Equity of Exoneration and Joint Liability: Insights from Armstrong & Anor v Harrow [2025] EWHC 1790 (Ch)

On 18 July 2025, ICC Judge Mullen handed down judgment in Armstrong & Anor v Harrow [2025] EWHC 1790 (Ch) denying Mrs Harrow’s claim for an equity of exoneration to keep the full proceeds from the sale of the matrimonial home. 

Key Points:

• A clear reminder as to the limited scope of the equity of exoneration where both parties actively participate in a borrowing company.
• Where both co-owners are directors and shareholders of the borrowing company and are engaged with the company’s financial dealings, they will be deemed to both be of equal liability.
• For individuals: ensure maximum transparency and clear documentation setting out financial transactions, which impact jointly owned / matrimonial property. 
• For insolvency practitioners: it’s a key reminder that the reality of the position on the ground, not the illusion, will determine liability and the co-owner’s ability to rely on the equity of exoneration. 
• An overarching reminder that, when relying on equity, clean hands are required. 

Background

The case involved Sandra Harrow and her former husband Chrisopher Russell who jointly owned a property called The Old Manse. 

The Old Manse was sold in July 2020, shortly before a bankruptcy petition was presented against Mr Russell in September 2020 and he was subsequently declared bankrupt in November 2020. 

A trust deed executed in January 2020 purported to transfer 99.9% of Mr Russell’s beneficial interest in Old Manse to Mrs Harrow.

The net sale proceeds were applied to discharge several secured loans from various lenders, some secured on the Old Manse and one secured on a separate property on Bell Street solely owned by Mrs Harrow. The net sale proceeds after loan repayments were paid to Mrs Harrow.

The trustees in bankruptcy of Mr Russell sought to recover half of the net sale proceeds.

Equity of Exoneration 

The Trustees contended that the Trust Deed was a transaction at an undervalue and / or a preference under the Insolvency Act 1986. The deed was declared ineffective. 

Mrs Harrow abandoned reliance on the Trust Deed and sought to rely on the principle of equity of exoneration instead. This principle allows a joint owner (e.g. Mrs Harrow) to claim that debts secured on jointly owned property should be borne by the co-owner who benefited from the loan (e.g. Mr Russell). Mrs Harrow argued she received no benefit from the loans, which were used to refinance debts of Mr Russell’s company, Watercare International Limited.

Net sale proceeds used to discharge security

Mr Russell and Mrs Harrow were both directors and shareholders of Callian Management Services Limited. Mr Harrow was also a director and shareholder of Watercare. Watercare had borrowed money from several unconnected lenders, and these loans were secured against the Old Manse. Watercare also indirectly borrowed money from another one of those lenders (“2017 Loan”). The 2017 Loan was secured against Bell Street. Callian also borrowed further funds from an unconnected lender, the majority of which were used to entirely discharge the prior lending to Watercare,—again the Callian Loan was secured against the Old Manse.

Mrs Harrow argued that, despite being a director and shareholder of Callian, in reality she had nothing to do with it and that Mr Russell had pressured her into granting the charges and she derived no benefit from them. Critically, around the same time as Mrs Harrow selling the Bell Street, she attempted to resign as director and shareholder and tried to backdate her resignation date to predate the loans.

The Court found that Mrs Harrow was actively involved in Callian, such activity involved signing loan documents and giving personal guarantees. Mrs Harrow was not a passive party but fully engaged with Callian’s financial dealings. Mr Russell and Mrs Harrow were deemed to be of both equal liability for the loan to Callian, despite even the fact that the monies were going to the benefit of Watercare.

The Court contended that Mrs Harrow was a joint principal debtor, not a mere surety, and thus equity of exoneration did not apply.

In respect of the loan made to Watercare, the Court found that Mrs Harrow was entitled to an equity of exoneration on the basis that she had no interest in Watercare and had no direct benefit of the loans to Watercare. 

The Court therefore held that the Trustees are entitled to recover half of the net proceeds of sale of the Old Manse paid to Mrs Harrow as well as half of the monies paid to discharge the loan secured on Bell Street, subject to the successful element of Mrs Harrow’s equity of exoneration claim. The Court held that Mrs Harrow was entitled to an equity of exoneration from the Trustees’ share of the net sale proceeds in respect of the loan made to Watercare. 

Apportionment of liability 

The Court considered in detail the response of equity to the apportionment of liability in various circumstances. 

It is clear from the Court’s analysis that the focus is not solely based upon just being a director or shareholder of a company but actual day to day participation in a company and whether a joint owner’s role can be considered illusory or insignificant. 

The Court stated the starting point is that “as Mr Russell and Mrs Harrow were shareholders and directors of Callian, they should be treated as if they were the joint principal debtors as if the loans to Callian had been made to them personally. The default position is thus that there is no basis for an equitable reapportionment of liability between themselves”. The Judge considered whether it could be said that Mrs Harrow had no interest, or no significant interest, in Callian based upon Mrs Harrow’s contention that despite being a director and shareholder of Callian, in reality she had nothing to do with it.

The Judge held “that Mrs Harrow was responsible, with her husband, for the taking of the loans by Callian. She is an experienced businesswoman, with a number of companies of her own. She agreed to the loans and signed documentation to give effect to them. They were not made without her knowledge or consent.”.

The Judge went further to say that “she was at all material times a director and a shareholder. She was an active director, executing documentation connected with obtaining the loans that were ultimately secured on The Old Manse and Bell Street and offering personal guarantees. She used its accounts, albeit for her own business purposes. She agreed to the loans and to the use that would be made of them. It is impossible to form the conclusion that, despite the position recorded at Companies House, she had no real role in the direction of the company or, as shareholder, a financial interest in it. That financial interest is no less real because, as I accept, Mrs Harrow had not, at the point the loans were made, received a salary or dividend from Callian”.

The Judge considered the reality of the position on the ground: “As a shareholder she had a direct financial interest in the company. To ask, simply, “Who got the money?” would ignore the reality that the loan was made to a company of which both Mr Russell and Mrs Harrow were the owners and the decision makers and I am not satisfied on the balance of probabilities that Mrs Harrow was unable make decisions freely or that she was no more than a cypher for her then husband. It follows that Mr Russell and Mrs Harrow are to be regarded as joint principal debtors for the purposes of determining the existence of an equity of exoneration in relation to the loans to Callian. It was accepted by Mrs Harrow that there was no agreement between Mr Russell and her as to how the liability should be apportioned between them and there is no basis to imply one. There is thus no basis to depart from the default position of equal liability”.

The above analysis should be considered when faced with a situation whereby, for example, Mrs Harrow was a 1% shareholder and Mr Russell was a 99% shareholder, or a situation where Mr Russell is a shareholder and director but Mrs Harrow is director, and not shareholder. The Court will look at the reality of the position on the ground when considering the whether the joint owner received any benefit from the loans. 

Conclusion

This is a valuable judgment for anyone dealing with property interests (within an insolvency context or otherwise) involving loans secured against jointly owned assets, where the funds loaned have not simply been used to purchase the property, and highlights the importance of actual involvement and benefit in determining the nuance between principal liability versus surety for jointly secured debts.