GETTING YOUR CHARGING ORDER NOTICED

Charging Orders: Priorities and Registration

1. This paper examines the interaction between charging orders and land registration requirements. 
2. One has to remember that the process of obtaining a charging order has four phases:

Stage One Stage Two Stage Three Stage Four

Pending      --> Interim --> Final --> Enforcement

Application C.O. C.O.

3. We are concerned with Stages 1 – 3 in this paper. 

The General Position

What Can A Charging Order over “Land” Attach To?

4. As has been explained charging order may be obtained in respect of “land” (amongst other assets): see Charging Orders Act 1979 (COA) section 1. There is no definition of “land” within COA, so that the general definition in the Interpretation Act 1978 applies. In Schedule 1 to the Interpretation Act, it is provided that

“Land” includes building and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land. 

5. For present purposes, it suffices to note that legal title and a beneficial interest in land under an express or implied trust of land are capable of constituting “land” to which a charging order can be attached. 

The Charging Order is in Some Respects an Equitable Charge

6. By force of statute, charging order under the takes effect like an equitable charge made in writing under hand: COA, s3(4). 

7. The first practical significance of this is that the charge may be enforced by either sale or the appointment of a receiver (Midland Bank v Pike [1988] 2 All E.R. 434, at 435). 

8. The second practical significance relates to the issue under consideration: protection of the equitable charging order, and the related question of its priority over prior and subsequent interests. 

9. As an equitable interest, and subject to some further discussion below, it is subject to the basic “first in time” rule, in both registered and unregistered land. We will unpack the implications of this below. 

10. The relevant moment that the charging order is created is when the interim order is imposed: Ropaigealach v Allied Irish Bank Plc [2001] EWCA Civ 1790. 

The Charging Order is in Some Respects not an Equitable Charge

11. Although 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”, it will be noted that the statutory language makes clear that it is “like”, but not “the same as” an equitable charge. 

12. This is because it is not a consensual granting of security, but a mode of enforcement of a judgment. To put it another way, although it takes effect “like” an equitable charge, it is protected as if it were a mode of execution. This affects the way in which it is protected under the Land Registration Act 2002 (LRA) and the Land Charges Act 1972 (LCA). 

13. The LCA (for unregistered land) and the LRA (for registered land) are applied to charging order as they apply to other orders or writs made for enforcing judgments. Section 3(2) of the COA states that “the Land Charges Act 1972 and the Land Registration Act 2002 shall apply in relation to charging orders as they apply in relation to other orders or writs issued or made for the purpose of enforcing judgments.”

14. This means that:

• Registered Land: Charging orders and applications for them are interests in land by reason of section 87(1) of the Land Registration Act 2002 and can be protected by notice or restriction if they affect the registered legal estate, however, they cannot be overriding interests supported by actual occupation (see section 87(3): “None of the matters mentioned in subsection (1) shall be capable of falling within paragraph 2 of Schedule 1 or 3”);
• Unregistered Land: If they affect the legal estate, applications for charging orders are pending land actions under the LCA and are capable of registration under section 5. If they are not registered they will not bind a purchaser without express notice *section 5(7)). Charging orders themselves are enforcement orders for the purposes of the Land Charges Act 1972, section 6. If they are not registered, they are void against a purchaser of land, irrespective of notice (section 6(4)).

The Chargee Is No-One’s Darling

15. Finally, a word needs to be said at this stage about the position of the chargee with the benefit of the charging order. 

16. The present state of the law is that the chargee does not give valuable consideration for his charging order. He is securing a pre-existing debt and receives the charging order as “volunteer”. 

17. In Hughmans Solicitors v Central Stream Services [2012] EWHC 1222 (Ch) at [23] – [25], Briggs J considered section 3(4) of the COA and explained that

"23 Most equitable charges are of course made for valuable consideration, and their enforcement in equity may depend upon that. Nonetheless, some equitable charges may be conferred voluntarily rather than for valuable consideration: see Megarry & Wade's Law of Real Property (8th Edition) at paragraph 24-042. It would therefore be wrong in my judgment to read section 3(4) as containing within it an unspoken presumption or deeming provision to the effect that a charge imposed by a charging order should, for the purposes of the Land Registration Act 2002 or otherwise, be treated as having been created for valuable consideration.

