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A charging order is an order granted by the Court in favour of a creditor that charges the amount of an outstanding judgment together with interest and costs against the property of the debtor. Once the charging order is made final, the judgment creditor may be entitled to apply to the Court for an order for sale over the charged property or land. Although the charging order is an effective tool for enforcing judgments, the recent case of Benwaitt v Dewji and another [2015] EWHC 3441 (Ch) provides a stark reminder to judgment creditors to be wary of securing charging orders over jointly owned property.
In Benwaitt, the claimant had obtained a charging order for a substantial debt arising from a judgment which the debtor had failed to pay. The claimant secured the charging order over the debtor’s property which he jointly owned with his wife. The debtor and his wife then subsequently transferred the property into the sole name of the wife for a modest sum and claimed that the charging order was no longer bound to the property as it had been “overreached” under sections 2 and 27 of the Law of Property Act 1925 (“the LPA”).
The claimant argued that the transaction did not amount to overreaching for the purposes of s.2 of the LPA and this was put to Master Matthews of the Chancery Division as a preliminary issue. The claimant argued that an equitable interest in land, such as a charging order over a share of land, can only be overreached under the LPA if there is a sale of the legal interest in the property. Therefore a sale of a beneficial interest in land is not sufficient. It was up the Court to decide whether the transfer between the debtor and his wife amounted to a sale of the legal interest or just the debtor’s beneficial share of the property.
Master Matthews decided that the transfer was not a sale of the legal interest in the property but rather both a sale of the debtor’s beneficial interest and a gratuitous transfer of the legal interest. The purchase price had not been paid to both defendants (i.e. to both the husband and wife acting as trustees of the estate within the meaning of section 27 of the LPA) but to the wife alone, thus there had been no overreaching.
The Court had to consider the nature of the rights and the obligations which the parties intended to create and then consider how to categorise the transaction as a matter of law. It decided that the structure of the transfer was not decisive in showing it to be a transfer of the legal interest. The fact that the wife and her solicitors described the transfer as being of the debtor’s beneficial share and that the value on the transfer was described as consideration for the share belonging to the debtor and not for the whole of the property showed that the parties did not intend to transfer the legal interest.
Due to the Master finding against the debtor on the preliminary issue, there was no need to explore the further strands of the case including the issue of whether the claimant had the right to claim any relief from the fact that the debtor had disposed of the property at a gross undervalue compared to the amount of the judgment debt.
Benwaitt shows that there is considerable ground for a creditor to challenge a debtor’s interest in property when a disposition affecting the charged property has been structured in a way which could potentially defeat the charge. Debtors should take care when entering into this kind of transaction and take proper advice as to implications of any transfer. Benwaitt also shows that the Court will take a careful look at the parties’ intentions when categorising the transaction as a matter of law.
Benwaitt also illustrates the difficulty that judgment creditors have in protecting their rights when the charge is imposed over a beneficial interest in land. If a judgment creditor has a charging order against a legal estate in land, it can be protected by way of notice on the property register of the title. This means that the charge will bind any subsequent purchaser of the land unless it is redeemed. However, a charging order over an equitable interest in land cannot be noted on the register. The standard protection usually takes the form of a Form K restriction, requiring any person attempting to alter the register to notify the person with the benefit of the restriction.
A Form K restriction is a blunt instrument in the eyes of a judgment creditor. It does not only require the person attempting to alter the register to notify the creditor of his application and as such the creditor has virtually no powers to object to any such application leaving him with the only real option of pursuing the debtor for the proceeds of the transaction. Benwaitt illustrates the need for the Land Registry to create a more potent standard restriction to protect the creditor’s position or alternatively, for the judgment creditor to seek a tightly worded nonstandard restriction from the Court when finalising the charging order.
For more information please contact Jake Rostron, on jake.rostron@michelmores.com or 0117 906 9305.
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