317. An Attachment of Earnings Order (AEO) allows a creditor to secure payment of a debt by ordering the debtor's employer to make regular deductions from a debtor's salary, until the debt is paid in full. The outstanding debt must be over £50 and deductions can be made from earnings, pensions and Statutory Sick Pay, but only after tax and National Insurance contributions have been made. Benefits and tax credits are exempt from an AEO. An AEO is not available if the debtor is self-employed.
318. In the county court, AEOs are the second most used enforcement procedure following warrants of execution. In 2001, for debt cases, 77,876 applications were filed, which led to the making of 42,011 orders and 30,461 suspended orders.45 Other AEO processes are in use for council tax collection, Scottish debt recovery and Student Loans. The Child Support Agency (CSA) operates Deductions from Earnings Orders (DEOs) which are a similar process for Child Support payments.
|An important aim of the Review is to ensure that distress is not used indiscriminately or disproportionately. If the debtor is in employment, AEOs provide a viable and effective alternative; they allow the debt to be repaid over a period of time, which is less likely to cause the debtor hardship, and may reduce the likelihood of over indebtedness.|
319. The First Phase of the Enforcement Review made two recommendations to enhance the county court AEO process:
320. Courts rely on the debtor's completion of a means form (N56) to calculate a Protected Earnings Rate (PER) and a Normal Deduction Rate (NDR). Our consultation identified that this often leads to unnecessary delay; some debtors do not return the means form when asked to do so. If it is not returned after 14 days, the court bailiff must serve the documents personally on the debtor and this may require several visits to the debtor's address before service can be effected.
321. Consultation and subsequent work by the expert panel questioned the reliability of the information supplied by the debtors, as in most cases the court does not verify this.46 This may work either in the debtor's favour, to secure a low repayment rate; or in the creditor's favour, if the debtor underestimates or omits some of their expenditure and a high repayment rate is set.
322. A sample of all AEOs issued from May 2001 to May 2002 indicated that the average time taken from the filing of an application to the making of a suspended order was 7.56 weeks, and from application to the making of a full order, 11.60 weeks.
323. We also sought to establish how effective the existing process is and to ascertain data such as the average debt, income and outgoings of existing cases. A sample of almost 1,000 completed N56 forms, (statement of means completed by defendants) spread through ten different county courts was completed. The courts were chosen based on size, location and region so that the sample was representative. Below is a summary of some of the additional issues of the current process, mostly relating to the use of a means form:
Failings of the current procedure from the Creditor's perspective
Failings of the current procedure from the Debtor's perspective
324. The changes proposed will only affect the county court AEO process. This will require making minor amendments to the Attachment of Earnings Act 1971 through primary legislation, as this currently states an order must specify the NDR and PER. The new fixed table process will be set out in secondary legislation and prescribed in procedural rules. Set out below are the basic principles of the process at this stage, and we will continue to formulate the details in conjunction with stakeholders and other interested parties.
325. The proposed fixed table process removes the need for a means form to be completed; once the court has made an order, the employer would be instructed to apply the deduction rate specified in the tables. Currently, the time from application to the making of an order takes an average 7.56 weeks, and for a Surplus Order, 11.60 weeks if the debtor fails to respond; with fixed tables, the process can be reduced to just over 14 days.
326. Various formulas were considered such as linking the deduction rate to the size of the debt but concluded that a court AEO procedure should continue to be based on the debtor's ability to make repayments. Although fixed tables provide a minimal amount of information on which to set the deduction rate, this is sufficient for the purposes of deduction rates in civil debt recovery as broad assumptions on average expenditure can be made.
327. Fixed tables are already used for council tax in England and Wales. During 2001/02 at least 316,587 council tax AEOs were made.47 Fixed Tables are used in Scotland for civil debt recovery, and though these tables have far more salary ranges than the council tax system, the percentage deductions are very similar.
Diagram A. From application to full order
Table A. Council Tax Tables for debtors paid monthly
|Monthly Net Pay||Council Tax Table|
|Not Exceeding £220||0%|
|£220 to £400||3%|
|£400 to £540||5%|
|£540 to £660||7%|
|£660 to £1040||12%|
|£1040 to £1480||17%|
|Exceeding £1480||17% for first £1480, 50% thereafter|
328. By using the information provided in the sampling exercise (paragraph 323), we conducted a comparison exercise by applying the Council Tax Table to existing cases. This identified that using the net pay of existing cases, the council tax deduction rates led to far higher repayments for many debtors. The main reasons for council tax debts being set at a higher rate, are:
329. We therefore created two fixed tables with lower deduction rates than the Council Tax Tables, shown below:
Table B. Two Examples of Possible County Court Tables.
Please note: Tables X and Y are only experimental tables, proposals for the final tables have yet to be made. It is proposed that the power to set them would be in primary legislation with subsequent secondary legislation to determine the rates. The final rates will be set on advice of the working group (see paragraph 354).
|Monthly Net Pay||New Table X||New Table Y||Council Tax Table|
|Not Exceeding £220||0%||0%||0%|
|£220 to £400||3%||2%||3%|
|£400 to £540||5%||4%||5%|
|£540 to £660||7%||6%||7%|
|£660 to £1040||9%||8%||12%|
|£1040 to £1480||11%||10%||17%|
|Exceeding £1480||11% for first £1480,||12%||17% for first £1480,|
|30% thereafter||50% thereafter|
330. Using the two experimental tables, we have been able to make further comparisons. These have helped to address and disprove a concern expressed by some debt advice groups in their response to the original consultation, that the most vulnerable would be worse off through fixed tables. Table C shows that most debtors in the three lowest salary bands would pay less using fixed tables.
331. These tables prevent a deduction being made if the monthly net pay is below £220 a month. It may be argued that this is a change from the existing position as the court can currently make a deduction on a very low income. Our view, however, is that under the current process a deduction is unlikely to be made as the PER is likely to be exceeded on such a low salary. By preventing a deduction rate below £220, the court will be safeguarding the income of those on low salaries, though they may make payments if they wish under a suspended order.
