Background

Nationwide Building Society obtained a charging order over Mr Wright’s share in a property. The charging order had been made to secure a judgment obtained by Nationwide in respect of a credit card debt. The interim charging order was made before the presentation of the bankruptcy petition against Mr Wright. The final order was made after presentation of the petition but before the making of the bankruptcy order.

Neither Nationwide nor the court which made the charging order knew of the pending petition. Mr Wright’s trustee in bankruptcy applied to discharge the order under section 3(5) of the Charging Orders Act 1979, which gives the court which makes a charging order discretion to discharge or vary it. The district judge held that since the court did not know of the pending bankruptcy petition the final charging order was properly made, but that as a matter of discretion it was right to discharge the order.

Appeal

On appeal, Nationwide submitted that the effect of sections 346(1) and 346(5)(b) of the Insolvency Act 1986 was that, notwithstanding section 3(5) of the 1979 Act, a creditor was entitled to retain the benefit of a charging order over land comprised in the bankrupt’s estate where the charging order pre-dated the commencement of the bankruptcy.

Section 3(5) of the Charging Orders Act 1979 says:

“The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.”

Sections 346(1) and (5) (b) of the Insolvency Act 1986 provide as follows:

(1) Subject to section 285 in chapter II (restrictions on proceedings and remedies) and to the following provisions of this section, where the creditor of any person who is adjudged bankrupt has, before the commencement of the bankruptcy –

(a) Issued execution against the goods or land of that person, or (b) Attached to a debt due to that person from another person, that creditor is not entitled, as against the official receiver or trustee of the bankrupt’s estate, to retain the benefit of the execution or attachment, or any sums paid to avoid it, unless the execution or attachment was completed, or the sums were paid, before the commencement of the bankruptcy.

(5) For the purposes of this section – (b) an execution against land is completed by seizure, by the appointment of a receiver or by the making of a charging order under [section 1 of the Charging Orders Act 1979].

The Court of Appeal allowed the appeal.

Rational

Before the coming into force of 1986 Act the commencement of the bankruptcy was related back to the commission of the act of bankruptcy on which the receiving order was made. The 1986 Act provided that the bankruptcy commenced when the bankruptcy order was made. Save to the extent permitted by section 284 of the 1986 Act (restrictions of dispositions of property), there was no relation back under that Act to a date before the making of the bankruptcy order. It appeared that legislature intended to alter the position in bankruptcy in respect of charging orders from that which had proceeded the 1986 Act and intended that, under the 1986 Act, the position in bankruptcy in respect of charging orders should differ from the position in corporate insolvency (where a creditor is not entitled to retain the benefit of execution or attachment unless completed before the presentation of the winding-up petition).

The principle lay behind both the restriction in section 346(1) of the Insolvency Act and the limitation to that restriction. A creditor who had issued execution against the land of a person who was adjudged bankrupt was not entitled, as against the trustee in bankruptcy, to retain the benefit of that execution unless the execution was completed before the commencement of the bankruptcy, which was when the bankruptcy order was made. That was not to say that a creditor who had completed execution before the commencement of the bankruptcy would, in all circumstances, be entitled to retain the benefit of that execution. There was no express limitation on the general power to discharge or vary a charging order under section 3(5) of the Charging Order Act.

However it was clearly the intention of the legislature that a creditor who had completed execution before the bankruptcy order was made was not to be deprived of his security by reason of the bankruptcy order alone; some additional feature as needed before it could be appropriate to exercise the general power under section 3(5).

It followed that the courts below had been in error in failing to recognise, and give weight to, the legislative policy underlying section 346(1) of the Insolvency Act, and were wrong to discharge the charging order.