On insolvency, the pari passu principle applies, meaning unsecured creditors rank equally in the distribution of available assets. That principle helps explain why a creditor who has obtained a judgment debt but has not completed enforcement (for instance by obtaining a final charging order) will usually be barred from doing so once insolvency intervenes. A charging order remains interim only and cannot “jump the queue.” Yet in Stacks Living, the Court did precisely that. It made an interim charging order final notwithstanding intervening bankruptcy under Insolvency Act 1986 (“IA 1986”).

This blog considers why the creditor was effectively allowed to bypass the pari passu principle.

Despite being a personal insolvency case, the reasoning will also be relevant to liquidations given that the statutory provisions are essentially the same.

Background

The judgment creditor obtained a judgment against the debtor for a substantial sum. The court made an interim charging order over the debtor’s interest in a property. Before the interim charging order could be made final, the debtor applied for and was granted a bankruptcy order. That would ordinarily prevent the judgment creditor continuing enforcement and obtaining a final charging order given s346 IA. Under s346 IA unless execution is completed (in other words the charging order has been made final before the bankruptcy order was made) the judgment creditor cannot retain the benefit of the execution as against the trustee in bankruptcy.

Nevertheless, the judgment creditor applied under s346(6) IA for the court to set aside the trustee’s rights, so as to “complete” the execution and allow the interim order to become final. The Court granted the application, and the interim charging order was made final. The Court found:

  • The judgment creditor obtained the interim charging order soon after judgment and applied without delay under s346(6) IA, acting promptly.
  • The debtor’s bankruptcy appeared to have been pursued deliberately to frustrate enforcement – the timing (between interim order and final hearing), the speed of the bankruptcy petition, and correspondence by the debtor’s solicitors pointed to an intention to use bankruptcy as a threat to force the judgment creditor to reach settlement in respect of the judgment debt.
  • Other unsecured creditors were few and comparatively minor. The judgment creditor represented around 96% by value of unsecured claims. The court considered that making the charging order final would not unfairly prejudice other creditors in the real world.

On balance, these were “exceptional circumstances” justifying a departure from the normal pari passu rule and the statutory default under s346(1) IA.

Why this matters for liquidation?

Although Stacks Living is a bankruptcy case, the reasoning is highly relevant to liquidation scenarios. The statutory provisions relevant to liquidation (s183(2)(c) IA) essentially mirror the wording in s346 IA. The core principle is the same – an intervening insolvency suspends or invalidates incomplete enforcement, to preserve pari passu distribution among creditors.

The decision illustrates that, where there is attempted use of interim enforcement (such as a charging order) before insolvency, the court may exercise discretion to allow security to crystallise. That could matter where liquidators or creditors in liquidation are faced with similar factual patterns.

However, a few caveats:

  • The discretion under s346(6) IA (or by analogy under s183(2)(c) IA) is narrow. The case emphasises “exceptional” and “rare”.
  • Success will likely depend on timing, conduct of the debtor, promptness of the creditor, and the overall creditor body (are there many competing creditors?).
  • The Court in Stacks Living was dealing with personal bankruptcy where the estate is often simpler in nature and there can be free assets which are not subject to security interests which a creditor can enforce against. In a corporate insolvency, assets are often subject to fixed and floating security and preferential creditors outrank unsecured creditors, which are likely to be relevant considerations when both seeking to enforce and in seeking to continue with enforcement action post liquidation.  For example, are there any free assets or equity against which a charging order can bite? How might a court factor in the rights of preferential creditors when weighing up whether to exercise its discretion.  The position is perhaps less straightforward in a liquidation, but that does not mean that a creditor could not seek relief if the circumstances were appropriate.

Key Points for Creditors

  1. Don’t assume “interim” is the end of the story. If you obtain an interim charging order (or other enforcement remedy) and insolvency intervenes quickly, it may still be possible to convert that into a final order using s346(6) IA or s183(2)(c) IA. The case demonstrates that courts retain a discretion, even when bankruptcy or winding-up intervenes.
  1. Act fast: Prompt application for enforcement and no avoidable delays will strengthen any application under s346(6) IA or s183(2)(c) IA.
  1. Be realistic: This recovery tool remains the exception rather than the norm, and successful cases will be rare and fact specific.
  1. Consider the wider creditor body. Applying s346(6) IA or s183(2)(c) may disadvantage other creditors. But where the applicant represents the vast majority of unsecured creditors, or where other creditors are unlikely suffer prejudice, the Court may be persuaded that fairness favours granting the order.

Conclusion

Stacks Living confirms that a court will still, in exceptional circumstances, preserve a creditor’s security against a bankrupt’s property by converting an interim charging order into a final one under s346(6) IA.  The pari passu regime remains the default but with the right facts and swift, strategic action, it is not an absolute bar.