Case law update

IPA Insolvency Practitioner newsletter, August 2025

An insolvency case law update prepared by Neil Stewart, Associate Director at Manolete Partners PLC.

Neil is a Regional Associate Director based in the South of England. Before joining Manolete in January 2019, Neil spent just over 20 years in legal practice, specialising in commercial dispute resolution and contentious insolvency. He was a partner in what is now known as Broadfield where he used his higher rights of audience and acted as an advocate in both interim hearings and at trial. He is an accredited mediator, a former R3 council member and current regional chairman of R3 Southern & Thames Valley.

Joint ownership – but who really owned the house?

Trustees in bankruptcy will be only too familiar with the picture.  A property is jointly owned with no indication in the TR1 or elsewhere indicating unequal shares.  One co-owner goes bankrupt.  The trustee in bankruptcy seeks to realise the bankruptcy estates presumed 50% share of the equity only to find the non-bankrupt co-owner claiming a far greater share based on devices which include:

• an eleventh-hour trust deed;
• a resulting or common intention constructive trust;
• equitable accounting arising from contributions boosting the property’s value; and
• the equity of exoneration.

In Armstrong & Anor v Harrow [2025] EWHC 1790 (Ch) the bankrupt, Christopher Russell, and his then wife, Sandra Harrow, had owned a property called The Old Manse which they sold on 31 July 2020, just 7 weeks before the issue of the bankruptcy petition on which Mr Russell was made bankrupt. 

Earlier that year, on 20 January 2020, they had executed a deed of trust purporting to give Mrs Harrow 99.9% of the beneficial interest.   But wisely she abandoned reliance on it, given its proximity to Mr Russell’s bankruptcy.  Instead, she sought to deprive the trustees in bankruptcy of all the net proceeds of sale (£152,447) based on the equity of exoneration.  

What is the equity of exoneration?

The equity of exoneration arises where one joint owner of a property charges the property for their sole benefit. The other co-owner is treated like a surety and is presumed to be entitled to be exonerated out of the other owner’s share. This equitable principle is based upon inferred intentions but can also be rebutted on the particular circumstances of the case.

A classic example where this equitable principle has arisen is where a wife mortgages the family home, together with her husband, as security for the husband’s business ventures for the husband’s sole benefit and then claims that the loan should be taken solely against the husband’s share of the equity. 

The dispute in Armstrong v Harrow

The key issue was whether the equity of exoneration applied.  The trustees argued that it did not.  They said that the loans were not to Mr Russell personally or even to his company, Watercare International Limited (in fact there was one small loan to Watercare) but to a company called Callian Management Services Limited which was owned and directed by both Mr Russell and Mrs Harrow.  They said it made no difference that the loans were used largely to discharge prior lending to Watercare.

Mrs Harrow’s case was that, in reality, she had little to nothing to do with Callian.  Mr Russell, she said, had pressured her into granting the charges and she derived no real benefit from them.

Proceeds of sale

After discharging loans of around £1.18 million, the full net sale proceeds went to Mrs Harrow. 

The trustees in bankruptcy claimed half of this (£76,223) plus half the sum of £55,996 (£27,998) used to pay a loan secured on a different property, solely owned by her.

The court’s decision

Judge Mullen’s early reference to “Mrs Harrow’s self-serving evidence as to her involvement” in Callian did not bode well for her.  The judge was similarly unconvinced by Mrs Harrow’s characterisation of the pressure to which she had been subjected by Mr Russell in agreeing the loans. 

In short, Mrs Harrow was not merely a cypher for Mr Russell or unable to make decisions freely.

That did not mean the equity of exoneration could not arise but it narrowed the scope of her case to the question of whether her apparent joint ownership and control of the Company was insignificant or illusory so that she could not be said to have benefited from the loan.  The facts were against her on that issue.

The judge found that:

• Mrs Harrow was a director of Callian and had acted as such in the execution of documents and use of its bank account;
• on her own admission, she understood the responsibilities of being a company director;
• she had her own business experience and was a director of other companies independently of Mr Russell; and
• as a shareholder, she had a direct financial interest in Callian.

Mrs Harrow was thus found to have benefited from the loans which defeated her equity of exoneration claim.  But not entirely:

Concession

Just under £18,000 of the proceeds of sale had been paid to a lender to discharge a secured loan made to Watercare, Mr Russell’s company.

Just as Mrs Harrow failed to satisfy the judge that she had no real interest in Callian, by the same token the trustees were unable to show that she derived any direct benefit from the small loan made to Watercare.  Any indirect benefit was intangible and impossible to quantify. 

She was therefore entitled to an equity of exoneration in respect of that slice.

Conclusion

Mrs Harrow’s downfall arose mainly because she had taken an active role in Callian’s affairs and was a shareholder as well as a director.  That settled the narrow question as to whether she could be regarded as having benefited from the loans to Callian.  The judge found that she could so she was not entitled to an equity of exoneration. 

But note the word “narrow”.  Unlike disputes involving equitable accounting or unequal beneficial interests arising through the co-owners’ financial arrangements with each other, the court did not have to consider the whole course of dealing between the joint owners.  When that happens, as is often the case, predicting the outcome can be a lot more difficult.  So always ensure you have a solid footing, both evidentially and financially, before issuing an application.

Content courtesy of IPA principal sponsor Manolete Partners PLC.

Manolete Partners PLC is an investment business focused on dispute finance. It is not a law firm and does not provide legal advice.

Please note that guest articles do not necessarily represent the views of the IPA.