The equity of exoneration is a principle which arises at the difficult intersection of the law of sureties and proprietary interests in jointly-owned property – commonly, family homes. It is a common law doctrine which saw much development in the latter part of the 19th Century, and had not been properly considered by the Court of Appeal since 1898 before the case of Williams v Onyearu.
The equity arises fairly frequently in contemporary practice – almost always where the sale of a jointly-owned property is contemplated. In very brief summary, the principle is that where A and B jointly own property, and B incurs a debt which is solely for his own benefit but which is secured over the whole property, A is entitled to a charge over B’s interest in the property to the extent that B’s indebtedness is discharged out of A’s share of the property. The practical result of this is that where the property is sold the secured creditor will be paid out of B’s share first, and will only have recourse to A’s share of the property once B’s interest in the property has been exhausted.
Often, this issue is of vital importance. The application of the equity can result in B’s interest in the property being wholly exhausted in discharging the secured debt, leaving him with no equity. If the underlying application for the sale of that property is parasitic upon B’s interest in it, the entire application may turn on whether the equity of exoneration does or does not arise.
For ease of reference, this note will refer throughout to a joint owner who is a debtor as ‘B’, and to the joint owner against whose interest B’s debt is secured as ‘A’, in accordance with the example above.
The facts and procedural background
Mr and Mrs Onyearu were at all relevant times a married couple. Mr Onyearu was the sole registered proprietor of the matrimonial home, which was purchased with a loan secured on the property and in Mr Onyearu’s name only.
Both Mr and Mrs Onyearu were in work at all relevant times. They kept separate bank accounts into which they each paid their own income, and out of which various household expenses were paid. For a significant period, Mr Onyearu alone discharged the mortgage payments while Mrs Onyearu met the cost of all other household outgoings. However, when Mr Onyearu’s solicitor’s practice began to experience financial difficulties, she took over the mortgage payments in addition to the other expenditure.
At the same time, Mr Onyearu took out a further loan from the mortgage lender. This loan was secured by the existing charge, which now took effect as an all monies charge. The sums advanced were for the sole purpose of discharging the liabilities of Mr Onyearu’s solicitor’s practice. Mrs Onyearu knew of the loan, and neither consented nor objected to it.
Ultimately, Mr Onyearu’s attempts to salvage his practice were unsuccessful, and he was declared bankrupt. His Trustee in Bankruptcy made an application for possession and sale of the property. In the course of that application, a declaration was made that Mr and Mrs Onyearu beneficially owned the property in equal shares.
Further directions were then given, before the application was ultimately dismissed. Deputy Registrar Middleton held that the equity of exoneration did apply, and the secured debt exhausted Mr Onyearu’s interest in the property. The Trustee in Bankruptcy therefore had no interest in the property, and there was no basis for an order for possession and sale.
Permission was given to appeal by the Deputy Registrar. The appeal was heard, and ultimately dismissed, by Mr Jonathan Klein sitting as a Deputy Judge of the Chancery Division. Lewison LJ then granted permission for a second appeal, which was heard before Vos, David Richards, and Elias LJJ. The sole point in issue on appeal was how the equity of exoneration is to be applied where one joint owned has received a form of indirect benefit as a result of the secured debt incurred by the (or an)other joint owner.
David Richards LJ gave the sole judgment dismissing the appeal.
The Court of Appeal’s decision
At the outset, Richards LJ confirmed that the equity has a wider application than only co-habiting couples. It is part of the law of sureties, and as such can apply in any instance where there is a principal debtor, a surety, and a jointly owned property upon which the principal debt is secured.
In these circumstances, there is an evidential inference that the equity will arise. This can be rebutted by any evidence which shows a contrary intention – either actual or inferred. In the absence of evidence as to actual intention, evidence which shows that the debt was incurred for A’s benefit will rebut the presumed intention. Rights under the equity of exoneration arise at the time the property is charged; it is at this stage that the intentions of the parties are to be assessed.
