Charging Orders (Orders for Sale: Financial Thresholds) Regulations 2012

Lord McNally Excerpts

Tuesday 8th January 2013 Grand Committee

Moved By

[Lord McNally]

That the Grand Committee do report to the House that it has considered the Charging Orders (Orders for Sale: Financial Thresholds) Regulations 2012.

Relevant document: 13th Report from the Joint Committee on Statutory Instruments

[The Minister of State, Ministry of Justice (Lord McNally)]

My Lords, the purpose of this draft order is to introduce a financial threshold of £1,000 for the enforcement of charging orders by an order for sale where the charging order was made to secure the payment of money owed under an agreement regulated under the Consumer Credit Act 1974. A charging order made in such cases may not be enforced by way of an order for sale where the amount owing, including interest, is less than £1,000.

Before I go into greater detail about the order, let me briefly provide background on charging orders and orders for sale. When a creditor has not received payment for a court judgment, they may apply to the court to enforce that judgment. They have several enforcement options open to them, including applying for a charging order on a debtor’s property or asset. While the majority of charging orders are made against property, the provisions themselves also cover land and stocks and shares.

The purpose of the charging order is to secure the debt. It does not, in itself, lead to repayment of the debt until the debtor sells their asset. The creditor may also choose to pursue other enforcement options or make a further, separate application for an order for sale. This application seeks the court’s permission to enforce the existing charging order by ordering the sale of the property, or other asset, either immediately or at some point in the future if a suspended order is made.

Both the application for a charging order and the further application for an order for sale are always listed for hearing before a judge and so are subject to case-by-case judicial discretion and case law. In each case the judge will consider, among other things, the proportionality of the debt as set against each of the parties’ assets and commitments; whether—if it is a property in question—it is the primary residence of the debtor or a secondary residence or a commercial property; who else may reside within the property, including children; the balance of rights between the creditor and the debtor; and whether the debtor should be granted additional time to pay, resulting in a suspended order.

Evidence shows that under the existing arrangements only a very small proportion of charging orders—some 0.5%—result in an order for sale, and some of these may be suspended orders. This is in part due to the fact that the process of applying for, calculating potential equity in and administrating the sale of a debtor’s property is economically risky for creditors. This, together with case-by-case judicial discretion, means that it is very rare for debtors to lose their homes as a result of a charging order.

With that background, I turn to the reason for the regulations before us today. Although it is indeed very rare for debtors to lose their homes as a result of a charging order, it is important that the Government ensure that all appropriate safeguards are in place to ensure that this does not happen as a result of what might have originally been relatively small, unsecured borrowing. The coalition commitment to introduce a threshold for orders for sale applications reflects this. However, it is also essential that protection for debtors is balanced against the rights of creditors. The Government believe that responsible creditors who are owed money and have gained a judgment in court have the right to enforce that judgment. Without effective enforcement we risk jeopardising the authority of the courts and public confidence in our justice system, as well as there being a negative impact on the economy if lenders are not confident that they can recoup money that is rightly owed to them.

Following extensive public consultation, we intend to introduce a £1,000 financial threshold, as set out in the draft regulations. While this differs from the £25,000 threshold set out in the coalition agreement, it was concluded to be the most appropriate level at which the necessary balance between the rights of debtors and the rights of creditors could be most effectively struck. While stakeholder opinion was, perhaps predictably, split between creditors and debtors, there were other groups who also held strong opinions—for example, the legal profession and the judiciary.

A number of arguments against a high financial threshold, or even any threshold, were given. With a high threshold, such as £25,000, there is a risk that creditors may seek to recover their debt by initiating bankruptcy proceedings as an alternative to enforcement. This would be a more draconian outcome for debtors than an order for sale. As many noble Lords will be aware, bankruptcy often results in debtors losing their homes, whereas the protections which are already in place within the enforcement system—and which will continue to be in place if these draft regulations are approved—protect most debtors from losing their homes.

