The Court of Appeal recently made an important decision on the equity of exoneration in the case of Armstrong (As Trustee In Bankruptcy Of Onyearu) V Onyearu & Anor (2017).
The equity of exoneration arises where one joint owner of a property charges the property for their sole benefit. The other co-owner is treated like a surety and is presumed to be entitled to be exonerated out of the other owner’s share. This equitable principle is based upon inferred intentions but can also be rebutted on the particular circumstances of the case.
A classic example where this equitable principle has arisen is where a wife mortgages the family home, together with her husband, as security for the husband's business ventures for the husband’s sole benefit and then claims that the loan should be taken solely against the husband’s share of the equity.
The Facts
This case concerns a husband and wife who were joint beneficial owners of their family home.
The husband was a solicitor working in a sole practice and his wife was employed as a lecturer. The couple had separate bank accounts but contributed jointly to the family's living expenses. The husband met the monthly interest payments on the mortgage and the wife paid the utility bills, council tax and all other household expenses.
The husband obtained a loan for the benefit of his legal practice secured on the family home. The husband was subsequently made bankrupt and the trustee in bankruptcy applied for the sale of the family home. In defence to this the couple claimed that the equity of exoneration applied so that the wife's share in the property was not subject to the husband's debt.
The trustee claimed that the equity of exoneration did not arise because, although the loan was for the husband's benefit only, the wife had obtained an indirect benefit from it as it enabled the husband to carry on in practice and hence continue to earn and meet the mortgage payments on the property. At first instance the Judge found in favour of the wife as it was held that the business loan was the sole liability of the husband and the wife had her own separate income so the equity of exoneration applied. The trustee then appealed this decision.
Rebuttable Presumption
The key focus for practitioners and trustees has been and continues to be whether the wife or co-owner of the property received a benefit from the loan over which the property was secured against. This stems from the case of Re Pittortou [1985] in which the court stated that exoneration is a presumption which can be rebutted if the person in whose favour it operates received direct benefits from the lending. In that case the presumption was rebutted as the business made payments toward household expenses such as the mortgage, food and utilities.
In Chawda, Re [2014] it was held that the wife of a bankrupt was not entitled to assert the equity of exoneration in respect of part of the proceeds of a re-mortgage. She alleged that the re-mortgage was for the sole benefit of her bankrupt husband but the court held they both benefited from the husbands business, they pooled their earnings together and took the ‘ups and downs’ of the business. Therefore the presumption was rebutted. The court held that it would be unfair to allow a wife to take the benefits of a business backed by a loan/mortgage and then subsequently seek to enforce the right of exoneration to his disadvantage and the disadvantage of his creditors.
Indirect Benefit
This presumption is exactly what the Trustee in bankruptcy attempted to rebut in Onyearu by stating that the wife received a benefit, as the husband’s lending allowed him to continue to earn and use his drawings to meet the mortgage payments.
However, it was held that there was no authority to support the view that the existence of some indirect benefit to the non-debtor co-owner would prevent the equitable principle from arising.
In this case it was held that the indirect benefit was not sufficient on its own to deny a right of exoneration to the wife who acted as surety. Also at the time of securing the loan the prospect of benefit was wholly uncertain and incapable of valuation as the parties did not know if the husband’s business would survive or not. Importantly here also was the fact that the wife had her own separate income.
Conclusion
It is therefore clear from case law that where a loan is for the sole benefit of the husband and used by him for such, the presumption applies, but where part or all of the funds are used for the joint benefit of both co-owners, the presumption does not apply. For an indirect benefit it would also seem that the presumption applies as in the present case. However where the wife receives a direct benefit from the loan the presumption can still be rebutted.
What can practitioners do?
Investigate the family finances. For example, is the borrower the sole source of income or are resources shared, and does the family unit take the ups and downs together rather than the finances being separated? What benefit does the family/wife take from the business entity that received the financing?
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