332. Overall, it is unlikely creditors will receive lower repayments using fixed tables. Table D demonstrates that the two experimental tables would on average result in a slight increase and Table E shows that those in the higher salary ranges are likely to pay more than at present.
Table C. Pay ranges of sampled cases and how many would pay less using the Council Tax and experimental tables.
|Monthly Net Pay||Sampled cases
would pay less
using Council Tax
would pay less
using Table X
would pay less
using Table Y
|Not Exceeding £220||17||17||17||17|
|£220 to £400||77||64||64||70|
|£400 to £540||81||52||52||65|
|£540 to £660||106||45||45||55|
|£660 to £1040||435||84||138||151|
|£1040 to £1480||156||10||33||35|
*924 out of 961 had sufficient information for this exercise.
Table D. Average amount paid under each procedure.
|Council Tax||Table X||Table Y|
*This figure was obtained using either the debtor's offer or the rate set by the court, whichever was the higher.
Table E. Average deduction per pay range.
|Net Pay per
|Table X||Table Y||Council Tax|
|Not Exceeding £220||£138.36||17||£26.71||£0||£0||£0|
|£220 to £400||£327.30||77||£35.10||£9.82||£6.55||£9.82|
|£400 to £540||£473.65||81||£47.33||£23.68||£18.95||£23.68|
|£540 to £660||£603.66||106||£45.74||£42.26||£36.22||£42.26|
|£660 to £1040||£839.93||435||£67.51||£75.59||£67.19||£100.79|
|£1040 to £1480||£1195.35||156||£82.33||£131.49||£119.54||£203.21|
333. Careful consideration will be given to the deduction rates, but the expenditure of some households will be far greater or lower than estimated in the fixed tables. Therefore creditors or debtors who can prove the fixed table deduction rates fall well above or below what can be afforded will be able to apply to the court for a review. This would protect the most vulnerable and be fairer.
334. We have yet to finalise the details of the review process but can set out some of the principles being considered. It is likely to be a paper-based application in the first instance and will probably be considered by an officer of the court. The grounds for a debtor's application for a review will be based on the principle that the fixed table rates would cause financial hardship to a household. It is envisaged that the court will require some verification of incomes and expenditures to undertake an assessment and prevent the indiscriminate use of reviews.
335. In cases where a creditor makes an application for a review, again we believe there will have to be safeguards to prevent unfounded applications. It is likely that a creditor's application will only be considered on certain grounds, such as sufficient reason to believe a debtor has another income, such as income from rental properties. Unlike a debtor's application the income of others within the household will not be considered. This is on the basis that the debt is the sole responsibility of the debtor to repay.
336. Following a review, any party will be able to apply for an appeal hearing before a District Judge, though we believe the grounds of an appeal will have to be limited to ensure that the appeal process is not abused. During the life of an order, a review may be applied for at any time, though again we may restrict the grounds for repeated applications on the basis that circumstances will have to have changed.
337. A key argument for fixed tables is to reduce the administrative burden on employers by removing the need for the employer to input and regularly check the NDR and PER rates set to each individual case. In addition, for those employers with automated payroll systems, fixed tables enable the process to be automated once the initial data is inputted.
338. For this reason, it is preferable to only request employers to apply deductions in line with the fixed tables. If an employer were to be asked to administer a deduction above or below the fixed table rates, the burden upon them would be substantially increased, as payroll systems would have to operate another AEO process. The procedure would then be more burdensome than the existing one and implementation and compliance costs to business may then outweigh the overall benefits of fixed tables.
339. We therefore propose that if the court makes a reduced payment order following a review, the order is suspended and if defaulted on, a full order is made and the fixed table deduction rates applied.
340. Though we estimate the number of cases where a review leads to an increased repayment rate will be relatively low (see paragraph 335), an increased repayment order does have additional difficulties.
341. The order following the review will, as with reduced repayments, result in a suspended order being made. The difficulty is how the court encourages payment under a suspended order, as repayments will be lower than if a full order is made. For this reason, it would be helpful to have your views on how this may be done without increasing the burden placed on employers.
342. One possible option is that a penalty could be imposed following non-payment of a suspended order. This would then be added to the debt so that the full order using fixed tables would run until the new amount was repaid. The primary aim of the penalty would be to produce an incentive for the debtor to make repayments under a suspended order and not to provide creditors with additional payments.
|Question 2 - A penalty, added to the debt, would be a suitable way of enforcing compliance with a suspended order, which increases repayments above the fixed table rates. Yes or No? If your answer is 'no' please state why, and, if possible, provide an alternative.|
343. Currently a debtor may apply to the court for a Suspended Order to permit payments to be made direct to the creditor, without the need for an order to be sent to the employer. For debtors who do not wish their employer to know about their judgment debt this is an important device. Suspended Orders also prevent the employer being burdened by administering an AEO.
344. Another advantage of a Suspended Order is that it may assist in the debt being paid off quicker and result in the debtor making savings, because under a full order, the employer may take £1 per pay period to compensate for administering an AEO. If the debtor is paid weekly this will amount to £52 a year and may become a substantial sum if the AEO is in place for several years.
345. Our sampling exercise identified that 28% of Suspended Orders were turned into full orders because payments were not maintained. The sample looked at AEOs made within the last two years, so this figure may now be higher. One reason for this is that some debtors may make high repayment offers that cannot be sustained. So, we propose that Suspended Orders remain available and be automatically granted when first requested by a debtor. We will also look at how to make debtors more aware of the benefits of Suspended Orders and how to make them easier to comply with. One suggestion is that creditors state how they would like to receive payments when making an application. If they choose payment through a bank account and provide details, then a standing order can be arranged. This would be more efficient for the debtor and creditor.
346. To establish the opinions of employers on fixed tables, we conducted a consultation exercise with businesses. Firstly, a letter explaining our proposals along with a questionnaire requesting views was cascaded to local chambers of commerce. Secondly, to target those responsible for payroll administration, the letter and questionnaire were published in several payroll organisation magazines and websites. Responses indicated that 95% of employers favoured the introduction of fixed tables over the current AEO procedure.
