Does a charging order have priority over a prior unregistered beneficial interest?

28 January, 2013

I was recently asked to consider a situation where an entity, who owned the whole beneficial interest of a property under an unregistered Declaration of Trust, received notice that a creditor of one of the other legal owners of the property was going to register a charging order against the property.

A charging order obtained over a property owned by more than one person takes effect as an equitable charge over the debtor’s share in the beneficial interest of the property (i.e. the equity).

Given that my client owned the whole of the equity in the property, albeit that interest was unregistered, could the creditor proceed with its application? Considering this point led me to the recent case of HughmansSolicitors v Central Stream Services and another [2012] EWCA Civ 1720.

In the Hughmans case, a solicitor had obtained a charging order in respect of unpaid fees and registered it against a property, the beneficial interest of which was subject to a compromise agreement in previous litigation.

Where there are competing interests in registered land, which one takes priority is determined by the date of creation of the interests with one exception – where a “registrable disposition” (i.e. transaction) of a registered estate is made for “valuable consideration”, registration of that interest means it jumps forward and takes priority over any earlier unregistered interests.

The High Court had to determine (amongst other things) whether the charging order was a “registrable disposition for valuable consideration”. This question had already been considered in United Bank of Kuwait Plc v Sahib [1997] Ch107 in which the court concluded that as a debtor receives no consideration from the creditor at the time a charging order is made, it is not a registrable disposition for valuable consideration.

The High Court agreed with the judge’s analysis in Sahib and said it was unlikely that Parliament intended the Charging Order Act 1979 should give the recipient of a charging order any priority over the holder of a beneficial interest in the relevant property, even if that interest had not been protected by registration. The Hughmans case went to the Court of Appeal who upheld the decision (although the appeal did not challenge the “valuable consideration” question which is of most interest to us).

After referring the creditors to the above case, they promptly withdrew their charging order application and my client was delighted.