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[Lord McNally]

My Lords, I am very grateful to the noble Lord, Lord Beecham, for that constructive response. I know from our exchanges during the Crime and Courts Bill of his long-standing interest in this area and I understand why he continues to probe on the matter. The Government remain committed to providing more protection for debtors and we are taking appropriate action to ensure that that happens. When we debated this on the Floor of the House, and again today, the noble Lord pointed out that the coalition agreement talked about a £25,000 limit and we now talk of £1,000. I suppose that the honest answer is that that was the outcome of the consultation. We now feel that the balance of what we wanted to do is better met by the guideline of £1,000 rather than £25,000, not least because we were advised that the higher limit could steer creditors more in the direction of bankruptcy solutions, with the impact that I indicated on house ownership, rather than a settlement under these regulations.

We were also very much influenced by the judiciary, which believes that a very low threshold, with a great deal of judicial discretion, provides a far more guaranteed protection for the creditor than the protection afforded by a higher level—

[Lord Beecham]

For the debtor.

[Lord McNally]

For the debtor, yes; I am sorry.

With these things it is always a matter of judgment. The judgment that we have come to, and the level we have set it at, is the result of consultation, with the aim of striking a right and proportionate balance that will give power and flexibility to the judiciary and a degree of protection for the lower levels of debt.

The noble Lord asked about early enforcement of parts of the Tribunals, Courts and Enforcement Act 2007. Following the Solving Disputes consultation paper we implemented Section 93 of the TCE Act. It closes an existing loophole, providing a greater degree of security to creditors and encouraging debtors who are in financial trouble to make more reasonable yet affordable offers to pay.

The Government consulted on introducing this section in 2010 in their Solving Disputes in the County Courts paper. Some 74% of respondents supported its introduction, arguing that it offers protection both for creditors, for whom a charging order is often the only effective long-term solution to recovering a liability, and for the debtor. By commencing Section 93 of the Act we have given creditors a certain ability to convert unsecured loans to secured loans. I am sorry—I had better clarify that. One of the criticisms that has been made is that we have given creditors the ability to convert unsecured loans to secured loans by extending the use of charging orders in this way. We do not believe that that is true. Charging orders are used to secure an unpaid judgment debt, not a loan. Legitimate judgment creditors who have obtained a valid judgment through the courts should have the right to enforce the judgment by the most appropriate means available.

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[Lord Beecham]

My Lords, I would be grateful if the Minister could clarify a couple of matters. He referred to the order allowing charging orders to be applied for, but is he aware that under the regulations enacted last October it would be possible to do that without the debtor having at that stage defaulted? That would seem to convert an unsecured loan into a secured one.

My second question relates to responses. Am I right in thinking that the balance of responses reflects the fact that most of those responding were creditors rather than debtors, their representatives or organisations interested on behalf of debtors?

[Lord McNally]

My Lords, the balance reflected the interests of the responders. The noble Lord is quite right: the creditors had one set of priorities and those speaking out of concern for debtors had others. That is the nature of consultations, as the noble Lord will be aware. I also pray in aid the strong view of the judiciary that it wants to retain as much judicial discretion as possible. In my remarks I listed the clear considerations that a judge takes and the fact that these matters come before a judge.

On the issue of whether it is pre-emptive, as it were, under the measures that we took last October, as I explained, it gives debtors who are in financial trouble the opportunity to make more reasonable and affordable offers to pay. The noble Lord appears to be saying that adjustments can be made only after disaster has struck, but that is not my reading. If I am not right in my interpretation I will write to the noble Lord. However, it seems to me that it provides an opportunity to intervene in a constructive way when people are running into difficulty.

[Lord Beecham]

My Lords, I am grateful to the Minister. However, as I understand it, the order does not require the debtor to be in any difficulty or to have made any default at all before the charging order can be applied for. That does not mean, of course, that the order for sale would automatically follow, but it is a precursor to that and can arise even before any default has taken place. We are unable to take this much further today, but I invite the Minister to look at the situation in due course.