The English Commercial Court denied that the court has a general discretion to achieve equity between creditors where there is no insolvency (British Arab Commercial Bank plc & Ors v Ahmad Hamad Algosaibi and Brothers Company & Ors [2011] EWHC 2444 (Comm)).

Introduction

A charging order is an order imposed by the court on the property of a debtor a charge for securing the payment of any money due to the creditor under a judgment or order.Upon the application of the creditor, the court will first grant a Charging Order Nisi.In deciding whether to make the Charging Order Absolute, the Court will pursuant to Section 20(3) of the High Court Ordinance (Cap. 4) consider the personal circumstances of the debtor and whether any other creditor would be likely to be prejudiced by the making of the order.

Facts of British Arab Case

In 2009, HSBC and the opposing banks (collectively “the Claimants”) commenced legal actions against the Defendants who are prominent and wealthy Saudi Algosaibi family.Since April 2011, the Claimants cooperated with each other in the presentation and preparation of their cases against the Defendants at the trial so as to deal with different but common issues for the purpose of avoiding duplication of costs.Finally judgments were entered in favour of the Claimants against the Defendants in June 2011.

In early July 2011, the Claimants co-operated in making similar applications for disclosure by the Defendants of all their assets worldwide for the purpose of enforcing the judgment debts.

In about end of July 2011, HSBC made an ex-parte application to the Court for the interim charging orders over five properties on the ground that the Defendants were beneficially interested in those assets. The Court granted the interim charging orders which were subsequently served on the opposing banks. The opposing banks immediately made similar applications as that of HSBC over the same properties.

It is undisputed that the Defendants were insolvent. Apart from HSBC and the opposing banks, the Defendants also had other bank creditors. Given that the Defendants were domiciled outside UK, the English statutory insolvency and bankruptcy regimes were not applicable.Although bankruptcy proceeding against the Defendants had been commenced in Saudi Arabia, it was an imperfect one which gives priority to Saudi creditors and would not result in a pari passu distribution of assets.

Since the HSBC’s interim charging orders were granted earlier in point of time, if the Court made the final charging orders, they would take the priority over the opposing banks and other creditors. On the other hand, there was difficulty in locating the Defendants’ assets in UK which were sufficient to meet all the judgment debts.

The opposing banks argued that notwithstanding the absence of the compulsory statutory regime, the Court should not make HSBC’s interim charging orders final, but should adopt a solution which apportions the fruits of enforcement between the Claimants on a pari passu basis for the purpose of achieving fairness and equity.

HSBC had several meeting with the opposing banks after it had discovered the properties of the Defendants. The opposing banks argued that HSBC should have disclosed this information in the meetings.HSBC had gained unfair advantage through attendance of the meetings among the Claimants.

General Rule

The Court held that where no compulsory statutory regime of apportionment can apply, the general principle is that the person who gets in first gets the fruits of his diligence. The court cannot establish nor administer a judicial insolvency scheme. It is not expected to order payment into court and then run its own liquidation. Further, the opposing banks were not seeking fairness and equity for the general body of creditors but only the section of the creditors which they comprised.

Situation When the General Rule is Displaced

The Court would exercise the discretion not to grant the final charging order only if other creditors would be unduly prejudiced. In the British Arab case, the prejudice to the other creditors such as the opposing banks could only be said “undue” if HSBC had some “sharp conduct” which put other creditors off the scent by purporting to agree to forego immediate pursuit of the claim or undue haste in obtaining a preferred position or unfair use of special knowledge.

However, the Court found that there was no litigation or asset sharing agreement among the Claimants.HSBC obtained the relevant information through its own diligence rather than the assistance of the opposing banks. The opposing banks were not aware of the properties until after HSBC had served the interim charging orders on them.