Insolvency Solicitors and Equity of Exoneration
A Recent Court Decision – Our Insolvency Solicitors Comment on its Impact on Claims Brought by Trustees in Bankruptcy
This article by our insolvency solicitors looks at a recent Court of Appeal Decision and its impact on claims brought by Trustees in Bankruptcy. The decision, made in the case of Williams v Onyearu ( EWCA Civ 268), provides a new insight for both bankrupts and Trustees in bankruptcy as to the factors the court will consider when considering Equity of Exoneration arguments.
The Law of Equity of Exoneration – An Overview
The principle of Equity of Exoneration applies where, prior to the making of the bankruptcy order, the bankrupt charges a jointly owned asset for their own personal benefit and advantage. This most commonly occurs when dealing with the family/matrimonial home.
Mr and Mrs Smith jointly own their matrimonial home which has equity of £100,000. Mr Smith then takes out a second mortgage on the property for the sum of £50,000 to pay for his personal debts.
Unfortunately, Mr Smith incurs further debts and is made bankrupt meaning that his 50% share in the matrimonial home vest in his Trustee. The Trustee in Bankruptcy would therefore be entitled and required to realise Mr Smith’s notional 50% interest in the property in the sum of £50,000 for the benefit of the creditors.
However, Mrs Smith may argue that her husband has already taken his 50% share out of the property by virtue of the earlier £50,000 remortgage and that she is therefore entitled to 100% of the equity.
The above is a commonly used defence to possession and sale applications, brought by Trustees in Bankruptcy in respect of matrimonial property. Until Williams v Onyearu, there has been little judicial guidance from the higher courts.
The Factors the Courts Have Traditionally Looked at
The courts, faced with such arguments, have traditionally looked at the following factors when considering Equity of Exoneration arguments:
- Whether husband and wife were financially independent from one another (e.g. whether they operated separate bank accounts);
- Whether the non-bankrupt spouse has been exclusively maintaining the mortgage and other household expenses;
- Whether the non-bankrupt spouse indirectly benefited from the bankrupt’s further borrowing (e.g. did the bankrupt invest the money into a business which improved the spouse’s lifestyle).
If (for example) the court decides that the bankrupt has had the exclusive benefit of the further borrowing then the general rule is that the bankrupt’s borrowing will be taken from their share of the equity in the property, with the following consequences:
- The Trustee in Bankruptcy will only be entitled to receive a much-reduced sum representing his interest in the property;
- The Bankrupt and his family will have to raise the lesser sum to buy out the Trustee’s interest in the property than would otherwise be the case.
The Finding in Williams v Onyearu
Williams v Onyearu was an appeal by Mr Onyearu’s trustee in bankruptcy from a High Court decision which held that the Equity of Exoneration applied in favour of Mrs Onyearu even though she had received an indirect benefit from her husband’s borrowing.
In his Judgement, Richards LJ made several remarks which are useful to understanding the operation of the Equity of Exoneration, as summarised below:
- Richards LJ clarified that the principle of Equity of Exoneration is not limited to cohabiting couples. It can arise in any case where there is jointly owned property and one party borrows against the whole of the equity.
- Where the conditions at (1.) above are met, it is to be inferred that Equity of Exoneration applies, unless rebutted by evidence.
- Equity of Exoneration can apply even where the non-bankrupt spouse has received an indirect benefit, although this may not be the case if the couple’s finances were intertwined.
Our Insolvency Solicitors Summarise
This finding appears to favour a non-bankrupt spouse who is seeking to safeguard the family home as it provides greater scope to argue that that Equity of Exoneration should apply. However, the finding will likely prove frustrating for Trustees as it may result in a greater number of possession and sale applications being defended.
Dealing with, and Defenses to, Possession Claims brought by Trustees in Bankruptcy
Quite separate from ‘equity of exoneration’ arguments there are a number of other tools available to the Bankrupt to reduce or eliminate the extent of the Trustee in bankruptcy’s Claims.
Our Insolvency Solicitors are well-used to dealing with such claims on behalf of both Trustees and the Bankrupt/His Family. Contact us or call us on 0121 200 7040 for help and advice in this area. The initial discussion is FREE.