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When is a spouse entitled to an equity of exoneration?

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03/07/2015

Background
In Cadlock (Trustee in Bankruptcy) v Dunn and Dunn [1], the appellant trustee in bankruptcy (T) of the husband (H) appealed against an order made in respect of the matrimonial home.

H had owned the property jointly with his wife (W). The property was secured. After H was adjudged bankrupt, the beneficial joint tenancy was severed and H’s half share of the property vested in T. In 2009, T agreed to release his interest for just over £150,000 which sum was provided by four individual lenders. T removed the bankruptcy notice registered at the Land Registry. In 2010, a second bankruptcy petition was presented against H. In January 2011, H and W executed a charge in favour of the four lenders. H was adjudged bankrupt in April 2011.

In 2013, T sought a declaration that he and W were beneficially entitled to the property in equal shares and an order for sale. A warrant for possession was issued. W successfully appealed against this on the basis that there was an equity of exoneration in her favour arising out of the re-acquisition of the trustee’s interest.

An equity of exoneration is an equitable right for a provider of security over an asset (X) jointly owned by X and Y to secure the debts of Y only to have the secured indebtedness discharged so far as possible out of Y’s equitable interest in the asset.

Submissions
T submitted that the equity of exoneration did not apply because the charge was not made for the purposes of H, and the monies were not applied for his benefit. T argued that W received a benefit from the transaction, namely she avoided the sale of her home and the associated expenses incurred with such sale.

Judgment
The principal purpose of the loan was to enable H to re-acquire his beneficial half share of the property. W had obtained no financial benefit from the transaction at all. W had charged her beneficial interest to secure H’s indebtedness and the fact that she was thereby entitled to remain in occupation was immaterial. W was entitled to a proprietary right over H’s share of the property.

Points to consider
Equity of exoneration is an old concept but there have not been many cases in which it has been applied in a modern context, so the judgment is welcome clarification of this. It is not uncommon, for example, for a parent to grant security over their home to support the business debts of their children. Following this case (and another recent case on equity of exoneration, Day v Shaw [2], referred to in the judgment) this will be supported by a proprietary interest in the child’s share of the property.

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[1] [2015] EWHC 1318 (Ch)
[2] [2014] EWHC 36 (Ch)