Table F. Responses from Chamber of Commerce and payroll organisations
|Strongly in favour of introducing fixed tables||48||30.97|
|Total for fixed tables||148||95.48|
347. Our discussions with payroll organisations identified the need for the process to be simple to operate for employers, so that their burden is kept to a minimum. One problem with the existing process is that it requires regular checking to ensure the PER rate has not been exceeded once a deduction has been made.
348. It was established that the fixed tables used for council tax AEOs are considered relatively simple to operate for employers and as these are already widely used, many payroll staff are likely to be familiar with the process, and so will require little if any additional training to implement our tables. Another benefit of using fixed tables is that payroll systems capable of making automatic deductions will require fewer changes than for a totally new process. These factors should keep implementation and compliance costs as low as possible.
349. The overall result is that, over time, the burden on employers will be reduced, as there will be two very similar AEO procedures operating.
350. Current arrangements for multiple county court AEOs are that a party to the action must apply to the court, or the court may upon its own motion order the debts to become consolidated. The result of this is that each creditor is paid a percentage of the money received when the court has received sufficient funds to enable a payment. This is, however, subject to the court reviewing the PER and NDR, and these may be changed to account for multiple debts.
351. Using fixed tables, we remain of the view that employers can only be asked to implement one set of deduction rates and therefore multiple cases must be subject to the same deductions as in single cases. It is our view that upon the court being made aware of a second AEO, the court will automatically consider consolidation and all parties, including employers, will be given an opportunity to object. On receipt of an objection, the matter will go before a District Judge for consideration and in default of a response, a consolidation order will be made. Any decision would have the same avenues of appeal as currently exist.
352. The consolidation process would operate in a similar way as it does now and once the employer pays the money to the court, the payments are distributed to the various creditors. We propose that the court apportion the payments in line with the size of the debts. An example of how deductions for multiple cases could work:
353. A review process will also be available for multiple AEO cases. The details of how this would be operated by the courts is still to be agreed, and it is likely that the Court Service will, as at present, take a percentage of the money received to cover the additional administrative costs of dealing with multiple AEOs.
354. As part of our continued policy development on multiple AEOs we will work closely with colleagues responsible for the review of Administration Orders. To assist with the further work required to finalise the details of fixed tables, we have established a working group, made up of creditor and debtor support groups, judiciary and payroll bodies. The group will consider possible deductions rates, the criteria for a review process and other technicalities of the procedure.
355. We will also continue to work with stakeholder groups and consider their views as we finalise the details of the process and continue to work with other Government Departments such as the Office of the Deputy Prime Minister (ODPM), who have responsibility for Council Tax Tables.
356. Discussions with Payroll Organisations have identified areas in which we may assist employers in implementing fixed tables. It is our intention to update the existing employer handbook and to provide this on the Internet. We will also be exploring the possibility of producing a calculator on the Internet so employers with access will be able to calculate the regional deductions.
AEOs are an effective enforcement tool and offer a more socially acceptable enforcement option to distress, as they allow the debt to be repaid over a period of time, based on the debtor's ability to repay. The First Phase of the Review identified that the existing procedure has weaknesses and our subsequent work supports this conclusion. It has also enabled us to conclude that the introduction of fixed tables would lead to the following benefits to the AEO process:
357. The First Phase of the Enforcement Review identified that creditors find it difficult to track debtors who change employment when an AEO is in place. Consequently, some AEOs may be unsuccessful in recovering the whole debt or subject to significant delay if the debtor changes employment and fails to provide new employment details. A weakness in the existing procedure is that it relies on the debtor to provide employment details. There may be a number of reasons why a debtor is not forthcoming with this information; the effect is that the procedure is less effective.
358. The First Phase explored options for obtaining information to assist with enforcement; the proposed Data Disclosure Order would enable the court to obtain information following judgment. This could include obtaining employment details where creditors do not already have these but does not include obtaining new employment details once an AEO is in place.
359. Currently, if a debtor changes employment during the life of an order, the court will request the debtor to provide their new employment details under section 15 of the Attachment of Earnings Act 1971. Section 23 of this Act makes it an offence to fail to comply with Section 15, punishable by a fine or up to 14 days imprisonment. However, this is rarely used and has little effect.
360. Creditors are often left to obtain the debtor's new employment details themselves, and this may be costly, time-consuming or impossible. There is a risk that such enquiries will be intrusive on the debtor's privacy, as the court has no control over how information is obtained. If the creditor obtains new details, the order may be re-instated and re-directed to the new employer to make the appropriate deductions. If the creditor cannot obtain this information, the order remains adjourned and the creditor must either choose another method of enforcement or decide not to pursue the debt further.
361. The Review looked at how courts can track debtors who change employment and fail to inform the court or creditor when an AEO is in operation. Inland Revenue (IR) employee records are the most reliable source of information to enable tracking and we have held detailed discussions with IR in relation to the establishment of a data-sharing gateway. This proposal requires primary legislation, as at present Inland Revenue confidentiality legislation prevents them from providing this information.
362. Our discussions also included the Department for Work and Pensions (DWP), responsible for Child Support, and ODPM, responsible for council tax collection. Both departments support our work as they have similar difficulties in tracking debtors who change employment. While LCD has begun to explore this with the Inland Revenue, significant further work would be needed to explore whether it was possible to extend this to cover the AEOs issued by CSA and the many local authorities.
363. A high-level feasibility study has already been undertaken, to consider how such a link between existing court and IR systems may work based on existing systems. The study has indicated that a computerised link is possible and that the set up costs are likely to be in the region of £500k at current prices.
364. Before any tracking procedure commences, the debtor will be asked to provide the information voluntarily within a prescribed period. At the same time, the creditor will be told why payments have stopped and asked if they have the debtor's new employment details. The tracking mechanism will only be operated following non-compliance by a debtor and if the creditor has no new details.
