Most readers will be familiar with the doctrine of exoneration and may have read our Insolvency Resource paper on the topic.
The doctrine may apply when one joint owner of property uses the property (with the consent to the other owner) as security for a loan that was made solely to them. The other joint owner does not get the benefit of the loan. The joint owners are commonly husband and wife, but the marriage relationship is not necessary to have the doctrine apply.
Essentially “the doctrine dictates that a loan solely to one party’s benefit should firstly be paid out of that party’s share, that the other party to the mortgage should be considered only as a surety, and their share should only be used in the case of any subsequent shortfall. The practical effect and the legal reasoning behind the doctrine are not that simple.”
“The doctrine provides a presumption of the intentions of the two parties and their roles in the transaction – who is the principle and who is the surety – even though both have the same legal obligation under the mortgage and the entire property (both share’s) is mortgaged. The principle of exoneration is that the co-owner is not to blame for the loan – they did not receive the benefit of it – so they should not be held to be primarily responsible for its repayment. That primarily responsibility should rest with the party to whose benefit the loan was made.”
“The over-riding factor is that the loan must be used for an individual purpose, separate from and not involving the other co-owner. If the husband and wife both stood to benefit from the loan, the husband should not alone bear the initial responsibility of repaying it. Obviously a bankruptcy trustee of one of the parties will want to know whether both parties benefited from the loan and to what extent the estate’s interest in the property is exposed to the debt. Any portion of the secured debt used for a joint purpose will not have the benefit of the principle.”
[Worrells Doctrine of Exoneration Insolvency Resource paper]
The topic of this article is the ‘individual purpose’ and ‘sole benefit’ of getting the loan. That is, who benefitted from the loan?
We currently have two insolvencies under our control involving the doctrine and both have the same factor involved. In both cases the property in question in the family home. In both cases the bankrupt is the husband and the wife is claiming application of the doctrine for the loans secured against the property. The argument is that the loans were for the sole benefit of the bankrupt husband.
In one case the husband ran a small business registered ‘in his name’. In the other case the money was loaned to a company of which the husband was a shareholder.
In both cases the entities running the business that received the benefit of the loans (the husband and the company) acted as trustees of trusts. They did not run the business in their own rights.
In the first case the husband was only the trustee in his capacity of business owner and borrower of the money. In the second, the company was only the trustee in its capacity of business owner and borrower of the money. The two trusts (in reality the beneficiaries of the trusts) were the entities who benefited from the loans. Obviously legal liability for the loans lies with the trustees of the trusts, but the benefit of loans lies with the beneficiaries.
In both cases the wife was one of the principle beneficiaries (along with the husband) so it cannot be said that the doctrine can apply in either case, as the husband and wife received the same benefit as beneficiaries of the trust.
It will be interesting to see whether the wives attempt to push their claims.