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Landmark decision allows recovery from non-debtors

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11/01/2016

The Chancery division of the High Court has produced a landmark judgment in relation to charging orders over a debtor’s beneficial interest. In a decision which will be of great benefit to judgment creditors, the court ordered that a charging order could be granted over the property of a non-debtor. Walton v Allman [1] therefore allows a creditor to recover from a debtor even though an asset may not be in the debtor’s own name.

Walton v Allman – facts and proceedings

The claimant, Mrs Walton, brought a breach of contract claim in 2011. In the course of the proceedings the defendant, Mrs Allman, issued an application for security for costs against Mrs Walton, who appeared to have no assets in her name. Mrs Walton opposed that application and adduced evidence that she held a beneficial interest in the marital home, which was registered in her husband’s sole name. The claim was dismissed at trial and Mrs Allman was awarded her costs in the sum of £30,000  When the costs went unpaid Mrs Allman applied for a charging order over the Mrs Walton’s interest in the home.

Mrs Walton’s husband joined the proceedings and disputed that his wife had any interest in the property. In addition, Mrs Walton then filed a witness statement which stated that she accepted that she did not have an interest in the property on a legal or equitable basis and that she had never held such an interest. Finding for Mrs Allman, the court held at first instance that Mrs Walton did hold a beneficial interest in the property, and made the charging order final, although it did not quantify the nature of the beneficial interest [2].

Mrs Walton was granted permission to appeal on the basis that it was in the public interest to determine whether a final charging order could be obtained over the beneficial interest of a debtor when the beneficial interest had not been quantified.

Landmark decision

The High Court decided that there was no need to quantify the extent of a judgment debtor’s beneficial interest before making a charging order final.

Snowden J first stated that, pursuant to section 2(1)(a) of the Charging Orders Act 1979 (the 1979 Act), a charging order can be granted over any interest held by the debtor beneficially. In addition, under s.3(4) of the 1979 Act, a charge imposed by a charging order shall have the same effect as an equitable charge created by the debtor.

The court rejected the Mrs Walton’s arguments regarding the requirement for the beneficial interest to be quantified [3]. Snowden J highlighted that the case law used by counsel for Mrs Walton was in relation to section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA), rather than to charging orders, and drew a distinction between the two. In a TOLATA application a claimant makes an application to ascertain the extent of the interest. However the purpose of a charging order is to give a judgment creditor the equivalent of an equitable charge to secure payment of a judgment debt. Therefore, in the same way that it must be possible for a debtor to grant an equitable charge over their beneficial interest without calculating the value or extent of that interest, Snowdon J found that there was no reason why it should be necessary for the court to quantify the extent of the beneficial interest before granting a final charging order. The judge also referred to the fact that the relevant court forms do not require the extent of the beneficial interest in the relevant asset to be quantified.

The High Court also highlighted the importance of policy considerations and the practicalities of the 1979 Act. A delay in being able to obtain a final charging order can be fatal, as the debtor can be subject to insolvency proceedings before the charging order is made final. The purposes of the 1979 Act may therefore be defeated if a judgment creditor has to wait for the interest to be quantified before a charging order will be granted.

WM Comment

The practical consequences of this decision for a judgment creditor are beneficial: it confirms that a creditor can obtain a charging order over an asset that is not in the debtor’s name. Therefore, where a debtor does not appear to have any assets, judgment creditors can and should make enquiries as to whether the debtor has any beneficial interest in any asset[s] that could be made subject to a charge. The case also shows that a charging order can be made over the relevant asset[s] without the need for the court to quantify any beneficial interest. It is therefore sensible to make any application for a charging order promptly. However it would be advisable to clarify the extent of any beneficial interest before taking subsequent steps to enforce any charging order obtained, to ascertain how much would be recovered and whether taking enforcement action would be cost effective.

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[1] [2015] EWCH 3325 (Ch)
[2] Mrs Allman argued that Mrs Walton held a beneficial interest in the property pursuant to a common intention constructive trust. The court held that Mrs Walton held a beneficial interest, but did not quantify the nature of that interest.
[3] Counsel for Mrs Walton had sought to rely on the two-stage test in Jones v Kernott [2012] 1 AC 776 (see Landmark decision allows recovery from non-debtors for previous Walker Morris briefings on the subject of ascertaining beneficial interests).

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