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26 June 2017

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Court of Appeal gives clarity on modern day “equity of exoneration”

Posted by: Alison Butler

In the first case in over 100 years, the Court of Appeal has provided clarity on the proper approach to the equity of exoneration in the context of a “modern” co-habiting couple.

The legal concept “equity of exoneration” typically applies in respect of co-owners of a property – commonly family homes. It arises where one co-owner uses that property to secure a debt for their sole benefit. The other co-owner may be entitled to a charge over the other owners interest in the property, to the extent that debts are paid out of their own share.

The case of Armstrong v Onyearu [2017] EWCA Civ 268 is the first case to be heard by the Court of Appeal in 100 years (since Paget v Paget [1898] 1 Ch 470.) The Court has clarified the proper approach to the equity of exoneration in the context of a “modern” co-habiting couple and effect of the non-bankrupt spouse receiving an indirect, as opposed to a direct benefit from such borrowings.

Mr and Mrs Onyearu are a married couple and Mr Onyearu was the sole registered proprietor of the matrimonial home. Prior to his bankruptcy Mr Onyearu took out a secured loan against the property which he used to meet his business liabilities he incurred as a sole practicing solicitor. On an application brought by the Trustee for sale of the property Mrs Onyearu obtained from the court a declaration that they jointly owned the beneficial interest in the property.

The charge in relation to the business borrowings exhausted Mr Onyearu’s beneficial interest in the property. The issue before the Court of Appeal was whether Mrs Onyearu received a direct or indirect benefit from her husband’s business borrowings that would entitle Mr Onyearu’s Trustee in Bankruptcy to draw on Mrs Onyearu’s share of the property to equally discharge her husband’s business borrowings from her beneficial interest in the property.

The Trustee in Bankruptcy brought the appeal on the basis that Mr and Mrs Onyearu were a co-habiting couple, the loan taken out by Mr Onyearu indirectly benefited Mrs Onyearu in that the secured loan not only allowed her husband’s business to continue it enabled her husband to continue contributing to the mortgage repayments.

The evidence before the court was that Mr and Mrs Onyearu had not operated as a single unit financially; they had kept their finances separate and shared the family expenses. The Court of Appeal dismissed the Trustee’s application finding that an indirect benefit of the type relied on was far from certain to accrue. Furthermore, the benefit was too remote and incapable of valuation. If Mrs Onyearu was unable to rely on the equity of exoneration she would not just be paying her share of the expenses but also her husband’s and this did not accord with the notions of equity.

Comment

Armstrong v Onyearu provides a useful review of the equity of exoneration principle and although it has not been properly considered by the Court of Appeal since 1898, it does appear alive and well.

Whether the equity is available to the non-bankrupt spouse will turn on the individual facts of each case. A full investigation into how the family operate their finances must be undertaken by the practitioner. Is the Bankrupt the sole source of income for the family? If not, how much does the non-bankrupt spouse contribute? Do the parties operate as a single unit financially or are their finances kept separate and the family expenses shared?

Carrying out a full investigation and answering such questions will assist practitioners to evaluate a non-bankrupt spouse’s claim. A view can then be taken by the practitioner whether it is right, in all of the circumstances of the case, to recalculate the parties’ respective beneficial interest in the jointly owned family home.

If you require any legal advice in relation to bankruptcy or insolvency, our experts are on hand to speak to you.

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Alison Butler - Senior Solicitor

To discuss how glaiysers can assist you contact Alison Butler on [email protected] or via 0161 832 4666.

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