Case Studies

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20/04/2016

Litigation: Final charging order set aside as evidence of prior disposal not properly tested

Background

Care London Limited v Nationwide Building Society [2015] EWHC 3890 (QB)

The Charging Orders At 1979 provides that a judgment creditor may apply for an order charging the judgment debtor’s beneficial interest in certain types of asset, including land. 

Following default judgment in favour of Nationwide Building Society (“NBS”) dated 4 January 2012 Mr Chana was ordered to pay the sum of £580,141.08, later reduced to £337,033.77. Mr Chana owned a beneficial interest in five flats at a property known as Puran House in London. NBS sought to secure their debt by obtaining charging orders against these flats. Interim Charging Orders were made on the 28 August 2014 and registered on the 9 September 2014.

Before the Master Fontaine, on behalf of Mr Chana and Care London Limited (“CLL”) it was argued that NBS had no entitlement to the charging order, as Mr Chana no longer had any beneficial interest in the properties: he was the former owner, but had sold the properties to Puran House Limited (“PHL”) on 10 December 2013, who then sold the properties to CLL on 4 March 2014. Mr Ewan, the solicitor instructed by CLL in relation to its acquisition of the properties, produced TR1 forms dated 10 December 2013, which recorded the property transfer to PHL and that a figure was paid. He also produced a contract between PHL and CCL in relation to the sale and CLL’s correspondence in relation to funding. NBS argued that the TR1’s were a Land Registry form which showed little substance of the transaction and they relied on the fact that Mr Chana was named as the owner on the Land Registry title at the time the interim charging orders were registered on 9 September 2014. 

Although by the time of the final hearing on 7 May 2015, NBS had also issued an application challenging the property transfers as transactions defrauding creditors (Section 423 Insolvency Act 1986), the Master decided the issue by reference only to the question whether Mr Chana was the beneficial owner when the interim charging orders were registered and whether the December 2013 transfer of the properties was valid. The Master rejected the witness evidence of Mr Chana and Mr Ewan without hearing it and found in favour of NBS, making the interim charging orders final. NBS were able to rely on the strong evidential presumption that Mr Chana had beneficial interest and this presumption could only be rebutted by sufficient evidence, which the Master had found had not been provided due to gaps in the evidence. 

The Appeal

This judgment was appealed on two grounds: the first that the court wrongly found against CLL on the basis of insinuations of fraud and sham transactions that were not pleaded, and the second that court was unfair in concluding that Mr Chana had not transferred his beneficial interest without his and Mr Ewan’s witness evidence being cross-examined. NBS argued that that the Master’s judgment should be upheld as she was entitled to reach the conclusion as sufficient evidence had not been produced to rebut the evidential burden. The appeal was allowed and judgment was delivered by Mrs Justice Whipple on 11 December 2015.

Judgment

Mrs Justice Whipple determined that the initial decision should be set aside and the case remitted for a fresh hearing. The Master had reached her decision because of the gaps in the evidence, but should not have discounted the evidence provided in the witness statements of Mr Chana and Mr Ewan without giving them the opportunity to give oral evidence and be cross-examined. 

Mrs Justice Whipple went on to state that allowing the opportunity to explain evidence before concluding that it should be disregard is a basic matter of natural justice. She also referred to the case of Re R (Children) [2015] EWCA Civ 167 as authority that where a witness provides evidence and is willing to be cross-examined, the court cannot disbelieve the evidence before them without cross-examination taking place.

While not suggesting that oral evidence should be heard in every case where a debtor argues prior disposal, there were cases where it would be necessary and Mrs Justice Whipple considered this to be such a case. This was because validity of transfers was the main issue in front of the Master, and an issue of fact in relation to which witness statements attested by a statement of truth had been filed at court. Therefore Mr Chana and CLL should have had the chance to meet the accusation that they were not telling the truth, which was implied in the judgment of Master Fontaine. If they were found to have made false statements, they witness could be liable to contempt of court and imprisonment. 

Conclusion 

Creditors seeking to secure debts by way of a charging order should be aware that following this case courts may be less inclined to deal with disputed matters in charging order hearing on paper and without hearing witnesses, in particular where it is argued that there has been a prior disposal of the property which has removed beneficial ownership from the judgment debtor.