24 The question whether a charging order should be so treated arose directly in United Bank of Kuwait plc v Sahib [1997] Ch 107. The case concerned a competition between two banks for priority in respect of their competing alleged equitable interests in freehold registered land. The defendant bank claimed an equitable charge by the proprieor's deposit of the land certificate in its favour. The claimant bank relied upon a subsequently obtained charging order. Chadwick J held that the charging order was obtained by the claimant bank as a volunteer, rather than for valuable consideration, for the purposes of the rule in Dearle v Hall. Nonetheless since, following the coming into force of the Law Property (Miscellaneous Provisions) Act, there could be no equitable charge created by deposit of title deeds, the claimant bank succeeded. The Court of Appeal upheld Chadwick J's decision on the issue as to the effect of the 1989 Act. It heard no argument, and therefore expressed no view, on the question whether the recipient of a charging order is a volunteer. Chadwick J's conclusion to that effect was based upon his analysis of the effect of Scott v Lord Hastings (1858) 4 K & J 633 , which decided that a judgment creditor under a charging order (under section 14 of the Judgments Act 1838) obtained thereby no priority over an earlier equitable assignment of the debtor's interest in the relevant property. He concluded that the modernisation of the language in section 3(4) of the Charging Orders Act 1979 gave rise to no difference in substance, and continued, at page 119G:

“If a charging order is to be treated as an equitable charge created by the judgment debtor, regard must be had to the circumstances in which it is created. The analogy must take into account the fact that the debtor receives no consideration from the judgment creditor at the time that the charge is created. The judgment creditor, as chargee, is a volunteer. The volunteer could take no more than the assignor or chargor was able to give: see Justice v Wynne (1860) 12 I. Ch. R. 289 , 299, 304-305.”

25 […] I consider that Chadwick J's analysis is compelling and correct. It seems to me most unlikely that the draftsman of the 1979 Act was unaware of Scott v Lord Hastings , still less that it was part of the purpose of the 1979 Act to confer upon the recipient of a charging order any priority over the holder of a prior beneficial interest in the relevant property, even if unprotected by registration.”

18. It follows that the chargee in unregistered land is not “equity’s darling”, and therefore it takes the charging order subject to all prior equitable interests, including beneficial interests under trusts of land. This is irrespective of whether they are registered or protected by notice (if they can be) or not. That can diminish greatly the value of the charged property and is of course a fertile source of imaginative Witness Statements relating to gifts of interests in land prior to the making of the charging order. 

19. Secondly, in registered land, the chargee when securing a charging order does (a) not acquire an interest under a registrable disposition (as the charging order is an equitable charge, and therefore not registrable) and in any event (b) does not give valuable consideration within the meaning of sections 29 and 30 of the Land Registration Act 2002. Again, therefore, the charging order takes effect subject to all prior equitable interests, registered, otherwise protected or not. 

Protection at Stage 1: Protecting a Pending Application for an Interim Charging Order

20. Let us go back to the four stages of the existence of a charging order and focus on stage one: the pending application. 

21. An application for a charging order against the legal estate, before the interim order is granted, is a “pending land action” within the meaning of the LCA, section 17(1). From this it follows that:

22. In unregistered land, it is capable of being protected in the register of pending actions (section 5(1)(a) of the Land Charges Act 1972). If unregistered, it is void as against a purchaser who has no express notice. 

23. In registered land, it is an interest affecting an estate or charge under the Land Registration Act 2002, section 87(1). It must be protected by notice (Land Registration Act 2002, section 87(1) and Land Registration Rules 2003. Rule 172). It is not an interest capable of overriding under Schedule 3 of that Act if there is no protection by notice. 

