Sub-Sureties And The Equity Of Exoneration: An Equitable Division Of Liabilities

In Day v. Shaw, the Court of Appeal considered the application of the equity of exoneration in circumstances where a wife entered into a mortgage to secure a debt guaranteed by her husband, Mr Shaw.

Mr Day obtained a charging order over Mr Shaw's share of the property. However, the mortgage took effect in priority to the charging order and liability fell first on Mr Shaw's share of the property (due to the principle of equity of exoneration). The liability under the mortgage exceeded the value of the Mr Shaw's interest, and accordingly Mr Day received nothing.

The Facts

In this case, there were various people who were liable in different ways for the debt owed to Barclays, as follows:

The Loan: Barclays Bank plc ("Barclays") advanced a loan in favour of Avon Independence Limited ("Avon"). The Guarantee: Under the loan agreement, the two company directors of Avon (Mr Shaw and his daughter) acted as joint and several guarantors. The Mortgage: By way of further surety, Mr Shaw and his wife granted a mortgage in favour of Barclays over their jointly owned property. Mr Shaw and his daughter ran Avon jointly as company directors. Mrs Shaw was not a director of Avon, nor was she directly involved in the running of the company.

In light of the above, Avon was the principal debtor under the loan. Under the mortgage, Mr Shaw and his wife covenanted to pay (1) the sums due from Avon to Barclays pursuant to the loan and (2) the sums due from Mr Shaw and his daughter to Barclays under the guarantee.

Avon defaulted on the loan. Consequently, Mr Shaw and his daughter were personally liable as guarantors under the guarantee.

The Charging Order

In 1997, Mr Shaw and his daughter (acting as directors of Avon) borrowed a sum of money from Mr Day. The loan was never repaid and Mr Day obtained a County Court Judgment against Mr Shaw and his daughter for a sum in excess of £22,000. The daughter was then made bankrupt on 29 November 2010.

As Mr Shaw and his daughter were jointly liable for the loan (and the prospects of recovery from the daughter were slim) Mr Day obtained a charging order over Mr Shaw's share of his jointly owned property in respect of the unpaid judgment. The charging order only attached to Mr Shaw's beneficial interest in the property as his wife was not a party to the loan nor was she liable under the judgment for repayment.

The Issue

Mr Day argued that his charging order should take priority over the mortgage. If the mortgage were to be...

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