11 Apr, 2017
In a recent Property & Estate article, Daisy Brown carefully analysed the development of the equity of exoneration ("a judge-made principle of some antiquity") and concluded that it was "crying out for the higher courts to take a fresh look at how it should be applied".
In Armstrong v Onyearu  EWCA Civ 268, the principle has been considered by the Court of Appeal for the first time in more than a century. A transcript of the judgment is available here. Simon Passfield acted for the appellant.
The case concerned an application by a trustee in bankruptcy for an order for sale of a property which was registered in the sole name of the bankrupt but which had been held beneficially by the bankrupt and his wife in equal shares. The bankrupt, who had been solely responsible for paying the mortgage, took out a loan to pay his business debts which was secured against the property. The Court proceeded on the basis that his wife had received an indirect benefit from the loan, in that it enabled her husband to continue to pay the mortgage. Nevertheless, she argued that she was entitled to rely on the equity of exoneration in respect of the loan, with the result that the bankrupt's beneficial interest in the property was extinguished.
The Court of Appeal agreed. In the leading judgment (with which Elias and Vos LJJ agreed), having carefully analysed the relevant jurisprudence from both England and the Commonwealth, David Richards LJ held that there was an evidential presumption that the parties intended that, as between them, the bankrupt was to bear responsibility for the repayment of the loan (see paras  and ) and that the indirect benefit received by the wife from the loan was too remote to displace this presumption; in general, it will be necessary to demonstrate that the co-owner received benefits which are "capable of carrying a financial value" (see paras  to ).
The Court was not persuaded that the law should be changed to accommodate what was said to be the relationship between co-habiting couples in their family affairs in current times, concluding that the law should continue to treat couples separately where one stands surety for the debt of the other, unless the circumstances or the evidence show otherwise and that (see paras  to ).
In reaching his conclusion, David Richards LJ cited with approval the decisions of Chief Registrar Baister in Re Chawda (in bankruptcy)  BPIR 49 (in which Chris Brockman acted for the applicant trustee) and Day v Shaw  EWHC 36 (Ch) (in which Michael Selway acted for the appellant and Daisy Brown acted for the respondent).
Paragraph  of the judgment contains the following helpful summary of the relevant principles:
In light of this decision, it is clear that the equity of exoneration remains alive and kicking in the 21st century, although its application will depend on the particular circumstances of any given case.