24. An application for a charging order against a beneficial/equitable interest in unregistered land is not a pending land action and cannot be protected as such. This is because “land” in the Land Charges Act 1972 excludes an undivided share: 

25. Section 17(1) LCA states that “pending land action” means any action or proceeding pending in court relating to land or any interest in or charge on land. That definition applies equally to registered and unregistered land; 

26. Section 17(1) further states that ““land” includes land of any tenure and mines and minerals, whether or not severed from the surface, buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other corporeal hereditaments, also a manor, an advowson and a rent and other incorporeal hereditaments, and an easement, right, privilege or benefit in, over or derived from land, but not an undivided share in land, and “hereditament” means real property which, on an intestacy occurring before 1st January 1926, might have devolved on an heir”;

27. Although an undivided share is a reference to an interest under a tenancy in common, it would be equally inappropriate to protect the interest against a beneficial joint tenancy (which would be severed once the application is granted). The LCA does not spell this out, but it is considered that it is not possible to register a pending land action in enforcement proceedings against any form of beneficial interest.

28. The same position applies to registered land which adopts the scheme of the LCA, see section 87(1) LRA. Enforcement against a beneficial interest is therefore not capable of protection. 

29. Unless there is a genuine concern that the asset to be charged will be sold, a pending land action is seldom registered. 

Protection at Stages 2 and 3: Interim & Final: One Charge or Two?

30. Although obtaining a charging order involves the interim and final stages, there is only one charge. It is conditional when made on an interim basis. It is unconditional when finalised. It does not have to be re-protected when it is made final, though this does happen in practice: see White Book, Volume 1, paragraph 17.4.3.

31. There is therefore only ever one charging order.  

Protection at Stages 2 and 3: Legal and Beneficial Interests: Hitting the Right Target

32. In a simple case, the charging order will be attached to the land belonging absolutely to the judgment debtor without any difficulty. 

33. The problem is that things are rarely that simple. In this section, we will look at some registration difficulties that arise when there is fragmentation of legal and beneficial interests, or when there is no exact overlap between the judgment debtor and the owner of the relevant property interest.

34. The starting point is section 2 of the COA, which was intended in part to address the question whether or not charging orders could be obtained over beneficial interests under what were then (prior to the Trusts of Land and Appointment of Trustees Act 1996; TOLATA) trusts for sale, under which the beneficial interest was arguably not an interest in land as such but an interest in sale proceeds

35. Section 2(1) sets out what a charging order can attach to:

 (1) Subject to subsection (3) below, a charge may be imposed by a charging order only on—

(a) any interest held by the debtor beneficially—

(i) in any asset of a kind mentioned in subsection (2) below, or

(ii) under any trust; or

(b) any interest held by a person as trustee of a trust (“the trust”), if the interest is in such an asset or is an interest under another trust and—

(i) the judgment or order in respect of which a charge is to be imposed was made against that person as trustee of the trust, or

(ii) the whole beneficial interest under the trust is held by the debtor unencumbered and for his own benefit, or

(iii) in a case where there are two or more debtors all of whom are liable to the creditor for the same debt, they together hold the whole beneficial interest under the trust unencumbered and for their own benefit.

36. Section 2(1)(a)(i) is simple. If A owns land outright, then the charging order can be taken over the legal estate. Applications in relation to land where the interests are held on trust, that is, where there is a disparity and division between legal and beneficial ownership, should not be made under this section: see Clark v Chief Land Registrar [1993] Ch. 294. The target here is the legal title. 

37. Section 2(1)(a)(ii) is also simple. If all that A has, is a beneficial interest under a trust of land, then only that beneficial interest can be charged. Enforcement then becomes an issue under TOLATA. The target here is the equitable interest.

38. There are then three specific situations provided for in section 2(1)(b) COA in which the legal title can be targeted where the land to be charged is held on trust. 

