For the first time since 1898, the Court of Appeal has considered the equity of exoneration principle in detail. The case in question is Williams v Onyearu  EWCA Civ 268.
Put simply, the equity of exoneration principle states that if a spouse incurs a debt, secured against the property for his or her own benefit, the creditor must be paid out of that spouse’s share of the property.
Facts of the case
In Williams v Onyearu, Mr and Mrs Onyearu beneficially owned their matrimonial home in equal shares. Mr and Mrs Onyearu kept separate bank accounts into which their own income was paid. Mr Onyearu paid the mortgage from his own income until his solicitor’s practice began to fail at which time Mrs Onyearu took over paying the mortgage from her own income. Mr Onyearu took out a further loan from their mortgage lender to discharge his business liabilities. The further loan was secured by a charge against their house. Mrs Onyearu knew about the loan but there was no agreement as to how it was to be borne between them. Mrs Onyearu neither consented nor disagreed to the loan.
Mr Onyearu’s solicitor’s practice failed and he was declared bankrupt. His Trustee in Bankruptcy applied for the possession and sale of the property. The Trustee argued that the equity of exoneration principle did not apply because families operate as a single unit and that the loan for Mr Onyearu’s practice indirectly benefited Mrs Onyearu.
Not responsible for the spouse’s business debts
The Court of Appeal rejected the Trustee’s argument. The Court of Appeal stated that it could not presume that a family operates as a unit for the purposes of application of the principle. Whether a family can be considered a unit for the purposes of applying the principle will depend on the facts of each case. The Court of Appeal stated that rights under the equity of exoneration principle arise at the time the property is charged. Consequently, the intentions of the parties should be assessed at this stage.
At the time the Onyearu’s property was charged, the benefit to Mrs Onyearu was uncertain because it was not certain that the solicitor’s practice would eventually become profitable. The Court of Appeal concluded that the Onyearus did not operate as a unit financially and any indirect benefit to Mrs Onyearu from Mr Onyearu’s loan was not sufficient to rebut the presumption that the equity of exoneration principle would apply. The secured debt exhausted Mr Onyearu’s interest in the property. Consequently, the Trustee in Bankruptcy had no interest in the property. This meant that there was no basis for an order of possession and sale of the property.
In effect, the circumstances of the case meant that Mrs Onyearu was not responsible for the business debts of her husband. Trustees in bankruptcy will need to be mindful of this case when analysing the recovery amount from a co-owned property if the loan was for the benefit of only one of the co-owners.
For more information please contact Sarah Payne.
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