Under the equity of exoneration, where jointly owned property is charged to secure the indebtedness of one joint owner, the other joint owner is presumed, in the absence of evidence to the contrary, to be acting as a surety only, and is entitled to be exonerated by the principal debtor. This long established principle remains relevant in the modern day, as was recently demonstrated in Day v Shaw.

Mr Shaw was the director of a company that had borrowed monies from Barclays Bank. He and his co‑director provided guarantees in respect of the debt. In addition, the property that Mr Shaw jointly owned with Mrs Shaw was charged as security for payment of the sums due from the company to the bank, and sums due from Mr Shaw under the guarantee. The company was unable to repay the debt and became insolvent, and the house was sold. Mr and Mrs Shaw were agreed that she should be indemnified by him in relation to her liability under the debt, and that such an indemnity should be subject to an equity of exoneration, such that her beneficial interest in the property should increase, leaving him with no part of the net proceeds of the sale. However, this would have left Mr Day, another of Mr Shaw’s creditors who had obtained a final charging order over Mr Shaw’s interest in the property, with nothing. Mr Day therefore contended that Mrs Shaw was not entitled to the indemnity and equity of exoneration.

Mr Day argued that the company was the principal debtor rather than Mr Shaw and so the equity of exoneration did not apply. However, the judge did not agree. Although there was no doubt that the company was the principal debtor, the real question concerned the respective rights of the guarantors and the mortgagors. The judge held that in substance the guarantors were sureties for the company’s debts, and the mortgagors were sub‑ sureties. As a result, the mortgagors were entitled to be indemnified by the guarantors in just the same way as the guarantors were entitled to be indemnified by the principal debtor and indeed, as between the guarantors and the mortgagors, the guarantors were the principal debtors. Thus Mrs Shaw, as mortgagor, was entitled to be indemnified by Mr Shaw, as guarantor. As the judge noted, this right to an indemnity was not merely a personal right, but was a proprietary right binding Mr Shaw’s share in the property and having priority over Mr Day’s charging order. Thus the liability for the debt fell first on Mr Shaw’s share.

As this case demonstrates, the equity of exoneration can have a significant role to play where two secured creditors are competing in relation to a single property. However, it is important to remember that the presumption that a joint owner is only acting as surety can be displaced, and it will therefore be vital to investigate the true nature of the circumstances of the indebtedness.

Day v Shaw & Anr [2014] EWHC 36 (Ch)