Orders for sale (following a charging order) are one of a number of methods available to creditors to enforce debts. The charging order secures the debt against a debtor’s title to property where the debtor holds an interest in land.
A charging order has the effect of placing a charge on the assets specified in the order, ie the debtor’s property. If the debtor then decides to sell their property against which the charge is registered, the amount owed is repaid to the creditor from the sale proceeds. This is subject to there being sufficient equity in the property after payment is made to any higher ranking creditors. Once a charge is registered, in some circumstances it is possible to obtain an order for sale which requires the debtor to sell their property in order to pay the debt.
Recently, the government has introduced a number of changes to charging orders and orders for sale as part of a number of reforms to the County Court system.
The first change
Section 94 of the Tribunals, Courts and Enforcement Act 2007 was brought into force on 17 May 2012. The Act incorporates a new section 3A into the Charging Orders Act 1979 and has given the Lord Chancellor the power to make regulations providing that:
- charging orders may not be imposed to secure an amount below a certain threshold; and
- charging orders may not be enforced by orders for sale if the amount in question is below £1,000. This will only apply to debts regulated by the Consumer Credit Act. Indications at the current time are that this change will be introduced in December 2012.
The second change
Section 93 of the Tribunals, Courts and Enforcement Act 2007 will come into force on 1 October 2012. The amendments allow an application for a charging order to be made in cases where the debtor has not defaulted on payment of an instalment judgment. However, it should be noted that:
- The court must take into consideration the fact that there has been no default when deciding whether to grant the order for sale; and
- An order for sale to enforce the charging order may not be made at the same time as the application for the charging order unless the whole or part of an instalment which falls due under the judgment remains unpaid.
What does this mean in practice?
The second change is significant given that, as matters currently stand, if the debtor is making payment under an instalment judgment, it is not possible to apply for a charging order until a debtor defaults in payment of any of those instalments. Under the new legislation, even if a debtor is adhering to judgment instalments, the creditor is still entitled to secure the debt by way of a charge however, as indicated, the court must take into account that payments are being maintained when deciding whether to impose a final charging order over the debtor’s property.
Once a charge is in place, a creditor may consider the use of an order for sale to recover the sums secured. Here, a practical problem may arise in that a charging order may not be enforced unless, at the time of the application, the whole or part of any instalment remains unpaid. It therefore follows that if the debtor brings instalments up to date at any stage, the Judge will be bound to dismiss the application. This could lead to last minute applications for relief by debtors facing eviction which in turn could lead to increased costs for creditors.
During the consultation process, concerns were raised that the £1,000 threshold would lead to more creditors petitioning for the bankruptcy of debtors, rather than seeking enforcement measures. These concerns have to be contrasted against the costs involved in bankruptcy. On balance, the new threshold is unlikely to result in a significant increase in bankruptcy petitions. In any event, the threshold only applies to Consumer Credit Act regulated debts.
The reforms will make it easier for creditors to seek security for instalment judgments they have obtained against debtors. However, creditors need to consider the position carefully, particularly where there has been no default in payment of instalments. It may be that an alternative method of enforcement is more appropriate and cost-effective.