In April 2017, the Court of Appeal considered the equity of exoneration for the first time in almost 120 years, in the case of Williams –v- Onyearu  EWCA Civ 268.
What is the equity of exoneration?
The equity of exoneration is a common law principle which relates both to the joint ownership of property and the law of sureties. If A and B jointly own a property, and a charge is put in place over the whole property to secure a debt owed only by A, B is entitled to a charge over A’s interest in the property, so that when it is sold, the debt is paid out of A’s interest first. The secured creditor would only receive payment from B’s interest in the property if A’s interest has been fully exhausted.
In Williams –v- Onyearu, the Court of Appeal explained that the equity is part of the law of sureties, in that the non-debtor owner (B) is effectively a surety for the debts of A. It said that “there is an evidential presumption that the parties intended that, as between themselves, the liability should fall on the debtor’s share of the property.” The evidential presumption can be rebutted by evidence of “a different intention. In the absence of an actual contrary intention, evidence that the debt is incurred for the direct benefit of B will rebut the presumed intention.”
What issues did the Court of Appeal have to consider in Williams v Onyearu?
The question in Williams –v- Onyearu was whether an indirect benefit to B is sufficient to infer that the parties intended that the equity of exoneration would not arise.
Mr and Mrs Onyearu were a married couple, who lived in a house owned solely by Mr Onyearu. They kept their finances entirely separate; Mr Onyearu paid the mortgage and Mrs Onyearu paid all of the other household expenses. Mr Onyearu ran his own solicitor’s practice and borrowed additional funds against the existing mortgage on the property, for the use of his business. Unfortunately the business failed and Mr Onyearu was made bankrupt. His Trustee in Bankruptcy applied to court for an order for sale and Mr and Mrs Onyearu argued that Mrs Onyearu was entitled to the equity of exoneration. Early in the proceedings, it was established that Mrs Onyeau had an equal beneficial interest in the property, so the question was whether her beneficial interest should be subject to the debt which Mr Onyearu had incurred in order to prop up his business. The Trustee argued that because Mrs Onyearu had enjoyed an indirect benefit from Mr Onyearu’s business (because profits from the business would have been used to meet household expenses), the equity of exoneration should not apply.
What finding did the Court of Appeal make?
The Court of Appeal rejected the Trustee’s arguments. In his judgment, Richards LJ stated that “It is clear from the cases that English law has not regarded an indirect benefit to be itself sufficient to deny a right of exoneration to the surety… The benefit must be direct of closely connected to the secured indebtedness… An indirect benefit of the type relied on in this case is far from certain to accrue. In the present case, any benefit was subject to a double contingency: first, that the firm would survive, and, secondly, that it would be profitable. Further, the intention as regards the equity is to be inferred as at the date of the transaction… In general, the benefits must be capable of carrying a financial value…”
In the Onyearu case, the purpose of the bank loan was to pay the creditors of Mr Onyearu’s business. Any benefit which might have been enjoyed by Mrs Onyearu was dependent on the business surviving and making a profit from which Mr Onyearu could make drawings, and accordingly was too remote to provide sufficient evidence that Mrs Onyearu’s intention was to “bear the burden of the loan equally with her husband”.
This case will be a blow to Trustees in Bankruptcy, whose ability to argue that the burden of business loans ought to be borne by joint owners who have received an indirect benefit from the loans has now been significantly affected. The separation of the Onyearus’ finances was an important factor in determining the extent of the benefit received by Mrs Onyearu, and so in future a close examination of the joint owners’ finances will be necessary in each case in order to try and find the evidence needed to rebut the presumption that the equity of exoneration will apply.
For further advice or assistance in this area please contact Jennifer Beatty on 0161 819 4911 or email@example.com.