Vol 10 (2013) - Issue 5

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Obtaining and Enforcing English Judgment Debts: First Past the Post?

Creditors of companies in financial difficulty frequently face a choice between engaging actively in settlement or debt restructuring negotiations with other, competing, creditors or going it alone and pursuing their claims through the Courts.
For those creditors who choose to pursue litigation, the incentive (and the imperative) is to put themselves in a position of advantage over the debtor’s other creditors by enforcing against the debtor’s limited assets first. It is this prospect which justifies the potential expense and inconvenience of the Court process.
It has generally been the position of the English Court that, in the absence of a statutory insolvency regime, the principle which governs the enforcement of judgments by competing creditors is 'first past the post'. This rule was put most succinctly by Lord Denning in Pritchard v Westminster Bank1 in which he stated that '[the] general principle when there is no insolvency is that the person who gets in first gets the fruits of his diligence.'
But this is not an automatic right. It is trite law that in exercising its jurisdiction under the Civil Procedure Rules (CPR) (and under the predecessor Rules of the Supreme Court (RSC) and relevant statutes) to grant orders executing judgment over the assets of judgment debtors, the Court has discretion as to whether or not to make an order final (absolute). Further, the Court has a clear discretion under its general case management powers to stay execution of any judgment. As to the scope of that discretion, the relevant rules and authorities establish that there 'may be exceptions when it is appropriate' to depart from the general rule and deny a creditor the fruits of his diligence. The authorities suggest that, in considering whether it is appropriate, the Court will take into account the position of the judgment creditor, the judgment debtor and the position of other creditors. One clear exception (discussed below) has been established. Beyond this, and particularly in circumstances where no formal insolvency process is or may be available, the limits of the Court’s discretion are less clear and several recent cases have sought to test the boundaries.

Established exception – pari passu distribution process reasonably in prospect
The Court’s approach in this area had developed principally as a matter of expediency in cases where the Court has been concerned to protect and encourage the efforts of companies and creditors to achieve the fair and proportionate division of an inadequate fund and prevent the actions of one creditor holding the others to ransom with the threat of a free-for-all.
Accordingly, the Court will typically not make a charging or third party debt order final if there are proceedings on foot for the pari passu distribution of the judgment debtor’s assets amongst all its creditors, even outside of a formal insolvency process. There are a number of recent authorities concerning schemes of arrangement (under Part 26 of the Companies Act 2006) in particular (although the same reasoning would apply to a company voluntary arrangement (CVA)). This is because doing so would have the effect of preferring one creditor over the others in circumstances where a process is or is likely to be underway with the aim of fulfilling the public policy objective of the equitable distribution of assets amongst creditors.
This approach is to be contrasted with the approach where there is an intervening resolution or petition for voluntary or compulsory winding up of a judgment debtor between grant of an interim charging order (whereby the Court makes a temporary order often without notice to the debtor or other creditors) and the application to make it final (following an on-notice hearing). Even though the debtor may be evidently and irretrievably insolvent and 'on the road to liquidation' the Court has not considered this, without more, to be sufficient cause to prevent an order being made final.