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 so that the money due under the charge is just taken from the borrower’s share of the equity. 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 and if the husband is made bankrupt the wife then claims that the loan should be taken solely against the husband’s share of the equity of the home and she should keep her share intact.
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  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  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 husband’s business, they pooled their earnings together and therefore both bore the ‘ups and downs’ of the business. In that case 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 the bankrupt’s disadvantage and the disadvantage of his creditors. In Onyearu the court referred to Chawda and unhelpfully stated that the result of any case would depend on the facts of each case rather than setting a rule that could be followed.
In Onyearu the Trustee in bankruptcy attempted to rebut the presumption by stating that the wife received a benefit of the husbands lending as it 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. Importantly here also was the fact that the wife had her own separate income.
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, then the presumption applies but where part or all of the funds are used for the joint direct 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?
Practitioners should therefore fully 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? Practitioners should also query what benefit the family/spouse takes from the business entity that received the financing?