Grant Murray explores the moral and business cases for charging orders

Surveys have shown that more than a third of independent schools have an unpaid debt that is secured via a charging order on a property. However, very few charge holders realise that they may apply for an Order for Sale which can result in the property being sold and the debt cleared.

Charging orders have long been a common way of enforcing a County Court Judgment (CCJ). Although HM Courts & Tribunals Service does not release official statistics, it is believed that around 100,000 charging orders are granted to claimants each year. These can be for anything from an unpaid credit card, a water bill, or of course unpaid school fees.

There are many reasons why a creditor may choose to secure a CCJ with a charging order. In the case of schools it is often because there’s a tacit agreement with the debtor(s) to secure the debt against the property until such time as the pupils finish their exams or otherwise leave at the end of the current year or key stage. This is sometimes accompanied by an agreement for the parents to make token payments toward the debt to clear the charge gradually. 

A feeling of insecurity

So, you have a charge on the property and the debt is ‘secured’ against that asset. But when the child has left, the payments have stopped, and with no one at the helm to guide the process, the debtor is no longer responding to letters – what happens next?

The debtor will often be content simply to let the charge remain on their property. Although this can almost seem to be a guaranteed long-term investment for the school (charging orders generally accrue 8% statutory interest per annum) the charge may not be as secure as first thought. Depending on how the charge was registered with HM Land Registry the debtor may still be able to sell the property without the consent of the charge-holding school, leaving the charging order redundant and the debt still unpaid. This is something that all schools with existing charging orders should urgently seek to clarify and I am happy to advise bursars on how to check theirs.

The case for action

There will always be those school fee debtors who are simply taking advantage of the system. Often such debtors know that the debt to the school will not immediately affect their credit worthiness in the same way that, for example, missing mortgage payments would. Priority may therefore be given to their other outgoings rather than their obligation to pay the school. An application for an Order for Sale has been shown to reverse this standpoint and often produces favourable repayment offers or settlements in full.

It’s perfectly reasonable to take into consideration someone’s net worth (where it’s possible to determine to a fair degree of accuracy) when assessing the appropriateness of an Order for Sale against a recalcitrant debtor. Some may be experiencing genuine financial hardship in terms of their income/expenditure, but also have a very high net worth. For these ‘cash poor, asset rich’ debtors, does it really constitute fair treatment of them to perpetuate their financial difficulty by accepting a low value instalment arrangement, keeping them indebted for an extended period of time, incurring even more interest? Perhaps it would suit all parties if the court granted the school’s Order for Sale and the debtor’s assets were liquidated. Depending on the value of their assets this could result in their debts being cleared, their monthly outgoings greatly reduced and substantial net funds given to them at the end of the process.

Protect the vulnerable

Any reputable solicitor or debt collection agency should have measures in place to spot sensitive circumstances and take them into consideration when weighing up whether to issue an Order for Sale, then advise the school accordingly. This helps to reassure the school that legal action is not being taken inappropriately.

Further protection for the vulnerable is provided by section 15 of the Trusts for Land and Appointment of Trustees Act 1996, which requires courts to consider the interests and the welfare of the debtor, other members of the debtor’s household (and dependent children in particular) when considering a creditor’s application for an Order for Sale. Therefore, if a judge ultimately approves a school’s application for an Order for Sale, that school can be sure that the decision has given appropriate consideration to the debtor’s circumstances.

Grant Murray is head of risk and compliance at Redwood Collections

Grant Murray