Robert Armstrong & Ors v Sandra Valerie Harrow

The equity of exoneration depends on the presumed intention of co-owners. Where jointly owned property secures borrowing by one owner, the burden ordinarily falls on that owner’s share. A company jointly owned and controlled by both co-owners is treated as if both were joint principal debtors, so the presumption of exoneration does not arise. This remains the default position unless there is an agreement reallocating liability or the apparent ownership and control of one co-owner is shown to be insignificant or illusory. Indirect benefits, such as support for joint living expenses, do not ordinarily defeat the equity. A transfer of beneficial ownership without consideration made by an insolvent individual within the relevant period may be a transaction at an undervalue, and may also constitute a preference.

The applicants were trustees in bankruptcy of Christopher John Russell. They sought recovery from Sandra Valerie Harrow of part of the proceeds of sale of a jointly owned property and part of the sum used to discharge borrowing secured on another property. Mrs Harrow relied on an equity of exoneration, contending that the borrowing had benefited companies associated with Mr Russell and that she had received no relevant benefit.

The principal issue was whether loans made to Callian Management Services Ltd, jointly owned and controlled by Mr Russell and Mrs Harrow, should be treated as loans to both co-owners, and whether the separate loan made to Watercare International Ltd gave rise to an equity of exoneration. The court also considered the effect of a deed reallocating the beneficial ownership of the jointly owned property.

1. The application succeeded. The trustees were entitled to one half of the net sale proceeds and one half of the monies paid to release the charge on Bell Street, subject to Mrs Harrow’s equity of exoneration in respect of the Merchant Money loan.

2. The court applied the principles discussed in Armstrong v Onyearu [2018] Ch 137. The equity is based on presumed intention. Where property is charged for the debt of one co-owner, the debt ordinarily falls primarily on that co-owner’s share. The inquiry concerns whether the other co-owner obtained a benefit from the loan, rather than simply who physically received the money.

3. A company jointly owned and controlled by both co-owners is treated as if the co-owners were joint principal debtors. The default position is therefore equal liability. That position may be displaced by an agreement as to apportionment, by proof that the other co-owner benefited from the loan, or where that co-owner’s apparent ownership and control is insignificant or illusory. The burden of proving the latter exception lies on the co-owner asserting it.

4. Mrs Harrow remained a director and shareholder of Callian when the relevant loans were made. She signed loan and security documents, gave personal guarantees, used the company’s bank accounts and agreed that the loan proceeds should be applied for Watercare. Her role was neither illusory nor insignificant. Mr Russell and Mrs Harrow were accordingly treated as joint principal debtors, and no basis existed for reapportioning liability.

5. The Merchant Money loan was made to Watercare, in which Mrs Harrow had no interest. The trustees did not prove that she received a tangible benefit from that loan. Any indirect benefit was intangible and unquantifiable, so the equity of exoneration arose in respect of the £17,984.65 paid to Merchant Money.

6. The deed of trust transferred beneficial ownership without consideration. Mr Russell was insolvent and the transaction occurred within the relevant period. It was therefore a transaction at an undervalue under section 339 of the Insolvency Act 1986. The deed was also a preference under section 340, with the statutory requirements presumed or established under section 341. The deed was ordered not to have effect insofar as it reapportioned the beneficial interest.

7. The court emphasised that the issue was confined to whether Mrs Harrow obtained a benefit from the secured loans. It was not a general accounting of the parties’ financial contributions during their relationship.

First-instance decision. No prior appellate decision is stated in the judgment.