An intervening bankruptcy will not defeat a charging order where the bankruptcy was entered into in an attempt to frustrate the charge.

In Tagore Investments SA v Official Receiver, the claimant obtained an interim charging order over the debtor's property. The charging order was made final one day after the debtor became bankrupt following his own petition. The claimant had not known of the debtor's petition for bankruptcy when applying for the charging order. The claimant alleged that the debtor's decision to petition for bankruptcy had been made deliberately in an attempt to frustrate the charge. It relied on the debtor's conduct before and during the litigation and the judge's findings as to the debtor's dishonest behaviour in support of its application for relief from the provisions of s346 Insolvency Act 1986 (the IA).

S346 IA provides that bankruptcy, or insolvency of a company, will defeat, as against the official receiver or trustee in bankruptcy, any enforcement action that was not completed before the commencement of the bankruptcy. However, the court does have discretion to set aside such rights in favour of the creditor on such terms as it thinks fit (s346(6) IA). That discretion is only exercised in exceptional cases and with great caution where the applicant can show that there would otherwise be unfairness sufficient to justify an exception.

Here, the judgment obtained by the creditor demonstrated that the debtor was a fraudster who was capable of manipulating a given situation to his own advantage. He had not given notice of his intention to present the petition and had no pressing creditors apart from the claimant. It was therefore highly unlikely that the decision to petition had been taken for the benefit of his creditors, or to relieve himself of a debt burden but more likely to manipulate the situation and frustrate the charging order. The claimant had acted properly throughout. The court found that the appropriate degree of unfairness had been established in this case. The final charging order was allowed to stand.

Things to consider

Each case will depend upon its own facts and successful applications will be the exception rather than the rule. However, if the debtor's behaviour both before and after judgment has been such as to cause substantial unfairness to the creditor and the petition is really a cynical attempt to avoid enforcement, an application should be considered. Here, the debtor was using bankruptcy to obtain a release from the debt and thwart the judgment creditor sitting on the charging order security indefinitely in the hope of some return eventually. That he should be prevented from doing so was only fair in this particular case. The important point is not to agree to the instant release of charging orders obtained around the same time as a petition or bankruptcy order.