The limits of the equity of exoneration) spousal relationships and direct benefit (Armstrong v Harrow)
Restructuring & Insolvency analysis: This case involved an application by trustees in bankruptcy to recover sums from the sale of a property formerly jointly owned by the bankrupt and his ex-wife during their marriage. The ex-wife argued that she was entitled to retain the full proceeds based on the equity of exoneration, claiming the secured loans discharged from the sale were taken solely for the bankrupt’s benefit. The court examined the principles governing equity of exoneration and held that, as the ex-wife was a director and shareholder of the debtor company (and had actively participated in the transactions—she had derived a direct benefit from the loans. As such, she was treated as a joint principal debtor, and her claim to be indemnified from the bankrupt’s share failed, save for one small exception. The decision underscores the limited scope of equity of exoneration where both parties have meaningful involvement in a borrowing entity, largely setting aside the old-fashioned principles of married women's property rights from which the equity of exoneration derives. Written by Stephen Alexander, partner at Mourant and Roxanna Lackschewitz-Martin, associate at Mourant.