GK Success: Pari Passu Principle Applied to Justify the Discharge of a Final Charging Order
Whilst the well-established pari passu principle means that all unsecured creditors in insolvency actions must share any available assets equally, it is not uncommon for creditors to find themselves involved in a race to the finish line before any insolvency takes effect.
GK were recently instructed to act for one of its finance clients to recover sums from a personal guarantor by way of a bankruptcy petition. Following service (but before expiry) of the statutory demand, GK were served with an interim charging order from another creditor. A charging order has the effect of securing a debt against a property, thereby making the creditor a secured one and so at priority in the event of a successful insolvency action.
GK immediately invited the Court to stay the creditor’s action pursuant to section 285 of the Insolvency Act 1986, failing which it was said that the Court should decline to make a final order in circumstances where a statutory scheme was in place to allow pari passu distribution (Mohamed Dewji v Amarjit Singh Banwaitt  EWHC 3746 (QB)) (the Court having been referred to the then pending petition).
Notwithstanding, and before the debtor was adjudged bankrupt, the interim charging order was made final by way of a paper exercise carried out by a Legal Advisor. It was unclear whether GK’s submissions had been considered and dismissed or overlooked.
Not deterred, GK sought reconsideration of the decision pursuant to CPR 73.10ZA, noting that retention of the charge for some £100,000 by one creditor would unfairly prejudice all others.
At the hearing, the Court, acting pursuant to CPR 73.10, discharged the final order, agreeing that:
- The interim charging order ought not to have been made final absent hearing from GK’s client.
- The making of the final charging order was inconsistent with the pari passu principle.
- It was therefore appropriate to discharge the final charging order.
By securing the discharge of the final charging order, a significant sum was put back into the bankruptcy for the benefit of all creditors (except perhaps the creditor who had initially crossed the finish line first!).
- At any time when proceedings on a bankruptcy application are ongoing or proceedings on a bankruptcy petition are pending or an individual has been made bankrupt, section 285 of the Insolvency Act 1986 allows the Court to stay any action, execution or other legal process against the property or person of the debtor or, as the case may be, of the bankrupt.
- A creditor may retain the benefit of a final charging order made final before the commencement of an insolvency action (ss346 and 183 of the Insolvency Act 1986).
- Winding up (and, by analogy, bankruptcy) brings into operation a statutory scheme for dealing with assets. If a winding up occurs before the final order, the Court will decline to make a final order.
- Whether an interim charging order should be made final is one for the discretion of the Court. The Court must take into account all relevant circumstances existing before and after the making of an interim charging order.
- The Court’s discretion to make a final order should be exercised equitably having regard to the interests of all parties, including other unsecured creditors (Roberts Petroleum Limited v Bernard Kenny Limited  1 W.L.R. 301, CA).
In terms of enforcement, each case should be taken on its own facts. GK ensures that each matter is considered in depth so that the best recovery options are presented.
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