Trustee in bankruptcy – Matrimonial home – Power of sale – Equity of exoneration – Second respondent husband being made bankrupt twice – First respondent wife applying to set aside court order for sale of matrimonial home and warrant for possession – Court declaring second charge on property payable first from interest in property of appellant trustee and setting aside possession order and warrant for possession – Appellant appealing – Whether first respondent having equity of exoneration in her favour on re-acquisition of appellant’s interest – Appeal dismissed
The respondents were joint owners of a property in Newcastle which they occupied as their matrimonial home. The property was held on a beneficial joint tenancy until 1998, when the second respondent was made bankrupt; at that time, the respondents’ respective interests were severed and the second respondent’s share vested in his trustee in bankruptcy. The second respondent was later discharged from bankruptcy and the appellant agreed to release his interest in the property for £150,700. The respondents financed the re-acquisition of the second respondent’s interest by taking out a loan of £196,500, secured by a charge on the property in favour of the lender. At the time when the charge was executed, a second bankruptcy petition had already been presented against the second respondent, who was subsequently was adjudged bankrupt for a second time. By then, the value of the property was around £450,000.
The appellant applied for a declaration that the respondents were beneficially entitled to the property in equal shares and for an order for sale. The court allowed that application. A warrant for possession was issued and was due for execution when the first respondent applied, under section 375 of the Insolvency Act 1986, to set aside the court’s order and to vacate the warrant for possession. The court declared that the second charge on the property be paid first from the appellant’s interest in the property and set aside the possession order and the warrant for possession. However, it gave the appellant permission to apply at such time as the values of the property and the legal charge were such as to entitle the appellant to a portion of the proceeds of sale of the property.
The appellant appealed. It was common ground that the legal charge was caught by section 284 of the Insolvency Act 1986, as a disposition of property made after the presentation of the second bankruptcy petition, and that it was accordingly void unless ratified by the court. However, it was not disputed that the legal charge was effective to create an equitable charge of the first respondent’s beneficial half share of the property in favour of the whole of the outstanding debt. The main issue was whether the first respondent had an equity of exoneration where her share of the property had been charged to secure the re-acquisition of the second respondent’s interest.
Held: The appeal was dismissed.
(1) A person who mortgaged his property to secure the debt of another stood in the relation of guarantor towards the person whose debt was thus secured, and was entitled to be exonerated by the principal debtor. That principle also applied where jointly owned property was charged to secure the indebtedness of one co-owner. The joint owner, who was effectively in the position of surety for the other joint owner, was not only entitled to be indemnified by the other joint owner in relation to the relevant debt; the right to an indemnity also carried with it a proprietary interest over the indemnifying party’s share in the property. Thus, the party with the benefit of an equity of exoneration had not only a personal claim but was also a secured creditor in relation to that claim: Re Pittortou [1985] 1 WLR 58, Day v Shaw [2014] EWHC 36 (Ch); [2015] PLSCS 152 and Lemon v Chawda [2014] BPIR 49 applied.
(2) The first respondent had charged her equitable half share of the property as security for a loan the primary purpose of which was to enable the second respondent to re-acquire his beneficial half share of the property. The first respondent had obtained no financial benefit in that regard. In those circumstances, the person primarily responsible for repaying the lender had been the second respondent and the first respondent had charged her beneficial interest to secure his indebtedness.
(3) The equity of exoneration depended on the presumed intention of the parties. There was nothing in the facts of the present case to negate the inference and show that the first respondent had been making a gift to the second respondent. However, there was no explanation of how the £196,500 was made up and it was by no means clear that it was wholly referable to the moneys used to acquire the second respondent’s half share. The district judge had therefore been correct to find that the first respondent was entitled to the equity of exoneration only to the extent of sums loaned to re-acquire the second respondent’s half share, plus interest. The first respondent was not only entitled to be indemnified by the second respondent, but was also entitled to a proprietary right over his share of the property. It followed that the judge’s approach in respect of the order for sale had been correct.
Andrew Vinson (instructed by Gateleys LLP) appeared for the appellant; Fred Banning, Solicitor Advocate (instructed by Clarke Mairs LLP, of Newcastle upon Tyne) appeared for the first respondent; The second respondent did not appear and was not represented.
Eileen O’Grady, barrister
Click here to read the transcript of Cadlock (as trustee in bankruptcy of Dunn) v Dunn and another
