There has been a scarcity of reported cases on the equity of exoneration since the 1985 landmark case [1]. Like bad perms, shell suits and Boy George it appeared that this judge-made principle had been abandoned, but after thirty years three recent cases have brought the doctrine into consideration once again.

The doctrine entitles a party to insist that the debt of the other, for which they are treated as having stood as surety and charged their property, be taken primarily from the debtor’s share in the property before being taken from their own when monies are raised by a loan for one party’s business, with that party’s spouse entering into a joint charge over their home to secure that borrowing.

While there is no reason to suggest the principle is limited to just a ‘husband and wife’ , that has been the context of the majority of cases so far.

This principle does not originate from legislation and the leading decision is over a century old and was ‘decided in the days when the wife did nothing except boss the servants about [2]’ . The principle is somewhat anachronistic in our modern society and the only consistency in case law is that the application of the principle is highly fact-sensitive.

There is no doubt that this remains an important principle to ensure fairness between sureties and debtors but the way in which the principle has developed has caused it to become shrouded in uncertainty with no clear guidance on how and when the principle should apply.

This principle was in dire need of some clarity and visibility by the higher courts, yet it would appear that the recent decisions [3,4 & 5] have done little more than confirm its unpredictability.

The details

In the first instance [3] monies were secured against the couple’s jointly owned property to enable Mr Chawdha’s business to acquire a property. The Chief Registrar concluded that this was a case in which the circumstances negated the inference of exoneration. Emphasis was put on the fact that the couple had operated as a family unit taking benefit of the ups and downs jointly, with both having equal control over the totality of the family income.

This decision in effect modernises the principle; where the surety and debtor act as a joint unit and the surety receives benefit from any loan, the surety also takes the burden and exoneration should not automatically apply.

As for the second case [4] monies were leant to a company in which Mr Shaw and another were directors. Mr and Mrs Shaw then charged their property against the borrowing. Mr Shaw and his co-director also gave personal guarantees for the borrowing and as such owed each other and were owed by the company, an implied indemnity. It was decided that Mrs Shaw was entitled to an indemnity from Mr Shaw which allowed her to cast the burden of the charge onto Mr Shaw’s proportion of the equity in the property, rendering Mr Day’s charging order worthless.

Finally, in the third recent case [5] a wife was allowed to rely on the doctrine where monies borrowed were used by her husband to re-acquire an interest in the matrimonial home from the husband’s trustee in bankruptcy.

The judge followed the reasoning used in the 1985 case and again emphasised that Mrs Dunn had derived no benefit from Mr Dunn re-acquiring his interest in the property. One could argue that the fact that Mrs Dunn was allowed to retain her family home and avoid the expense and inconvenience of finding a new home was in itself a benefit.

This decision suggests that the Courts remain wedded to a somewhat outdated approach rather than embracing the more modernistic decision in the first case we discussed [3].

It is worth noting…

Practitioners should ensure that investigations into family finances are thorough to avoid any presumed intention that exoneration should apply. This doctrine was created to promote fairness and justice, yet it seems in some instances to have fallen short.

Equity of exoneration is decided on the circumstances and facts of each case which leaves it open to the interpretation of the judge presiding over it. Until the Courts provide us with clarity and consistency, trustees in bankruptcy may unfortunately be debilitated by this capricious remedy, which is so often only claimed at the eleventh hour.

This post was edited by Hannah Edmondson. For more information, email blogs@gateleyplc.com.

[1] Re Pittortou (A Bankrupt) [1985] 1 W.L.R. 58

[2] Walton J said this in the case of re Woodstock (a bankrupt) [1980] C.L.Y. 148.

[2] Re Chawda [2014] B.P.I.R. 49

[3] Day v Shaw [2014] EWHC 36 (Ch)

[4] Cadlock v Dunn [2015] EWHC 1318 (Ch)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.