Cadlock v Dunn & Anor

Where jointly owned property is charged to secure one co-owner’s debt, the other co-owner may obtain an equity of exoneration. The inquiry is whether the charge secured the debtor’s debt, assessed through the presumed intention of the parties and the circumstances of the transaction. A benefit to the non-debtor co-owner, such as remaining in the matrimonial home, does not by itself defeat the equity where the borrowed money was used solely to acquire the debtor’s interest. The equity is limited to the part of the borrowing referable to that acquisition, together with interest. It does not extend to sums used for joint, household or other expenditure benefiting both parties.

The trustee in bankruptcy appealed against an order of the Newcastle County Court made by District Judge Morgan. The underlying proceedings concerned the former matrimonial home of the respondents, in which the trustee claimed an interest following the second respondent’s bankruptcy.

The respondents had jointly borrowed money from lenders. The principal sum was used to enable the second respondent to reacquire his beneficial half share from the trustee, but the charge securing the borrowing was for a larger unexplained amount. District Judge Morgan held that the first respondent was entitled to an equity of exoneration. The central issue was the nature and extent of that equity.

1. Appeal dismissed subject to limitation. District Judge Morgan was correct to hold that the first respondent was entitled to an equity of exoneration. The equity was, however, limited to the sums loaned for the acquisition of the second respondent’s beneficial half share, plus interest.
2. The governing principle is that a person who mortgages or charges their property to secure another’s debt is treated as a guarantor and is entitled to exoneration by the principal debtor. The same principle applies where jointly owned property is charged to secure one co-owner’s indebtedness. The equity depends on the presumed intention of the parties, which may be negatived by the circumstances.
3. The primary purpose of the relevant borrowing was to enable the second respondent to reacquire his beneficial half share. The first respondent obtained no financial benefit from that payment. The fact that she was able to remain in occupation of the matrimonial home did not defeat the equity, since the relevant question was whether the charge secured the second respondent’s debt.
4. The equity could not automatically extend to the whole charge. The acquisition payment was £150,700, whereas the charge secured £196,500 and there was no evidence explaining the balance. Consistently with Re Pittortou [1985] 1 All ER 285, sums used for joint or household expenditure, or for the parties’ joint benefit, would not attract exoneration.
5. The equity gave the first respondent both a personal indemnity and a proprietary right over the second respondent’s share. District Judge Morgan’s approach to the order for sale was therefore correct. The precise order was to be settled at a resumed hearing after the second respondent had an opportunity to comment.

• High Court (Chancery Division): District Judge Morgan’s order of 15 January 2015 was upheld in substance. The appeal was dismissed subject to limiting the equity of exoneration.