365. The tracking process requires that a gateway be created allowing IR to share information with the courts. We envisage a computerised link, so that once an AEO fails due to a change in employment, the court will be able to locate the new work address and re-direct the order. The information would only state the debtor's new work address and be used solely to enable the court to re-direct the AEO to the new employer. Information would not be released to the creditor.
366. Further work, which may include consultation, on the possible usage and unit price costs of a tracking process, will have to be completed. At this time, it is envisaged that the costs will ultimately be borne by the debtor. The debtor will be informed of his responsibility at every stage of the AEO process and therefore the additional costs involved with tracking can be avoided by the debtor simply providing the information when first requested to do so.
|In order for the AEO procedure to offer a viable alternative to distress the court must have an effective method for ensuring orders are complied with. By creating a tracking system, it is likely that more AEOs will be successful in obtaining repayment of the whole judgment debt. By using IR records, the courts will have the most reliable source of employee details available to enable tracking to work. Any concerns about data sharing are more than balanced by the need for proportionate, controlled and appropriate use of information, solely for ensuring enforcement of a court order following wilful non-compliance by a debtor.|
367. A charging order is a means of securing a debt by placing a charge onto the debtor's immovable property, particularly a house or land, although it can also be used against shares. A charging order also allows a creditor to apply subsequently to the court for an order for sale. Charging orders therefore provide a means by which a creditor can gain access to any equity a debtor holds in a property.
368. Because charging orders need to be legally registered against a property, they are more complex and specialised than some other forms of enforcement. This is likely to remain the case - the Review has identified no significant means by which the charging order procedure should be changed. Registration against the property will therefore remain an essential feature of the process. It is our conclusion that the existing procedure works well in the main. Our recommendations are therefore of a procedural nature, to help the system run more smoothly.
369. Our proposals can be summarised as follows:
1. That enforcement by way of charging order should be made available in cases in which the debtor is not in arrears with an instalment order.
370. At present, the court cannot make a charging order when payments due under an instalment order are not in arrears. When making an application for a charging order, the creditor must specify that the whole or any part of an instalment (or instalments) due remains unpaid.
371. It leaves a major loophole that allows debtors with large judgment debts, paying off their debt in small instalments which are not reviewed regularly if the debtor's circumstances change, to benefit from the sale of a property without paying off the debt. The debtor thereby obtains a capital sum and is under no obligation to make any payments towards the judgment debt. However, if a charging order is in place, this provides the creditor with some security that the proceeds of the sale would go towards paying off the judgment debt. Although the debtor if he became aware of the sale could apply to the court for a review of the instalment order, the money from the sale could already have been disposed of and an opportunity to settle the debt more quickly would have been lost.
372. Most respondents to our consultation agreed that charging orders should be made available in cases in which the debtor is not in arrears with an instalment order, and that creditors should have the right to seek a charging order even if no arrears exist under the judgment order. They felt that the charging order provides a degree of security for payment of what would otherwise be an unsecured debt, albeit one subject to a county court judgment. It is this long-term security that encourages creditors to accept instalment arrangements spreading payments over a number of months, or even years, in the knowledge that their position is secure. Such an arrangement should have benefits all round.
373. It should result in debtors making reasonable yet affordable offers, because creditors are more likely to accept them if they will have access to security to back it up. It would avoid the current situation where creditors are forced to press for a forthwith judgment to enable them to get a charging order in place before beginning the lengthy negotiation process involved to obtain an instalment order.
374. Our research indicates that charging orders are used most often as a form of long-term security for a judgment debt. From a sample of 800 Charging Order cases of one major creditor, in only one was an application for an Order for Sale made (which was unsuccessful). In the overwhelming majority of instances, once the security of a charging order has been obtained, creditors (including major financial institutions and lenders) are more willing to accept long-term 'time to pay' agreements to clear the judgment debt, knowing that their position is secure. Without such security, creditors are often left with no option but to consider other methods of enforcement, such as warrants of execution or even bankruptcy, to the greater detriment of vulnerable debtors, whose home and personal property is at greater risk.
375. It is, of course, important that this 'security' should not be enforced by way of an order for sale until considerable arrears have accrued. All enforcement action must be proportionate to the size of the debt involved, and reflect the circumstances of the individual case. This is particularly so with charging orders, especially if the property is the family home. Judges will always bear in mind the full circumstances of the case, before granting an Order for Sale. For example, if the debtor is in a position to sell the family home, pay off the judgment creditor and still be able to adequately rehouse himself and his family to an acceptable standard. We are including a provision that an application for an Order for Sale cannot be made when a creditor is up to date with payments under an instalment order. We are also considering whether the subsequent Rules of Court should provide that applications for a Charging Order Absolute or an Order for Sale be heard in the debtor's home court.
|Question 3 - Should the application for a Charging Order Absolute or Order for Sale be heard in the debtor's home court?|
376. A debtor who is following the orders of the court in paying his or her instalments in full and on time should not, and will not, face the prospect of losing their home to an order for sale. We previously took the view, supported by our legal advice, that existing judicial discretion is sufficient to prevent this happening. This opinion was endorsed by respondents to the First Phase, and subsequently in our consultations with representatives of the finance industry and the judiciary. We believe, however, that with the extra safeguards we are putting into place we have made adequate provision to protect vulnerable debtors in all foreseeable circumstances.
2. That debtors who are the subject of a charging order, who have been keeping to the terms of an instalment order and who believe they would be unduly prejudiced against when selling their property, can ask the court to look at their circumstances and consider whether the charging order should be removed to allow the sale to take place.
377. It is important to ensure that debtors are not unable to move house if they need to, for example because of a change of job. The loss of the entire equity in a property could prevent the debtor from purchasing a new property, or from finding sufficient funds for a deposit on a rented property. This seems unduly harsh.
