A
Modern
Twist
to an
Old Equity
When an individual is made bankrupt
one of the first questions they or their
spouse will ask is “what will happen to
the house?”
The bankrupt’s interest in the dwellinghouse vests in the trustee immediately
on his or her appointment. The family
home will normally need to be dealt
with by the Trustee within 3 years. If
the Trustee does not deal with the
interest within 3 years of the date of the
bankruptcy order it will automatically
re-vest in the bankrupt. There are limited
exceptions to this time period.
If no agreement is reached with the
Trustee and there is sufficient equity in
the property to justify it, the Trustee is
likely to apply to court for an order of
possession and sale. Usually such an
application is made one year after the
property has first vested in a Trustee,
this allows the Trustee to make use
of provisions within the Insolvency
Act 1986 which provide that save
in exceptional circumstances the
interest of creditors will outweigh other
considerations.
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Whether an agreement can be reached
or not, consideration should turn to
whether the equity of exoneration applies.
made for its own expenses or the extramarital affair Mr Pittortou was having.
Scott J in that case went on to state:
The equity of exoneration comes into
play where a spouse, in this example lets
assume it is the wife, allows her property
to be charged or mortgaged to raise
funds for the husband to be able to pay
his debts or to be used for his benefit. The
wife’s property can be held in her name
alone or jointly owned. The presumption
is that in the absence of evidence to the
contrary she only intended to be a surety
and is entitled to be reimbursed by the
husband from his estate.
“The equity of exoneration is a
principle of equity which depends on
the presumed intention of the parties.
If the circumstances of a particular
case do not justify the inference, or
indeed if the circumstances negate the
inference, that it was the joint intention
of the joint mortgagors that the burden
of the secured indebtedness should
fall primarily on the share of that of
them who was the debtor, then that
consequence will not follow.”
The case relied upon traditionally has
been Re Pittortou [1985] 1 All ER 285.
Mr and Mrs Pittortou jointly owned their
property; the bank took a charge over the
property to secure the husband’s business
overdraft. In this case the presumption
mentioned above was both applied
and rebutted. Mrs Pittortou found the
presumption rebutted for payments to the
business made for household expenses
(mortgage payments, food and utilities
etc) but not for expenditure the business
Taking into account the above, the equity
of exoneration would only apply if the
borrowing was used for the purposes of
the borrower alone. In a today’s society
it seems that in the majority of cases
spouses support each other and jointly
contribute what they can to the general
pot of the family finances. Would that
then rule out the equity of exoneration?
The Pittortou decision is 30 years old
and quite fact specific. Advisers have
assumed that if the charge secured
finance for a Company which was run by
one spouse then the indirect benefits the
family received from the income of that
Company to fund living expenses would
rebut the presumption.
After many years without cases reexamining this area, we have had two
recently. The first was Lemon and Another
v Chawda [2014] BPIR 49, which was
before Chief Registrar Baister in October
2013. In this case the bankrupt’s spouse
was denied the equity of exoneration due
to the pooling of assets jointly. The two
of them had administered their financial
affairs jointly and it was found that it was
impossible to establish who financed any
particular aspect of their lifestyle.
In the second case in January 2014, Day v
Shaw and Another [2014] EWHC 36 (Ch),
Mr Shaw was a director of a company
with another person. The company
borrowed monies which were secured
on the property of Mr and Mrs Shaw. Mr
Shaw and his fellow director had also
given personal guarantee. Mr Day had
successfully obtained judgment against
Mr Shaw and this was secured against Mr
Shaw’s interest in the matrimonial home
by way of a charging order. The case
came to Court as if Mrs Shaw could argue
that the equity of exoneration applied and
the bank lending fell to be discharged from
Mr Shaw’s interest in the property alone
then Mr Day would not receive anything
under his charging order.
pot of the family finances, in doing so it
would appear to rule out the equity of
exoneration. However if the parties have
a clear intention when the funding is
obtained and secured that the equity of
exoneration should apply rather than rely
on a presumption they ought to evidence
their intentions in a document such as a
declaration of trust
The Court looked at the bank lending
and concluded that Mr Shaw and his codirector were co-sureties for the company
debt through their personal guarantees;
they could look to the Company to
indemnify them. Mr and Mrs Shaw, in
giving security were sub sureties who
could look to be indemnified from the cosureties. In essence Mrs Shaw could look
to Mr Shaw to indemnify her. This being
the case she could rely on the equity of
exoneration.
The Shaw case shows that the Court
will take into account lending secured
for the benefit of a Company operated
by a spouse. It was unfortunate in
some respects that it was established
in evidence that the Company had not
made a profit as it meant that the Court
did not need to investigate whether Mrs
Shaw had benefitted from the lending or
investigate the intention of the parties.
Conclusion
The Chawda case shows that in today’s
society where in the majority of cases
spouses support each other and jointly
contribute what they can to the general
It does however appear that the Courts
will be called upon to decide more cases
involving this aspect of the law.
By Dar ren Stone
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