Charging orders - a false sense of security?

A charging order is a useful mechanism often employed by unpaid judgment creditors to obtain secured status by entering a restriction against title of the debtor’s property. But how much protection is afforded by a charging order and how does the creditor ultimately obtain payment?

Charging orders

Section 3(4) of the Charging Orders Act 1979 provides that a charging order “shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand.” Therefore, by obtaining a charging order, the position of the unpaid judgment creditor is elevated to that of equitable charge holder (i.e. they are provided security for their debt).

A charging order is protected by entering a restriction on title to the debtor’s property; it is not registered in the same way as a legal charge. The purpose of the restriction is to prevent the disposition of the property without the judgment creditor’s consent; such consent will be provided only ordinarily in exchange for repayment of the judgment debt.

Protection by restriction

The level of protection offered by a charging order will entirely depend upon the form of restriction entered against title to the property.

The standard form of restriction entered upon obtaining an interim charging order (form K) merely provides that no disposition of the property “is to be registered without a certificate … that written notice of the disposition was given” to the creditor with the benefit of the charging order. There is no requirement for notice to be provided in advance of the disposition (or before the sale proceeds are paid) so that the creditor can obtain an undertaking that their debt will be paid before completion monies change hands. Therefore, it is possible for a judgment creditor to be notified of a sale after completion and, if they do not react quickly enough, the transfer of the property will be registered (and their restriction removed) without receiving payment under their charging order. In such circumstances, the judgment creditor will lose the benefit of their security and rank as an unsecured creditor of the seller.

Additional protection by court order

There are two steps to obtaining a charging order: (1) an initial hearing of the application at which an interim charging order is obtained (the form K restriction is usually entered against title at this stage); and (2) a further hearing at which the interim charging order is made final. Often the standard restriction is entered against title upon obtaining an interim charging order and the judgment creditor does not bother to update their restriction once the charging order is made final.

To obtain better protection, judgment creditors should seek a court order for a non-standard restriction to be entered against title to the property at the second hearing when the charging order is made final. The non-standard notice should require 14 days’ advance notice of any proposed disposition to be given to the judgment creditor. This would enable the judgment creditor sufficient time to obtain an undertaking that their debt will be paid upon completion of the sale, i.e. before the proceeds are paid over to the seller and their restriction (and security) is removed.