378. We therefore propose, that debtors who have kept to the terms of an instalment order and believe they would be unduly prejudiced when selling their property if the charging order remained in place, should be able to ask the court to consider whether it should be removed before the sale. The debtor's payment record already forms part of the judge's deliberations in charging order cases, and it is highly unlikely that a judge would force an order for sale when the debtor has kept up with their instalment order payments, except in the most extreme circumstances. The court could, at the same time, review the instalment order, and consider whether payments should be increased to take account of the change in circumstances.
3. That the Lord Chancellor be given the power to set financial and/or procedural limits for enforcement by way of charging order or order for sale in the future, should circumstances necessitate.
379. The Review seeks adequate safeguards for vulnerable debtors, with regard to charging orders and orders for sale. Members of the debt advice sector suggested the introduction of a lower limit on the size of debt for which a charging order or an order for sale could be sought. There were also calls for debts arising from credit agreements under the Consumer Credit Act 1974 to be exempted from enforcement by way of charging orders and orders for sale. The Review must balance the interests of the creditor with those of the debtor and his family. Similarly the judge needs some discretion when considering an application.
380. However, responsible creditors who are owed money and have gained valid judgments through the county court must retain the right to enforce that judgment by the most appropriate means.
381. It is clear from our discussions with the British Banking Association and the Finance and Leasing Association that the vast majority of financial institutions and their trade organisations are committed to sensible lending and enforcement practises. On the whole, they make use of charging orders as a way of securing their position, but do not resort to the use of orders for sale except in extreme circumstances. There are many reasons for this, which are outlined below.
382. Firstly, there is the existing judicial discretion. Lenders believe that judges make great use of their discretionary powers, and avoid granting orders for sale except in the most extreme circumstances.
383. Secondly, many lenders have already adopted a policy of minimum debt levels below which they do not pursue debtors by way of charging order. There are several reasons for this.
384. It is felt by many within the financial sector that judges, quite rightly, will exercise their discretionary powers and not even consider granting an order for sale for small sums. It is also felt that for small debts the charging order procedure is a bit of a 'sledgehammer' approach when there are other enforcement methods available that can work just as well, and is therefore just not a rational way to approach the problem. The cost of a successful charging order and order for sale (in terms of lawyers time etc. rather than the application fees payable) is not justified for such relatively small sums. Anecdotal evidence indicates that the 'High Street Banks' place a strong emphasis on retaining a good reputation. The potential damage from adverse press or television coverage for inappropriately pursuing an order for sale, e.g. on a property with children, elderly, infirm or disabled persons resident, would be detrimental.
385. In our view, at present there is no need to introduce any such limits, financial or procedural, on enforcement by way of charging order. We believe that denying responsible creditors the right to enforce in this manner will not solve the problems identified by the debt advice sector. Instead, they can be more effectively dealt with by tightening up on licensing procedures as part of the DTI's review of the Consumer Credit Act.
386. However, it is possible that in the future, further reviews or evaluation may indicate that such limits have become necessary. Therefore, we plan to provide the Lord Chancellor with the means to act swiftly to introduce such limits if the situation requires. It is proposed that the Lord Chancellor should be granted, by way of primary legislation, the right to impose, by way of secondary legislation, financial and/or procedural limits for enforcement by way of charging order in the future, should circumstances necessitate. It is envisaged that this method will be used, for example, to implement the provision that an Order for Sale cannot be applied for if a debtor is up to date with their instalment order payments. Indeed, we have been advised that this may well be the best way of achieving this. But it could also be used to place, for example, minimum financial limits below which a creditor could not apply for a charging order or order for sale.
387. It is hoped that such powers would never have to be used in this way, and that by working in conjunction with responsible lenders, they will make the necessary internal reforms of their processes that would mean such a step is unnecessary. We will continue to liaise closely with both the British Banking Association and the Finance and Leasing Association on this matter. As part of the evaluating and monitoring procedure of this policy we will be looking at the use of charging orders and orders for sale.
4. That orders for sale be retained.
388. Orders for sale are used particularly against debtors who have a large debt but few assets other than equity in property, or against debtors who just flatly refuse to pay when all other forms of enforcement available have been exhausted. Their use is, as we have seen, strictly controlled by the court, who have an obligation to consider the position of the creditor and compare that to the detriment caused to the debtor by the loss of his home. Some debtor organisations have called for the abolition of orders for sale. We have carefully considered this suggestion, and have concluded that such a step is not appropriate. Abolition of orders for sale would allow debtors living in expensive properties, and who have run up large debts, to avoid paying those debts whilst continuing to remain comfortably accommodated.
389. The existence of the order for sale also helps avoid situations where creditors may otherwise have no other option than to proceed with bankruptcy, which of course could lead to the judgment debtor losing much more than just his home. Removal of this enforcement option may well lead to an increase in the use of bankruptcy proceedings. Whilst creditors should retain the right to enforce their judgments by the most appropriate method, vulnerable debtors should be afforded adequate protection wherever possible. The Government has exhibited its commitment to this ideal through its proposed changes to bankruptcy procedures, with the express aim of helping debtors to get back on their feet.
390. We have concluded, in the light of all the evidence available to us, that the court has adequate discretion to refuse orders for sale if they would be unduly oppressive to a vulnerable debtor, and that orders for sale should be retained as part of the civil enforcement system.
391. Our current proposals form part of a comprehensive package of safeguards providing protection to vulnerable debtors, we believe these ensure that existing judicial discretion is a sufficient safeguard for vulnerable debtors.
Sections 1(5) and 3(1) Charging Order Act 1979
392. These sections establish that a charging order may be made either absolutely or subject to conditions, and that decision as to whether to make a charging order is discretionary.
Section 71(2) County Court Act 1984
393. This section establishes that any judgment or order of the court (including charging orders or orders for sale) may, at the discretion of the court, be stayed or suspended on such terms as the court thinks fit, such as, for example, payment by instalments.
