Bankruptcy, beneficial interest and the battle for the family home

Come with me, if you will, on a journey that long predates the Equalities Acts of the 21st Century. One that takes us back in time long before either the Sex Discrimination Act 1975 or the Equal Pay Act 1970. Indeed we must venture even before the suffragette movement brought enfranchisement for women and before the landmark Married Women’s Property Act 1882. In this landscape that now seems so strange through today’s eyes, upon marriage a woman’s legal identity was largely merged with her husband’s under the doctrine of coverture. She could not own property in her own right and anything she brought to the marriage, inherited or earned became her husband’s legal property.

In 1882 the Married Women’s Property Act granted women the right to own property separately and the courts increasingly recognised that property held by a married woman was her own and that she was not automatically liable for her husband’s debts. Should a husband burden his estate with debts, this change in the law gave women the opportunity to invoke the equitable principle of “exoneration”. In other words, she could argue that her property should be exonerated from her husband’s debts. This gave real financial autonomy and was a major step towards the economic independence of women.

The idea of equity of exoneration was in fact established long before the Married Women’s Property Act 1882. It was originally developed to ensure that property left to a beneficiary by will or in trust was exonerated from debts or charges that encumbered it. But once married women gained their own financial identity, they could finally apply this principle to protect their interests in matrimonial property and claim indemnity from debts incurred solely by their husbands.

And so we leap forward – both temporally and socially - to 13 May 2025. On that date in the case of Amstrong and another v Harrow [2025] EWHC 1790 (Ch), Mrs Harrow invoked the equity of exoneration in the Insolvency and Companies Court, judgment having been handed down some weeks later.  The case serves as a modern illustration of the equity of exoneration and its limitations within insolvency proceedings. Mrs Harrow claimed that the principle entitled her to retain all the net proceeds of sale of the matrimonial home she previously shared with her former husband (sold just over 6 weeks before a bankruptcy petition was presented against her former husband) and that his trustees in bankruptcy should have no share. It was her case that the loans secured against the former matrimonial home were taken out solely for her former husband’s benefit and accordingly she should not bear their burden.

Whilst equity of exoneration presumes that a debt secured on jointly owned property should be borne primarily by the co-owner who is the debtor, there can be a rebuttal if either (i) there is an express or implied agreement between the parties about how the liability should be shared or (ii) the non-debtor co-owner received a benefit from the loan. 

Under the second head, whether there has been a benefit or not is interpreted more widely than by just looking at who received the funds. Indeed, in the instant case, the loan was in fact made to a company of which Mrs Harrow was also a director and shareholder when the loans were made. In such circumstances the court held that the presumption does not arise and the liability should be shared. Husband and wife were treated as joint principal debtors in the same way as if the loan were made to them both personally.  

Although there may still have been scope for Mrs Harrow to benefit from an equity of exoneration if her involvement in the company had been purely illusory or insignificant, there was a burden upon her to prove that was the case and she was unable to do so in practice.  She had signed loan documentation herself and the court found no coercion by her former husband to do so. It did not matter that she had not received a salary or a dividend from the company in question at the time of the loan. The trustees in bankruptcy were subsequently deemed entitled to one half of the net proceeds of the sale of the former matrimonial home (together with half of the monies forming part of the sales proceeds used to release a charge on another property solely owned by Mrs Harrow).

She was exonerated from one small loan made to another of the former husband’s (since insolvent) companies in which she had no interest.  In this instance the presumption of exoneration was not displaced by her having potentially received a small indirect, intangible benefit from that loan having been granted.

It is also of interest here that the parties entered into a Deed of Trust that purported to sever the joint tenancy of the property, with the property being held on trust such that 99.9% of the beneficial interest in the property vested in her but which they executed just a few months before the sale of the property and the presentation of the bankruptcy petition. In fact the wife did not seek to rely upon the Deed of Trust given the timing, but the court considered the document in any event. The court found that the execution of the Deed of Trust was a transaction at an undervalue under s.339 Insolvency Act 1986 as there was no consideration and that the former husband was insolvent at the time so the Deed was caught within the statutory five-year retrospective view.  As an ‘associate’ of the former husband within the meaning of s.340 and s.341 of the Insolvency Act 1986, to the extent it could have been argued that the transfer of the beneficial interest to Mrs Harrow was in part satisfaction of a debt due to her, it was also found that it would amount to a preference and the court declared the Deed of Trust void.

From a family law perspective, it is interesting to note the rigour of the Insolvency Court in the context of a marriage. It highlights the willingness of the Court to pierce the veil of marital arrangements, including in circumstances where the Judge accepted the marriage had been an unhappy one and the wife’s case was that she had suffered coercive control during the marriage which had been a ‘disaster’ and ‘financially devastated’ her. A timely reminder to all parties, perhaps, to enter into contemporaneous formal documentation in respect of all joint financial dealings, particularly where there may be a risk of insolvency on the horizon. An express agreement about how to share liabilities will always provide more certainty without the need to rely upon rebuttable equitable presumptions.

From an insolvency law perspective, this case reiterates the duty placed on trustees in bankruptcy to consider, review and scrutinise transactions preceding bankruptcy to identify any that can be challenged with a view to obtaining the optimal outcome for creditors of the bankruptcy estate. This case highlights such investigations and provides a clear example of those actions which may be deemed antecedent and open to challenge, including seeking to place assets outside of the bankruptcy estate at a time when the individual is insolvent / at risk of bankruptcy proceedings. On the making of a bankruptcy order, the legal and beneficial title to any property forming part of the debtor’s estate will automatically pass to the trustees in bankruptcy. Individuals should be aware of this in the context of property held in a marriage and be wary of any arrangement the other party may seek to put in place in the event of financial issues which could be challenged by trustees in bankruptcy. 

The Armstrong v Harrow case is a stark reminder of the rigorous scrutiny applied by Insolvency Courts to transactions involving marital property. It highlights the necessity for individuals to maintain transparency and fairness in financial dealings, especially when insolvency is a looming threat. This case serves as a timely reminder of the complexities involved in balancing family law principles with insolvency law obligations, and the need for careful planning and documentation to protect one's financial interests.