39. Section 2(1)(b)(i) deals with a situation where there is a trust of land, and where that trustee has been made the subject of a judgment debt in proceedings he or she has undertaken as trustee. This provision was considered by Hart J in Beckenham MC Ltd v Centralex Ltd & Ors [2004] EWHC 1287 at [30] – [31]:

"Such assistance as can be derived on this point from the report of the Law Commission No.74 which led to the passing of the 1979 Act is to be found at paragraph 63 where the following explanation is given: "There is one further situation in which it would be proper for the trustee's interest to be the subject of a charging order, namely where it is the trustees themselves who are indebted as trustees to the judgment creditor. The trustee's interest in the property is not, of course, a beneficial one and so it could not be charged to secure any personal debt of theirs. They hold it on behalf of the trust. But if the debt is also incurred on behalf of the trust and a judgment has been obtained against the trustees in that capacity, we think it clear that a charging order should be obtainable in respect of the trust asset."

The primary concept in play in that paragraph is of the liability having been incurred on behalf of the trust. Where the liability is incurred, as here, by virtue of the bare legal ownership of the property in question, together with the concomitant rights necessary for its enjoyment (ex hypothesi authorised by the trust) it seems to me entirely apposite to speak of it as having been incurred on behalf of the trust and in that sense a liability of the trustee as trustee. That, in my judgment, remains the case whatever the private arrangements exist between the trustee and his beneficiary as to the former's right to be indemnified against a liability out of the trust property."

40. This has been considered most recently in Kamran v Davenport [2017] EWHC 1844 (QB). Mr Kamran owned a house and got into a neighbour dispute, which he lost. He was ordered to pay costs. A charging order was made, and Mrs Kamran appealed. She said that she was the beneficial owner under a trust and no such order ought to have been made. She further alleged her husband was not even a trustee. The latter point was wrong on the face of the trust instrument she relied on, which made clear her husband was the trustee. Further, it was clear that he had conducted the proceedings as legal owner and on behalf of the trust, as he would otherwise have had no standing for bringing the claim (based on part on nuisance). Thirdly, although an issue had been raised as to whether Mr Kamran had obtained his wife’s consent, that was irrelevant. Morris J explained at paragraph 18 that

[…] that is a matter between Mr Malik and the appellant and is of no concern to the respondent, nor relevant to the making of an order under the 1979. The 1979 Act specifically allows for a charging order to be made in circumstances where a trustee is acting as trustee of a trust without any reference to the question of whether or not the liability had been incurred with or without the beneficiaries' consent. That this is so is made clear in the final sentence of paragraph 30 of the judgment of Hart J in the Beckenham case.

41. Under section 2(1)(b)(ii), if the debtor is the beneficiary of land under a bare trust, then the trustee’s interest can be charged. A bare trust is a trust under which the bare legal title is manages for the sole benefit of one beneficiary who is of full age, where there are no separate settlor instructions and the trustee acts at the direction of the beneficiary. As the legal and beneficial ownership division in such a case is nothing more than a technicality, it makes sense for the COA to treat a case under section 2(1)(b)(ii) as if the trust did not exist at all. 

42. Under section 2(1)(b)(iii), the interest of the trustee can be charged if the beneficiaries are the debtors. This enshrined in statute the position pre-COA arrived at in National Westminster Bank Ltd v Allen [1971] 2 Q.B. 718. Care will need to be taken to understand the basis of that debt, however. If there is no joint debt, then (a) only the debtor’s beneficial interest can be charged and (b) the making of a charging order against one of two joint tenants leads to a severance of that joint tenancy to create an equitable tenancy in common: Midland Bank Plc v Pike [1988] 2 All E.R. 434. It is to be noted that, if separate charging orders are made against joint owners, that is not enough, without more, to permit the legal estate to be charged.

Protection at Stages 2 and 3: Protecting the Interim or Final Charging Order By the Right Means

43. In Registered Land:

1. A charging order against a registered legal estate 
2. can be protected by UN1; 
3. An official search with priority (using OS1 or OS2) cannot be applied for as the making of a charging order is not a disposition capable of protection; 
4. An outline application can be made for the purposes of protecting priority.
5. The notice can be either agreed or unilateral. If the applicant applies for an agreed notice, then the proprietor’s consent can be disposed with, where the Land Registry is satisfied that the applicant’s claim is a valid one (section 34(3) of the LRA). 
6. By reason of section 87(3) of the LRA, a charging order cannot be protected as an overriding interest by actual occupation. Notice, or nothing. 

