Sale of property – Net proceeds of sale – Indemnity – Equity of exoneration – Respondent joint owners of property granting second charge in favour of bank – Property being sold and borrowings repaid – Issue arising in relation to net proceeds of sale – Appellant obtaining charging order over first respondent’s interest in property for judgment debt – District judge finding in favour of respondents – Appellant appealing – Whether second respondent entitled to be indemnified by first respondent in relation to her liability under second charge – Whether any right to indemnity being subject of equity of exoneration – Appeal dismissed
The respondents, a husband and wife, jointly purchased the freehold of a house in Locking, Weston-Super-Mare. They later charged the property to a bank as security for monies lent to a company of which the first respondent was a director. The second respondent was not a director of the company or directly involved in its running. The bank registered its title to the property. The company later changed its bank and the respondents granted a second charge in favour of that bank which was also registered against the title. The property was subsequently sold and the sums due under the second charge were paid. The resulting net proceeds of sale were held by the solicitors for the respondents in accordance with an order of the court.
An issue arose whether the second respondent wife was entitled to be indemnified by the first respondent husband in relation to her liability under the second charge and whether any such right to an indemnity was the subject of an equity of exoneration. Any such equity would produce the result of increasing the extent of her beneficial interest in the property, leaving the first respondent with no part of the net proceeds of sale.
The respondents were agreed that the second respondent should be so indemnified and have an equity of exoneration. However, the appellant had obtained a judgment against the first respondent and had a final charging order over the first respondent’s interest in the property in relation to that judgment debt. Accordingly he challenged the second respondent’s asserted right to an indemnity and an equity of exoneration. The district judge decided the issue in favour of the respondents. The appellant appealed contending that, since the principal debt was that of the company, the equity of exoneration did not apply to a property jointly owned by the respondents.
Held: The appeal was dismissed.
(1) Overall the principal debtor for the monies owed to the bank was the company. The question was as to the respective rights of the joint and several guarantors (the first respondent and his daughter) and of the mortgagors (the first and second respondents) as between themselves. Although the guarantee and the mortgage had been entered into on the same day, it was clear that, in substance, the guarantors were sureties for the debt of the company. The respondents were sub-sureties. The guarantors and the mortgagors were not co-sureties equally liable for the principal debt. Accordingly, the respondents, as sub-sureties, were entitled to be indemnified by the guarantors in the same way as a surety was entitled to be indemnified by a principal debtor. Although, overall, the company was the principal debtor, as between the guarantors and the mortgagors, the guarantors were the principal debtor. As there was no prospect of payment by the daughter, the position was that the first and second respondents, as sub-sureties, were entitled to be indemnified by the first respondent as guarantor: Craythorne v Swinburne (1807) 14 Ves Jun 160, Re Denton’s Estate [1904] 2 Ch 178, Fox v Royal Bank of Canada [1976] 2 SCR 2 and Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562 applied.
(2) For the purpose of establishing the position between the respondents, in relation to the equity of exoneration, the first respondent could not deny his liability to indemnify the second respondent. It followed that, for the purposes of the equity of exoneration, the second respondent could establish that she was entitled to be indemnified by the first respondent in relation to the debt owed to the bank. The right to an indemnity was not merely a personal right but as a proprietary right binding the first respondent’s share in the property and having priority over the claimant’s charging order. It followed that the second respondent was able to show that the liability under the mortgage to the bank should fall first on the first respondent’s share. On that basis, on the figures in the present case, the first respondent had no entitlement to any net proceeds of sale and the claimant’s charging order did not attach to any property of the first respondent: Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Sup Ct (Eq Div) NSW; [1999] BPIR 754 considered.
Michael Selway (instructed by Powells with Chawner Grey, of Weston-Super-Mare) appeared for the appellant; Daisy Brown (instructed by Alletsons, of Bridgwater) appeared for the respondents.
Eileen O’Grady, barrister