Indirect benefit to co-owner does not prevent equity of exoneration arising in their favour
In the recent decision of Armstrong v Onyearu and another  EWCA Civ 268, the Court of Appeal held that an indirect benefit to a non-bankrupt co-owner will not defeat the principle of equity of exoneration.
Where jointly owned property is charged to secure the debts of only one of the joint owners, then, under the equitable doctrine of exoneration and in the absence of evidence to the contrary, the other joint owner, is entitled, to have the secured indebtedness discharged so far as possible out of the debtor’s interest in the property, thereby enhancing the value of the other joint owner’s share of the property.
The classic example of a situation where the equity of exoneration arises is where spouses mortgage the jointly-owned family home as security for one spouse’s business ventures. In some situations, such as in this case, the spouse’s business fails and bankruptcy ensues. The leading modern authority is Re Pittortou  1 WLR 58, which is commonly cited in cases dealing with the property of separated unmarried couples and bankrupt spouses and partners and has generally been treated as stating the law on the subject. The position in English law following Re Pittortou can be summarised as follows:
- Where jointly-owned property is charged to secure the indebtedness of one of the joint owners, there is an evidential presumption that the parties intended that, as between themselves, the liability should fall on the debtor’s share of the property.
- Where the benefit was direct or closely connected to the secured indebtedness, the circumstances may be such that this presumed intention does not arise at all (e.g. where the borrowing was incurred by a spouse to repay debts incurred to fund the couple’s joint extravagant lifestyle). In these situations, the debts of one co-owner are in substance the debts of the other co-owner(s) or the co-owners jointly.
- The presumed intention, which follows from the nature of the transaction and the position generally of a surety, may be rebutted by evidence of a different intention.
- In the absence of evidence of an actual contrary intention, evidence that the debt is incurred for the direct benefit of the co-owner will rebut the presumed intention.
- Historically, it was the case that household expenses were ordinarily the responsibility of the husband but this is no longer the case (as shown by Re Pittortou, where the burden of borrowings by one joint owner to fund the ordinary living expenses of both co-owners is assumed to be shared equally between them).
- The equity applies to borrowings by one co-owner to fund his or her business, even though the other co-owner may derive some indirect benefit from the business, by way of contributions to joint living expenses from the business owner’s income. Any benefit must, however, have a financial value.
- The intention of the parties is to be determined as at the time the charge is given, although subsequent events may be considered for the light they shed on what the intention was.
- The particular facts of each case need careful consideration to determine whether the equity of exoneration applies.
The principle has been the subject of much debate, specifically whether it is still as relevant in the 21st century as it was when it was first introduced (with a view to protect married women’s property rights) before the introduction of the Married Women’s Property Act 1882.
The Court of Appeal in Armstrong v Onyearu considered, however, that it is as much a feature of contemporary law as it was of equity in the eighteenth and nineteenth centuries.
In this case the respondents were a married couple. The applicant was the husband’s trustee in bankruptcy (“the Trustee”). The husband was the sole registered proprietor of the property, which he had bought in 2000 as the family home for the couple and their children.
The couple operated separate bank accounts as there was no joint account. The husband met the monthly interest payments on the mortgage and his wife paid the utility bills, council tax and all other household expenses. The couple generally contributed jointly to the family’s living expenses, including the upkeep and maintenance of the property. There was no evidence of an extravagant lifestyle.
In 2005, the husband obtained a loan to meet his personal business debts. It was secured by an all monies charge in favour of the bank, originally granted to secure the loan taken out to purchase the property. The husband had informed his wife of the loan but did not seek her consent. There was no agreement between them as to whether and, if so, how the liability on the loan facility should be shared.
The husband got into further financial difficulties in around 2009 and his business closed in 2010. The wife took over responsibility for the monthly interest payments but the husband was declared bankrupt in 2011.
The couple maintained that they beneficially owned the property in equal shares. A declaration to that effect was made by Chief Registrar Baister, and was not opposed by the Trustee, in an application brought for the sale of the property. However, the Trustee’s application was dismissed as the court held that the equity of exoneration applied, so that the wife’s share in the property was not subject to her husband’s debt.
The Trustee appealed on the grounds that the equity of exoneration did not arise because, although the loan facility was directly for the husband’s benefit only, the wife had indirectly benefitted from it i.e. the funds had enabled the husband to carry on his business to meet the mortgage interest payments.
The Trustee’s appeal was dismissed but permission to appeal was granted due to an important point of principle. The High Court had held that the equity of exoneration applied in favour of the wife because the business loan was the sole liability of the husband. The wife had her own, separate, income as did their children, however, the Trustee contended that the wife received an indirect benefit from the husband’s business loan, which was sufficient to displace any inference in favour of the equity of exoneration applying.
The Court of Appeal unanimously dismissed the Trustee’s appeal. It held that the purpose of the loan was to pay the husband’s creditors and, as such, the husband and his creditors were those that directly benefitted.
Any anticipated benefit for the wife, assessed at the date of the loan, was subject to a double contingency: first that the husband’s business would survive and secondly that it would be profitable. This basis was too remote for the court to infer or presume that the wife’s intention was to bear the burden of the loan equally with her husband. Any indirect benefit for the wife was incapable of valuation and unlikely to bear any relation to the amount of the loan.
This case raised an important point on the modern application of the equity of exoneration, specifically, where the joint owner had received an indirect, as opposed to a direct, benefit. Previously, there was no English authority directly on this point so the case provides welcome clarity for insolvency practitioners.
For more information about this article or for any insolvency queries please contact Lauren Hartigan-Pritchard on 01905 677051 or firstname.lastname@example.org