In Armstrong v Onyearu ( EWCA Civ 268, CA (Eng)) title to Mr and Mrs Onyearu’s family home was in Mr Onyearu’s name but the couple had equal beneficial shares. Mr Onyearu borrowed money to finance his business. The loan was secured by a charge over the family home. The business failed. A was Mr Onyearu’s trustee in bankruptcy.
The question was whether Mrs Onyearu was entitled to rely on an equity of exoneration as against Mr Onyearu (and as against A). A contended that she was not since she had derived an indirect benefit from the loan: it enabled Mr Onyearu to keep his business going and so to continue to meet the mortgage payments.
David Richards LJ, delivering the Court of Apeal’s judgment, explained the equity of exoneration:
‘Where property jointly owned by A and B is charged to secure the debts of B only, A is or may be entitled to a charge over B’s share of the property to the extent that B’s debts are paid out of A’s share.’ ()
Whether the equity applies depends on the parties’ common intention (). Where there is no evidence of an actual intention, a presumed intention may arise depending on all the relevant circumstances. In particular, the court looks at whether the co-owner derived any benefit from the debt secured on the property ().
The equity is part of the law relating to the rights of sureties ().
The importance of this case is that it examines whether the type of indirect benefit that Mrs Onyearu was said to have derived from the loan to her husband was relevant to the parties’ presumed intention ().
A contended that the equity could only arise if Mrs Onyearu received no benefit, direct or indirect, from the secured loan (). In effect, A was arguing that the equity could rarely arise in the family home context given the likelihood that the parties’ financial affairs were, at least somewhat, intertwined.
David Richards LJ’s review of the authorities led him to the conclusion that an indirect benefit is not sufficient to deny a right of exoneration to parties in the position of Mrs Onyearu ().
‘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. As at that date, the prospect of benefit was wholly uncertain and incapable of any valuation … In general, the benefits must be capable of carrying a financial value’ ().
Mrs Onyearu was entitled to rely on the equity.