Section 15(1) Trusts of Land and Appointment of Trustees Act 1996
394. Charging orders where a debtor has a shared interest in a property rather than outright sole ownership of the property as a whole are taken under this Act. The creditor must apply under section 14 for an order for the co-owners to sell in order to realise the debtor's interest in the property. However, section 15 states that the court must have regard for the following when determining any such application:
'Mesher' type orders
395. A 'Mesher' order is the name given to a particular type of order made in charging order cases, so called because it was first used in the case of Mesher vs. Mesher and Hall 1980. In this case a Charging Order Absolute was granted, but with the proviso that it could not be enforced as long as there was a minor resident at the property concerned. The use of such orders was confirmed by a ruling in the case of Harman vs. Glencross 1986.
Royal Bank of Scotland vs. Etridge 2001
396. This case established the precedent that, where a joint loan has been taken out by, for example, a husband and wife, with a jointly owned property as collateral, such as the matrimonial home, then it is incumbent on the lender to explain to both lendees at the time of signing the potential consequences of default. In this case it was ruled that one party had signed the forms without being informed by the lender of the possible consequences of non-compliance with the terms of the loan. Therefore the Royal Bank of Scotland did not have the legal right to enforce by way of charging order against the property.
Bank of Ireland Home Mortgages vs. Bell 2001
397. This case effectively established the circumstances in which an order for sale would be granted, even if the defendant claimed that the property concerned was the family home. Here, the equity available on the property was sufficient to pay off the judgment creditor and all other interested parties, including the defendant's ex-wife's beneficial share, and still leave enough money to adequately rehouse the defendant and his son, who as he was over 18 and not in full-time education was not considered a minor. The application for an order for sale was therefore granted, even though the defendant claimed it was the 'family home'.
Consumer Credit Act 1974
398. Some commentators have already argued that in passing the Consumer Credit Act 1974, Parliament has conceded that it considers it appropriate to confer greater legal protection upon borrowers under regulated agreements than upon other borrowers and general debtors. Certainly there exists within the terms of the Consumer Credit Act sections that refer to 'Time Orders' and 'extortionate credit bargains'.
The 'Civil Bench Book'
399. The 'Civil Bench Book', produced by the Judicial Studies Board, gives guidance to judges as to the conduct of hearing the various types of enforcement application. Section 11.6 concerns itself with the conduct of charging order applications. This section refers to the need to consider that everyone has the right to respect for his or her private and family life and home - there must be no interference by a public authority with the exercise of this right, except such as is in accordance with the law. It makes it explicit that, as a consequence, the judge has a duty to ensure that all steps taken in charging order cases have followed the correct procedures, and that the defendant is afforded a fair hearing. The section in the 'Civil Bench Book' on charging orders was expanded in August 2002, to give further guidance on the use of judicial discretion in charging order cases and includes examples of relevant previous cases.
400. As well as the examples above, a further safeguard recommended by the First Phase was implemented in March 2002. This built upon the 'discretion' outlined in section 1(5)(b) of the Charging Order Act 1979, which stated that the judge must consider evidence as to whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order. It is now incumbent upon the judgment creditor, when applying for an order for sale, to name all known creditors and existing charge holders and beneficiaries. If the judge feels that these other creditors will be unduly prejudiced against, he is to refuse the application for an order for sale.
401. DTI is reviewing the Consumer Credit Act 1974 (CCA). This fits with the Review's work on charging orders in two ways. Firstly, some in the debt advice sector call for CCA -regulated debts to be made exempt from enforcement by way of charging order (because it is seen as a back-door way for lenders to effectively secure what was originally an unsecured debt). Secondly, lenders who are responsible for the CCA debts that make up a large proportion of charging order cases have to be licensed under the terms of the CCA.
402. It remains the Government's position that responsible creditors who are owed money and have gained valid judgments through the county court should have the right to enforce that judgment by the most appropriate means available. Government does not believe that denying responsible creditors access to charging orders will solve the problems that the debt advice sector has identified. In our view it is by tightening up the licensing procedure, and by tackling the unscrupulous lenders at source, ensuring they are not able to gain a licence that many of the problems identified by the debt advice sector will be solved. LCD and DTI continue to liase closely on the planned reforms of the Consumer Credit Act 1974, as outlined previously in Chapter One. This is particularly the case with regard to proposals to change existing legislation to ensure greater use of the 'time order' provisions, and to ensure that the availability of these provisions is better and more widely promoted.
403. There have been representations from some in the debt advice sector who seek to exclude or restrict charging orders as a means of enforcing a judgment debt, particularly with regard to CCA-regulated debts. The policy reasons for not doing so have already been covered - but there are also sound economic reasons for this decision.
404. Firstly, one of the factors behind the current economic buoyancy of this country is the ready availability of unsecured credit at relatively low interest rates. Lenders are willing to grant loans on fairly easy terms because they know that if the worst comes to the worst, they always have the option of enforcing any judgment debt by way of charging order to secure their position. If this were not the case, they have indicated that they would have to seriously rethink their lending policies. They would either move towards lending on a secured basis only; or they would substantially raise interest rates on unsecured lending to make provision for the increased number of 'bad debts' that they would be unable to effectively pursue. Many people would as a result find their access to credit severely restricted, if not cut off altogether; and those with access to credit would be paying higher interest to compensate for, and effectively subsidise, defaulters.
405. Secondly, such a restriction would almost certainly lead to an increased use of bankruptcy proceedings for enforcement. In many cases, bankruptcy would become the only means of enforcement left available to lenders. In such cases, the loss of any property, such as the family home, becomes virtually automatic rather than discretionary. Our research has revealed that over recent years there has been a rise in the number of 'consumer' bankruptcies, and in 2000 'consumer' bankruptcies began to outstrip 'business' bankruptcies for the first time. We would not wish to exacerbate such a situation.