However, it may be the case that the inference never arises in the first instance. Where that is the case, there will be no presumption to rebut. This will depend on the particular circumstances of the case, but could include a scenario in which B provides consideration to A in exchange for A’s agreement to the property being charged. There are cases in which the court has declined to apply any inference in circumstances where the loan moneys were applied to the benefit of the whole family (for example, discharging shared household expenses). One formulation of the test whether the inference will arise is whether the secured debt is in substance the debt of both A and B, notwithstanding that it is B’s debt alone as a matter of law.
The equity of exoneration is entirely distinct from the doctrine of constructive trusts, and is not to be approached in the same way (save that both doctrines require an examination of all the relevant facts of the case). An open-textured approach is not appropriate, and the issue ought to be approached in the structured manner set out above.
Richards LJ then turned to the submissions made by the Trustee. In essence, the Trustee argued that families ought to be regarded as operating as a unit. In that light, where A and B are married, any loan for the purpose of B’s business will always be to the indirect benefit of A (and the household as a whole) as profits from B’s business can be used to meet household expenditure.
The Court of Appeal rejected the Trustee’s submissions on indirect benefit for three reasons. First, the courts should not apply a blanket presumption that families will ‘operate as a unit’ in the sense contended for by the Trustee. A family may well ‘operate as a unit’ in some ways, but this says nothing of how the individuals within that family arrange their finances. It may be the case that the finances of a married couple are wholly intertwined, in which case the equity of exoneration may well not apply, but this will not necessarily be the case.
Secondly, the indirect benefit to Mrs Onyearu (and to any ‘A’ in her position) is subject to a double contingency. For Mrs Onyearu to obtain any benefit from a loan to Mr Onyearu’s business, that business would not only have to survive but would also have to turn a profit. Given that the relevant date for assessing the intentions of the parties is the date of the loan transaction, it is clear that any benefit to Mrs Onyearu would be insufficiently certain to disapply the doctrine.
Thirdly, an indirect benefit is not capable of financial valuation and is of a different nature to moneys used for joint expenditure. Richards LJ approved the decision in Cadlock v Dunn  BPIR 739 in this regard. That case concerned a wife charging her interest in a property to allow her husband to re-acquire his share in the property from his trustee in bankruptcy. The benefit to the wife in that case was in being allowed to stay in her home, which was not sufficient to prevent the equity of exoneration from arising.
The conclusion of the Court of Appeal on the matter in issue was clear: the doctrine will apply where B borrows money to fund his business, even if A derives an indirect benefit from that borrowing. In the present case, the Onyearus did not operate financially as a single unit and the indirect benefit to Mrs Onyearu was not sufficient to rebut the presumption that the equity of exoneration would apply. The appeal was dismissed.
The decision in Williams v Onyearu provides greater certainty as to the correct approach to cases in which the issue may arise, but preserves the flexibility of what is at heart an equitable doctrine.
This may well be a disappointing decision to those who are frequently in the position of a third party attempting to enforce against jointly owned property – institutional creditors and trustees in bankruptcy being the two most obvious examples. It would appear that there is now less scope for arguing against the equity of exoneration applying than might previously have been the case. However, the conclusion of the Court of Appeal is not entirely surprising: if the Trustee’s submissions had been accepted then it would significantly narrow the application of the equity – it would potentially be limited to circumstances where B had borrowed profligately, to fund a second household, or cases of that nature.
That said, what will be of comfort to third parties is the clarity as to the approach to the doctrine, and the way in the scope of factual enquiry has been limited. In particular, the rejection of an approach mirroring that used for constructive trusts will be welcome news. The merits of equity of exoneration arguments, and the strength of the relevant evidence, will likely be more readily evaluated by third parties than the position in relation to constructive trusts (especially for trustees in bankruptcy – who will have some insight into the financial affairs of the bankrupt).
Williams v Onyearu provides a useful review of the law in this area, and reaffirms the importance of the equity of exoneration in contemporary practice. The doctrine is an important tool for doing justice between joint owners, and the judgment reiterates a simple and uncontroversial proposition: the business debts of a husband cannot be assume to be the debts of his wife.
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