Armstrong v Onyearu & Anor

Where jointly owned property secures the debt of one co-owner, the non-debtor co-owner is ordinarily entitled, as a surety, to have the debt borne from the debtor’s share. The equity of exoneration depends on actual or presumed intention and is subject to the circumstances of the particular case.

A direct or closely connected benefit from the secured borrowing may displace the equity. A speculative and indirect prospect that a debtor’s business will generate income for the household does not do so. The court must not treat the fact that a couple operate as a family unit as a decisive test. It must examine their actual financial arrangements when the security was given.

The appellant trustee in bankruptcy sought to realise the bankrupt husband’s beneficial half-share in the matrimonial home. The property had been charged to secure a bank facility used solely to pay liabilities of his solicitor’s practice.

The wife had consented to the charge but had no involvement in the practice. The deputy registrar held that she was entitled to an equity of exoneration over her husband’s share, which exhausted that share. A Deputy Judge of the Chancery Division dismissed the trustee’s first appeal.

The trustee’s second appeal raised whether an indirect benefit to a co-owning spouse, in enabling the debtor spouse’s business to continue and potentially contribute to family income, prevented an equity of exoneration.

1. Appeal dismissed unanimously. The wife was entitled to an equity of exoneration over her husband’s beneficial half-share. Lord Justice Elias and Lord Justice Vos agreed with the judgment of David Richards LJ.

2. The equity is an incident of the relationship between surety and principal debtor. Where jointly owned property is charged for the debt of only one owner, an evidential inference ordinarily arises that, as between the owners, the debtor’s share should bear the liability. The issue is governed by actual or presumed intention. The inference may not arise where the debt is, in substance, joint or the non-debtor’s debt, and it may be rebutted by a contrary intention or a direct benefit from the borrowing.

3. The court approved the approach in Re Pittortou [1985] 1 WLR 58. Borrowing used for joint household expenditure is ordinarily to be borne jointly to that extent. However, borrowing by one owner for that owner’s business may attract exoneration even if the other owner may indirectly benefit through contributions to household expenses from the business income.

4. An indirect and contingent benefit is insufficient. The anticipated benefit here depended both on the practice surviving and on its making profits. It was incapable of valuation when the charge was granted and bore no meaningful relation to the secured debt. The court rejected a general rule based on spouses operating as a family unit. Couples arrange their finances in many different ways, and the inquiry must remain fact-sensitive but guided by settled principles.

5. The spouses kept separate accounts and incomes, and divided household expenditure. The business loan paid the husband’s creditors alone. Denying exoneration would require the wife to meet both her own share of family expenditure and her husband’s business liabilities. The appeal was therefore dismissed.

• Court of Appeal (Civil Division): dismissed the trustee’s second appeal and upheld the wife’s equity of exoneration.
• High Court of Justice, Chancery Division: a Deputy Judge dismissed the trustee’s appeal by an order dated 3 June 2015.
• Bankruptcy proceedings: Deputy Registrar Middleton dismissed the trustee’s application by an order dated 18 November 2014, holding that the equity of exoneration exhausted the bankrupt’s beneficial half-share.