Section 1(5) of the Charging Orders Act 1979 provides as follows: ‘In deciding whether to make a charging order the court shall consider all the circumstances of the case and, in particular, any evidence before it as to (a) the personal circumstances of the debtor, and (b) whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order.’

A debtor who is insolvent in asset terms but is making pro rata payments from his surplus income to his creditors will often seek to argue that it is unfair that one creditor should effectively be able to barge to the front of the queue. That, on the face of it, is an attractive argument. Why, after all, should a creditor who refrains from taking proceedings because he is already receiving a fair instalment payment be disadvantaged by his forbearance? Is such a creditor not ‘unduly prejudiced’ by the making of the order?

However, there is clear authority that this is not a permissible approach for the court to take.

As Lord Denning observed in Pritchard v Westminster Bank [1969] 1 All ER 999: ‘The general principle when there is no insolvency is that the person who gets in first gets the fruits of his diligence.’

When there is an ‘insolvency’, of course, the House of Lords – in the well-known case of Roberts Petroleum v Bernard Kenny [1983] 1 All ER 564 – held that the liquidation of a company in the period after the order nisi was a sufficient reason for refusing to make the order absolute.

If the debtor is seeking to enter into an individual voluntary arrangement (IVA), and an interim order is in force when the making of a final charging order is considered, the creditor will not be allowed to keep the benefit of the charging order. Clarke v Coutts & Co [2002] EWCA Civ 943, [2002] All ER(D) 98 (Jun), [2002] BPIR 916, a remarkable case where the charging order was set aside, was made nearly six years later, but the reason why the charging order had to be set aside in that case was that it had been obtained in breach of the mandatory moratorium under section 252(2) of the Insolvency Act 1986.

And in Nationwide Building Society v Wright [2009] EWCA Civ 811, [2009] All ER (D) 305 (Jul) an interim charging order was made before the presentation of a bankruptcy petition. The final order was made after presentation of the petition but before the making of the bankruptcy order. Neither Nationwide nor the court that made the charging order knew of the pending petition.

Sir John Chadwick, delivering the only reasoned judgment in the Court of Appeal, said that it was ‘clearly parliament’s intention’ that a creditor who had obtained a final charging order before a bankruptcy order was made was not to be deprived of his security by reason of the bankruptcy order alone. There was nothing in the facts of the case that justified a departure from that principle. The county court had been wrong to discharge the charging order.

Nationwide v Wright is a very strong decision because the petition was based on the failure of an IVA – not only was Mr Wright hopelessly insolvent, he had been hopelessly insolvent for some considerable time. Moreover, the appeal court accepted that if the judge considering the final charging order had known of the pending bankruptcy, it would have been right to refuse a final order. The only distinction between Wright and Industrial Diseases Compensation Limited v Marrons [2001] BPIR 600 (where Judge Behrens, sitting as a High Court judge, correctly held it to be wrong to make a [garnishee] order absolute in the period between the presentation of a bankruptcy petition and the making of the bankruptcy order) lies in the fairly arbitrary circumstance that in Marrons the judge considering the final order knew of the pending bankruptcy, whereas in Wright he did not.

The reason given by deputy district Judge Jolly in Wright for setting aside the charging order was that ‘given the balance of interest and the nature of the assets available in this case for distribution to creditors, I think it is appropriate for me to exercise my discretion in favour of the trustee in bankruptcy and discharge the charging order’. In other words, he considered that it was right to protect the interests of the creditors as a group rather than favouring the one creditor who had obtained a charging order. The appeal court held that he was wrong to take that view – although he had a discretion to set aside the charging order, he ought not to have exercised it in favour of the trustee in bankruptcy. A liquidation, as in Roberts Petroleum, commences with the petition or the resolution to wind up; a bankruptcy commences with the making of the bankruptcy order.

In F G Hemisphere Associates LLC v Republic of Congo [2005] EWHC 3103 (Comm), Mr Justice Cooke said: ‘No creditor, it is said, should be allowed to steal a march on another creditor in a potential insolvency situation… [but where] no compulsory statutory regime of apportionment can apply, the historic first past the post rule applies on enforcement of judgments...’

Accordingly, it appears impossible to argue that the desirability of equal treatment of creditors in a non-statutory scheme can ever be a sufficient ground in law for refusing to make a charging order final. In any event, one seldom actually sees proposals for making the equity in the defendant’s property available for the creditors as a group.

Having said that, there is anecdotal evidence that some creditors may seek to use the threat of a charging order and its enforcement by an order for sale as a means of extracting a larger instalment payment than a pro rata division would justify. This, I suggest, is capable of unduly prejudicing other creditors. And the growing practice of waiting until the last possible moment to serve the interim order (presumably seeking to give the defendant as little opportunity as possible to be awkward) appears to be a clear breach of Civil Procedure Rule 23.7(1)(a).

District Judge Neil Hickman sits at Milton Keynes County Court. He is general editor of Civil Court Service (Jordans)