court makes the Charging Order sought, the creditor’s interests are protected in the event that the debtor should subsequently decide to enter into an Individual Voluntary Arrangement or to declare Bankruptcy. Normally, the Court initially issues an Interim Charging Order to afford time for the debtor to challenge the debt or to reach an amicable agreement with the creditor in relation to discharging the debt. Should no such accommodation be reached, the court will in due course grant a Final Charging Order to the creditor enabling it to change the status of the debt from being unsecured to being secured.
After the Final Charging Order is granted, if the debtor does not repay the debt in question, an option available to the creditor is to seek and obtain from the Court an order for the sale of the property or to force the repossession of the property, although this action is relatively rare. If the debtor discharges the debt, then the court can and will remove the Charging Order following receipt of the relevant application by the debtor.
Where a Bankruptcy Petition is presented against a debtor and an Interim Charging Order has already been granted to a creditor, the question arises as to whether the court will make a Final Charging Order or adjourn the hearing of the Final Charging Order until after the Bankruptcy Order has been made, or not, as the case may be.
If either the creditor, who is seeking the Final Charging Order, or the judge, who is conducting the hearing relating to the Final Charging Order, are aware of the Bankruptcy Petition, then the proper course of action is for the judge to adjourn the Final Charging Order hearing until the Bankruptcy Court has made a Bankruptcy Order, or not, as the case may be.
If however neither the creditor nor the judge are aware of the Bankruptcy Petition and a Final Charging Order is made, then that Final Charging Order is valid and the creditor is entitled to retain the security they have acquired via the Charging Order, provided that that creditor acted in good faith, for value and had no notice of the Bankruptcy Petition.
The date of a Bankruptcy Order triggers the commencement of the Bankruptcy for the purposes of section 278 of the Insolvency Act 1986 (IA1986). In effect this means that the date of the Bankruptcy Order, and not the date of the Bankruptcy Petition, is the date of the vesting of the bankrupt’s assets in a trustee. Under the IA 1986, dispositions between the presentation of the Bankruptcy Petition and the subsequent Bankruptcy Order are not capable of being avoided under s284 IA 1986, in relation to a recipient acting in good faith, for value and without notice of the Bankruptcy Petition.