406. Our statistical research was carried out in two stages. The first involved approaching 22 County Courts, selected to represent a cross section of the country geographically but also courts which records showed had dealt with a large number of Charging Order applications. From those courts, we obtained details of 1,408 Charging Order applications made in the period January - June 2001. We analysed the case details to provide data regarding debt size, creditor and debtor types, the major users of Charging Orders as a method of enforcement and the number of cases that go forward for an Order for Sale. (In this sample, four cases [0.3%] went forward for an Order for Sale.) This enabled us to identify, for example, that at the lower end of the financial spectrum, Charging Orders are just as likely to be used by individual litigants in person as by financial institutions.
407. The second stage involved spending time at a county court, collating details of cases involving one major creditor organisation. We analysed the case details to provide data regarding the outcomes of these cases and the further actions taken, debtor types and size of debt, and identify any other trends apparent.
408. During our research into the use of charging orders, meetings were also held with representatives of the following organisations: the British Banking Association, the Finance and Leasing Association, the Money Advice Association, Citizens Advice, the Association of District Judges and Court Service. There have also been statistical compilation exercises involving Citizens Advice and the Insolvency Service. We thank them all for their continued help.
409. This section explains why Government is not planning to proceed with one of the proposals from the First Phase of the Enforcement Review, namely that joint accounts should be subject to attachment under Third Party Debt Orders (TPDOs) (previously known as Garnishee Orders).48 TPDOs are a method of enforcement used by creditors to secure the payment of an outstanding judgment debt by freezing then seizing money owed or payable by a third party to the debtor in order to pay the judgment debt.
410. The initial proposal to attach joint accounts arose from a belief that debtors could transfer funds into joint accounts to protect them from seizure by a creditor through a Third Party Debt Order (TPDO). Current law holds that a joint account, even if owned by a husband and wife, cannot be attached under such an order if the debt is owed by one spouse. Any changes to this position would require primary legislation.49 Phase One proposed such a legislative change as it was thought that this would provide access to business accounts, many of which are joint accounts.
411. Three main issues arose and were considered at length during our reappraisal of this proposal:
Defining Joint Accounts
412. A joint account is defined in law as a debt that is owed (by the bank) jointly to the account holders. However, a precise detailed statutory definition would be required to remove legislative ambiguity and limit the application of the law to appropriate joint accounts to be captured by TPDOs. Without such a definition, the category 'joint account' could include any account with more than one party to it, so partnership accounts, accounts where another is authorised to act as an agent, and trustee accounts could be considered to be joint accounts. It would be problematic if, and it was clearly not intended that, such accounts should be captured by TPDOs.
413. It is also difficult to define accounts by their use. Although it was the intention that business partnerships should be captured by attaching joint accounts, in practice this would prove difficult. Business accounts are often registered in the trading name of the company so the account would not be held in the name of the partners themselves. Any search conducted by the bank for the account holder's name with this kind of account would prove unsuccessful. It is also often the case that with large partnerships not all of the partners will be on the bank mandate. It would be difficult, if not impossible, for the bank to locate these accounts when searching their records.
414. Even if business partnership accounts were easily identifiable, they give rise to particular problems related to the nature of the judgment debt. Although partners are jointly liable for debts owed by the firm, any debts accrued when not acting in the usual course of business are not jointly owned by the other partners. Including a partnership account in a statutory definition could give rise to challenges by the other account holders, who should not be subjected to loss of business funds for other purposes. Partnership accounts, therefore, could not realistically be included in a statutory definition that would be effective in practice.
415. Recent changes to the Civil Procedure Rules add further procedural difficulties to attempts to attach joint accounts. The rules require banks to undertake a search for any other related accounts held in the name of the debtor. If this were extended to joint accounts, existing systems would not always be able to find a joint account with only the name of one partner. Such operational difficulties substantially affect the success of the scheme, especially for business accounts where the partnership names would often be unknown to the creditor.
416. Conversely, legislation would need to address the situation where multiple accounts were identified, in order to tackle the issue of priority. If a bank were to find itself with several accounts in the name of the debtor, they could be faced with the choice of attaching one large joint account or attaching several small single accounts. Whichever approach were to be taken, there would be significant cost involved and extra procedures necessary for the proposal to function successfully. This would impose financial and administrative burdens, thereby complicating a system that the Review intends to simplify.
417. Any definition of a joint account, for practical and operational reasons, is likely to entail the exclusion of trustee and business accounts. There is a definite risk with the latter, therefore, that the effect would be felt not by the business sector as intended, but by domestic debtors. This is contrary to the intention of the policy recommendation and is likely to have a differential impact on couples.
Allocating Ownership of Funds in Joint Accounts
418. It was proposed that any attachment of joint accounts should be subject to a 50% maximum attachment (proportionately less if more than two account holders), to ensure a minimum level of protection for the other account holder/s. Further consultation with financial institutions reveals that they would be unable to determine precisely the proportions of an account belonging to each of the account holders. Legislation would be needed to establish a formula to allocate the proportion of an account that belonged to each of the account holders. Such a legislative provision should be clear and unambiguous, otherwise the financial institutions would be accountable for all decisions made estimating the proportions held by each account holder. This would place the financial institutions in a contentious and unacceptable position.
419. The amount in the account could be divided by the number of account holders, with each account holder being allocated an equal proportion of the funds. The banks and building societies would be responsible for making this calculation since the court would not be aware of the contents of the mandate, nor the exact number of account holders. For such a procedure to address ECHR concerns, there should be a mechanism for appeal by the other account holder/s.
420. However, the proposal is still problematic. Proving the exact amount of funds owned by individual parties to an account is extremely difficult, as statement records do not necessarily indicate ownership of the funds. Any legislation would require detailed rules addressing all of the issues and could generate complex and lengthy procedures in the courts. The costs would either have to be built into the price of a TPDO or borne by the courts. This would be contrary to the aim of the Review in seeking to simplify the civil enforcement process and increasing access to justice.
Addressing the Rights of 'Innocent' Third Parties
421. Although the TPDO applies to the funds owned by only one of the joint account holders, the other account holders - the 'innocent' third parties to the account - need to be notified of the order. Such notice would be necessary, firstly so that they could have the option to challenge the deemed proportion of ownership, and secondly so that they would be aware that the account had been frozen and the reasons for this action.
