The court has confirmed that where there is no insolvency, the general principle of 'first past the post' applies between judgment creditors unless undue prejudice would be caused to the other creditors.
In British Arab Commercial Bank PLC and others v Algosaibi and Brothers Company and others, HSBC obtained interim charging orders against properties owned by the defendants. HSBC's claim and a number of other banks' claims raised similar issues and had been ordered to be tried together. When HSBC applied to make the charging orders final, the other banks, who had subsequently also obtained interim charging orders over the same properties, objected on the basis that the proceeds of enforcement should be shared equally between them. The banks argued that:
- They had all agreed to co-operate to obtain their various judgments against the defendants.
- HSBC had only obtained details of the defendants' properties through luck.
- The banks and HSBC had all met together to discuss enforcement issues and HSBC had suggested they would continue co-operating with the other banks when in fact they were about to take enforcement steps.
- HSBC's application for the interim charging order had been without notice.
The court held that where there is no insolvency, creditors will be treated on a 'first past the post' basis. However, the court had discretion whether to make the charging order absolute and could refuse to do so if the creditor's conduct, or other exceptional circumstances, justified a departure from the general rule.
This would only occur if the other creditor would suffer some prejudice over and above the prejudice that it would inevitably suffer if an order was made in favour of the judgment creditor. The prejudice would only be undue if there was something in the judgment creditor's behaviour that would cause undue prejudice or there were some other exceptional circumstances.
The judge held that there was no undue prejudice in this case. HSBC's conduct was not such that it had obtained an unfair advantage over the other banks. There was no litigation sharing agreement between all the banks and the co-operation between them arose out of court case management. There was no obligation between the banks to share any settlement monies, had settlement been achieved.
HSBC had worked hard to find out the information about the defendants' properties. Nothing relating to enforcement had been agreed between the banks and HSBC when they had met. HSBC had not been misleading either bank at the meeting or at the without notice hearing when it could not refer back to that meeting which the banks had agreed was privileged.
Things to consider
The first creditor to obtain a charging order will generally take priority where there is no insolvency situation. The court will only exercise its discretion not to follow the 'first past the post' principle in exceptional circumstances. Where there is a statutory insolvency situation, creditors will be treated on a pari passu basis, i.e. on an equal footing.
However, a creditor's best interests are not always served by looking after its own interests and getting involved in a race. In our experience, in many situations, the opposite can be true. A collaborative approach where risk and reward are shared appropriately among creditors can minimise the erosion of the 'pot' through multiple parties' legal costs and thereby increase returns in real terms. This was recognised by the Financial Times' Innovative Lawyers Awards 2010, in which Wragge & Co was commended for taking this initiative on a leasing fraud case where it successfully represented eight finance companies on such a basis.