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Wife not liable for husband’s loan

Despite the passage of some forty years, the memory of studying the law of equity at university still gives me the shudders. I have mentioned here before the Chancery Division of the High Court, with its archaic and arcane practices. The law of equity was developed in the Chancery Division, and can thus be equally arcane and impenetrable. I’m not even going to attempt to explain here what the law of equity is about, save to say that it sets out various legal principles that cover certain situations (the term ’equity’ referring to ‘fairness’).

One of those principles is the ‘equity of exoneration’. This is not a term that one comes across very often, but it can have serious implications for joint owners of property. I’ll try to explain the term in simple language (which is more than my equity lecturer did for me all those years ago!).

The equity of exoneration can arise when a jointly owned property is mortgaged to secure the debts of only one of the joint owners. The non-debtor owner can be exonerated from the debt, so that it is paid only from the debtor’s share of the property, so far as possible. The idea behind the principle is obviously that one party should not be responsible for the other party’s debts or, to put it another way, the creditor should not be able to recover the debt from someone who did not owe it.

But there is another requirement before the non-debtor owner can take advantage of the equity of exoneration. They must not have benefitted from the debt. It is quite logical: if they had benefitted from the debt, then it would not be right that they should be able to avoid any responsibility for it.

There is a problem, however. The non-debtor owner can benefit from the debt both directly and indirectly. If they benefit directly, then it is clear that the equity of exoneration should not apply, but what if they benefit indirectly? This was the point that fell to the Court of Appeal to decide in the recent case Armstrong v Onyearu & Another which, remarkably, was the first occasion on which any issue on the equity of exoneration had arisen for decision by the Court of Appeal since 1898.

The facts in the case were that the property was effectively owned by Mr and Mrs Onyearu (for the sake of simplicity, I’m not going to explain here why I say ‘effectively’, but this is detailed in the judgment). Mr Onyearu carried on a solicitor’s practice. Unfortunately, the practice fell into financial difficulties and in 2005 he obtained a loan facility secured against the property to provide funds to meet liabilities of the practice. Between 2005 and 2007, he used the facility to pay debts of his practice totalling £131,642.

But that was not the end of the financial difficulties. The firm closed in September 2010 and in March 2011 Mr Onyearu was declared bankrupt.

The trustee in bankruptcy sought to recover the debt against the property. The matter went to court and Mrs Onyearu successfully argued that she was entitled to the equity of exoneration.

The trustee appealed to the Court of Appeal, claiming that whilst Mrs Onyearu had not received any direct benefit from the loan facility, she had received an indirect benefit in that the facility had allowed Mr Onyearu to continue practising, and thereby to continue to meet the repayments on the original mortgage that was used to purchase the property.

The Court of Appeal did not agree. Lord Justice David Richards concluded his leading judgment as follows:

“The purpose of the bank loan secured by the charge on the matrimonial home was to pay the creditors of Mr Onyearu’s practice. The creditors, and Mr Onyearu, were the people directly benefitted by the loan. Any benefit that might have been anticipated for Mrs Onyearu was subject to a double contingency: first, that Mr Onyearu’s practice would survive and, secondly, that it would make profits from which he could make drawings. Any benefit to Mrs Onyearu was too remote to provide a basis for inferring or presuming that her intention was to bear the burden of the loan equally with her husband.”

He went on to point out an important factor in the case, i.e. that Mr and Mrs Onyearu kept their finances separate:

“Mr and Mrs Onyearu did not operate as a single unit financially. They kept their finances separate, as many couples do. They each had their own income and their own bank accounts. They shared the family expenses, Mr Onyearu paying the mortgage instalments and Mrs Onyearu paying all the other household expenses. By denying her an equity of exoneration, she would be paying not only her share of the expenses but also his, a result that does not strike me as according with notions of equity.”

Lords Justices Elias and Vos gave concurring judgments. Accordingly, the appeal was dismissed.

The full report of the case can be found here.

Photo by GotCredit.

The blog team at Stowe is a group of writers based across our family law offices who share their advice on the wellbeing and emotional aspects of divorce or separation from personal experience. As well as pieces from our family law solicitors, guest contributors also regularly contribute to share their knowledge.

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