422. Notice could be given by one of two methods. Either the court could send two forms to the bank: a notice to inform the other account holders, and the interim TPDO itself. Once the bank had established there were sufficient funds they would inform the other account holders by sending a copy of the notice to each of them. This could place a significant administrative and financial burden on the bank where multiple account holders were involved. Alternatively, the bank could notify the court of the names and addresses of the account holders and the court could then send out notifications to the other account holders. The court would not be able to send out the notification at the same time as sending the order to the bank as they would not yet have received the names and addresses of the other account holders. In this instance the court would first send the bank an interim order and an order for information concerning the names and addresses of the other account holders. The bank would then act upon the interim order and inform the court of the names and addresses of other account holders. Finally, the court would write to the account holders informing them of the TPDO.
423. Both options impose financial and administrative burdens on the courts and the financial institutions and further complicate a system and an enforcement method that the Review is intended to simplify and streamline. The increased cost involved in notifying the other account holders would also have to be built into the cost of applying for a TPDO, making it an expensive and less desirable enforcement option.
424. There are further potential problems with the proposal in relation to notice. It is proposed that the other account holder/s be informed when the court is informed of the details of the contents of the account, i.e. at the stage of the interim order. This could be considered a breach of the debtor's right to privacy with regard to his or her personal information. The issuing of an interim order does not guarantee the issuing of a final order, and it may be the case that the final order is not actually made. The other account holder would then have been made aware of private details concerning the debtor's accounts where it was not necessary to do so for the payment of the debt. This could potentially give rise to ECHR concerns.
425. Freezing a joint account for the period between an interim and a final TPDO also gives rise to difficulties. There are two possible options available to the financial institutions in relation to freezing the account. The bank may freeze just the proportion of the account allocated as belonging to the debtor, therefore allowing the other account holder/s to continue accessing their proportion of the account. However, financial institutions may be technically unable to do this, and even if they could they would require extensive guidance on the process of freezing a proportion of the account and what actions could follow the freezing, for example determining withdrawal rights against the remaining balance. Depending on the nature of the mandate there may be nothing to stop any of the account holders taking out the rest of the money in the account and therefore ignoring the allocations made by the court.
426. The other account holder/s may also suffer at the hands of the unscrupulous debtor once the debtor's proportion of the account money has been frozen. There is nothing to prevent the debtor removing further money from the account despite the possibility of their proportion of the funds having been removed to pay off the debt. Unless transactions require authorisation by all account holders, the other account holder/s may be susceptible to abuse of the account by the debtor.
427. The second and more viable option, therefore, would be for the financial institution to freeze the whole account, then take out the money covering the amount in question from the proportion of the account which has been allocated to the debtor and place it in a separate account. The other account holder will therefore be denied access to their money for a period of up to a month through no fault of their own. Although hardship funds may be made available, similar to those available to the debtor, thereby introducing further hearings to the process, it remains an unsatisfactory situation for the innocent account holder/s.
428. The policy proposal as a whole is therefore contrary to the aims and objectives of the Enforcement Review. It imposes significant burdens on the courts and the financial institutions and, rather than simplifying the enforcement process, creates an over-complicated procedure.
429. In addition, even if the proposal were introduced and all procedural obstacles overcome, it would still be possible for debtors to evade TPDOs even though they may have sufficient funds. A debtor could easily transfer funds into an account held in the name of someone else thus preventing their name being connected with the account when the bank undertakes their search. This is something that legislation cannot address.
430. In the light of the arguments set out above, the benefits of introducing a policy to attach joint accounts under TPDOs would be disproportionate to the range of operational, cost and policy difficulties which would impact on debtors, creditors and third parties alike.
We would welcome responses to the following questions set out in this paper:
Question 1: In order to establish an evidence base to inform the future regulator, we seek views on:
i) which of the three up-front fee options would be preferable?
ii) whether the same type of up-front fee should apply to all debt stream areas?
iii) If a fixed fee were introduced, at what level should it be set?
iv) where upper and lower limits are set, what should those limits be?
Question 2: A penalty, added to the debt, would be a suitable way of enforcing compliance with a suspended order, which increases repayments above the fixed table rates. Yes or No? If your answer is 'no' please state why, and, if possible, provide an alternative.
Question 3: Should the application for a Charging Order Absolute or Order for Sale be heard in the debtor's home court?
If you are a representative group please give a summary of the people and organisations you represent.
Please send your completed response to:
Civil Justice Division
Lord Chancellor's Department
Room 3.23 Selborne House
54-60 Victoria Street, London SW1E 6QW
45 A proportion of suspended orders will be converted to full orders as a result of non-compliance. Our sample (paragraph 323) identified that 28% of suspended orders were made into full orders
46 The First Phase of the Enforcement Review set up four expert panels whose membership was drawn from across the whole range of interest groups to generate ideas, solutions to the perceived problems and develop proposals. The membership of the panel responsible for Attachment of Earnings, Charging Orders and Garnishee Orders comprised: Jill Collins, Court Manager, Woolwich County Court; Ruth Dixon, Debt and Insolvency Manager, Travell Horner & Partners, Solicitors; Caroline Harmer, Legal Training Consultant; William Lewis, Head of Legal Support, Recoveries, Barclays Bank; Nick Pearson, National Money Advice Co-ordinator, Federation of Independent Advice Centres; and the following attended one meeting each: Roger Denman, Treasurer's Department, London Borough of Greenwich; and Mike Nicholas, Publishing Manager, Butterworths Tolley
47 Not all local authorities provide this statistical information.
49 The legal position regarding joint accounts stems from the case of Beasley v Roney in 1891, which establishes that 'the debt owing by a garnishee to a judgment debtor which can be attached to answer the judgment debt must be a debt due to the judgment debtor alone, and that where it is only due to him jointly with another it cannot be attached.' The current legal position confirming this approach was stated in the case of Hirschon v Evans  3 ALL ER 491 by the Court of Appeal