British Arab Commercial Bank Plc & Ors v Algosaibi & Ors

Where no compulsory statutory insolvency or bankruptcy regime requires pari passu distribution, the general rule is that the first judgment creditor to obtain an effective charging order takes priority on enforcement.

The court retains a limited discretion under the Charging Orders Act 1979 and CPR 73.8. It may refuse to make an order final where another creditor would suffer undue prejudice, but ordinary priority prejudice is insufficient. Exceptional circumstances may arise from sharp conduct, such as misleading other creditors, undue haste, or unfair use of special knowledge. The discretion is not a general jurisdiction to create a judicial insolvency scheme or distribute assets equally among a selected group of creditors.

The judgment concerned competing interim charging orders over five Mayfair flats and a related shareholding. HSBC obtained its orders on 27 July 2011. Other claimant banks obtained orders over the same assets in August 2011 and objected to HSBC receiving priority.

The defendants were insolvent, but no English statutory insolvency or bankruptcy regime applied, and any available Saudi process would not provide an effective pari passu distribution. The court was asked whether CPR 73.8 and the Charging Orders Act 1979 permitted the court to make the later orders final while requiring the banks to share enforcement proceeds equally.

The separate question whether the defendants had beneficial interests in the assets was directed to a later trial.

1. Priority rule. The court followed the principle stated by Cooke J in FG Hemisphere v Republic of Congo [2005] EWHC 3103 (Comm). In the absence of a compulsory statutory apportionment regime, the historic first-past-the-post rule applies. A charging order creates a defeasible charge which, if confirmed and made final, gives priority over later creditors.
2. Limited discretion. Sections 1 and 3 of the Charging Orders Act 1979, together with CPR 73.8, preserve a discretion whether to make an interim charging order final. That discretion is not at large. The relevant question is whether another creditor would be “unduly prejudiced”. Ordinary prejudice arising because one creditor has obtained security is not enough.
3. Exceptional circumstances. Undue prejudice may arise from conduct by the first creditor which causes prejudice beyond the ordinary consequence of priority, or from other exceptional circumstances. The guidance in Burston Finance v Godfrey [1976] 1 WLR 719 was treated cautiously because its ratio had been disapproved in Roberts Petroleum v Bernard Kenny [1983] 2 AC 192. Examples of potentially sharp conduct include putting creditors off the scent, undue haste in obtaining priority, and unfair use of special knowledge.
4. Application. Cooperation between the claimant banks did not create an agreement to share enforcement proceeds. HSBC’s use of information lawfully shared within its corporate group was not unfair. Its attendance at a privileged meeting did not indicate willingness to postpone enforcement or mislead the other banks. The proposed pari passu undertaking would also leave other actual or potential creditors outside the arrangement and would improperly resemble a judicial insolvency scheme.
5. Disposition. HSBC therefore had priority over the opposing banks if charging orders were ultimately made final. The entitlement to final orders awaited trial of the defendants’ alleged beneficial interests in the assets.

This was a first-instance Commercial Court determination of priority between competing interim charging orders. The final charging-order question was deferred pending trial of the defendants’ alleged beneficial interests.