44. A charging order against an equitable interest in registered land

1. is incapable of protection by notice: see section 33(a) of the LRA. 
2. A degree of protection can however be attained by imposing restrictions: 
3. Form A (LRA, section 42(4); Land Registration Rules 2003, r.93(a)) specifying that no disposition by a sole proprietor can be made of the registered estate (except in the case of a trust corporation) where capital money arises is to be registered except as authorised by Court order. This does no more than preserve such protection as is afforded by overreaching; and
4. Form K (LRA, section 42(4); Land Registration Rules 2003, r.93(k)), specifying that no disposition is to be made without the holder of the charging order being notified. It is commonly considered that this form of protection is completely useless.
5. Non-standard restriction: Often a bespoke restriction is sought as part of the Court Order, for example that the chargee should receive 14 days’ notice before any disposition is made: see White Book 2017, Volume 1, paragraph 17.4.3.1. The time to ask is when the finalised order is made. This is the best thing to do in a case such as this. 
6. If no restriction is entered, then the charging order is liable to be overreached along with the beneficial interest to which it has been attached, or postponed to any subsequent registered disposition. 

45. In unregistered land, a charging order against legal title can be registered as a “writ or order affecting land” (LCA, section 6(1)(a)). However, no registration can occur where the charging order attaches to a beneficial interest: see section 6(1A) of the LCA. This is because the beneficial interest is itself not capable of protection as a land charge. It is protected by the process of overreaching. As the charging order is parasitic on the equitable interest it should not enjoy any stronger protection: see Perry v Phoenix Assurance [1988] 1 W.L.R. 940. 

A Different Question of Priorities: Charging Order Races

46. In Midtown Acquisitions LP v Essar Global Fund, the following facts arose: D, a Cayman company, controlled all the companies in the Essar group. D had guaranteed the obligations of an Essar company. There were two Claimants, M and IB, each of which had obtained US judgments against the defendant on the guarantees for US$171 million and $588 million respectively, and then English judgments. M had obtained an interim charging order about six weeks before IB had obtained a similar order. On finalisation, M said it should have priority as it had applied first. IB said that the charges should rank equally. 

47. Knowles J determined that:

1. First past the post was not an inevitable outcome, but merely a possible one: As Lord Goddard CJ said in James Bibby Ltd v Woods (Howard, Garnishee) [1949] 2 K.B. 449: "it not infrequently happens that, where there are several claims, or may be several claims, against money, the person who gets in first gets the fruits of his diligence",
2. To make first past the post a rule was inconsistent with the fact that the COA gave the court a discretion as to whether to grant a charging order or make it final, FG Hemisphere Associates LLC v Democratic Republic of Congo [2005] EWHC 3103 (QB) and British Arab Commercial Bank Plc v Ahmad Hamad Algosaibi and Brothers Co [2011] EWHC 2444 (Comm). One might add that the COA lets the Court impose certain conditions as well. 
3. The correct approach was to seek to achieve an equitable result, having regard to all the circumstances of the case, Roberts Petroleum Ltd v Bernard Kenny Ltd (In Liquidation) [1983] 2 A.C. 192; Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 252.
4. It was open to the court to achieve a pari passu outcome between the two judgment creditors but that was not a rule or usual outcome, Nathan v Orchard [2004] EWHC 344 (QB).

48. Knowles J therefore decided that IB should not have equality of priority with M, which had obtained its interim charging order first, for a number of reasons. Both creditors were significant commercial parties well able to look after their own interests. The fact that M had obtained its order first had not been engineered by the debtor. IB was not seeking pari passu treatment for all creditors, as would be the case in an insolvency proceeding. The court could not conclude that IB had been delayed by any conduct on the part of the debtor. The creditors were seeking security over the same assets and the court had no reason to question the diligence of either. Neither side had been dilatory and it was not inequitable to prefer one party over the other on the basis of first past the post. In all the circumstances M should enjoy priority because it was first in time.