Day v Shaw & Anor

Where jointly owned property secures a debt connected with one co-owner, the equity of exoneration depends on the parties’ presumed intention and the equitable allocation of liability between them. A court must distinguish co-sureties from sub-sureties. Where one co-owner is a guarantor of the principal debtor and both co-owners mortgage the property, the mortgagors may be sub-sureties entitled to an indemnity from the guarantors. That indemnity may create a proprietary right over the other co-owner’s share, taking priority over that co-owner’s charging-order creditor. The corporate personality of the principal debtor does not prevent the court from considering ownership, control and benefit when deciding whether equal contribution is equitable.

The claimant obtained judgment against Jeffrey Shaw and a final charging order over his interest in a property jointly owned with Patricia Shaw. The property had secured Barclays’ lending to Avon Independence Ltd. Jeffrey Shaw and the parties’ daughter had guaranteed Avon’s liabilities, while Jeffrey and Patricia Shaw had charged their jointly owned home to secure the liabilities of Avon and those arising under Jeffrey’s guarantee.

After the property was sold and Barclays paid, Patricia claimed an equity of exoneration so that the secured debt would be borne first by Jeffrey’s share. The District Judge accepted that claim. The issue on appeal was whether the existence of Avon as the principal debtor prevented an indemnity and equity of exoneration between the co-owners.

1. Appeal dismissed. Patricia Shaw was entitled to an indemnity from Jeffrey Shaw, and that indemnity carried a proprietary right over Jeffrey’s share in the property. The right had priority over the claimant’s charging order.
2. Avon was the overall principal debtor. Jeffrey Shaw and the daughter were sureties under their joint and several guarantee. Jeffrey and Patricia, as mortgagors, were sub-sureties in relation to the liabilities secured by the charge.
3. The guarantors and mortgagors were therefore not co-sureties of equal rank. The sub-sureties were entitled to be indemnified by the sureties in the same way that a surety is indemnified by a principal debtor. As between the guarantors and mortgagors, the guarantors were effectively the principal debtors.
4. Although Jeffrey appeared both to owe and to benefit from the indemnity, he could not deny his liability to indemnify Patricia. Patricia was consequently entitled to have the Barclays liability borne first from Jeffrey’s share. On the figures, no proceeds remained for Jeffrey and the charging order attached to nothing.
5. As an alternative, if there had been no guarantee, the prima facie position between jointly mortgaging co-sureties would have been equal contribution. That default may be displaced where the circumstances make another allocation equitable. Ownership, control and benefit remain relevant despite the separate corporate personality of the borrowing company.
6. The proposed new evidence concerning Avon’s shareholdings was refused. It was available at trial, did not establish the complete position, and would have required findings on an issue not fairly explored below.

Costs were agreed to follow the event.

High Court (Chancery Division): The appeal from the order of Deputy District Judge Toussaint dated 8 July 2013 was dismissed. Permission to appeal had been granted by Judge McCahill QC on 14 October 2013.