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A recent case has raised issues which may have far-reaching and important consequences on the finances of one spouse in the event of the bankruptcy of the other. The question which arose in the recent case of Lemon & Wood v Chawda concerned a residential investment property jointly owned by Mr and Mrs Chawda since it was purchased in 1995. Both before and after Mr Chawda’s bankruptcy in November 2011, the rental income had been shared equally between them.

In 1999 the property had been remortgaged in 1999 to raise £80,000 to enable Mr Chawda to buy a business premises jointly with his brother. Mrs Chawda claimed that she had no interest in either the business premises or the business (a mobile phone business) itself. Consequently she claimed that, under the principle of equity of exoneration, the £80,000 should have been repaid out of the husband’s share, leaving her with a greater share of the equity.

The leading case on exoneration was Re Pittortou, a 1995 case in which the judge said that exoneration depended on the intention of the parties. In essence, it applied in cases where a spouse joined in a charge over jointly-owned property for the purposes of the bankrupt, and the money was borrowed and used for the bankrupt’s sole benefit.

In the Chawda case, the Court found that, where a husband and wife had pooled their resources and enjoyed a prosperous lifestyle as a result of the bankrupt’s business, then it would be artificial for one spouse to take the benefits of that business whilst trying to enforce the individual right of exoneration. Mr and Mrs Chawda had administered their affairs jointly, which made it impossible to establish who had financed what. It followed that exoneration did not apply, and Mrs Chawda was not entitled to any more than a 50% interest.

This decision means that, in a modern society where husbands and wives tend to pool their resources and enjoy a lifestyle on the back of the other’s income, there are few circumstances where exoneration will apply.

At Burton Sweet Corporate Recovery we have experience of both sides. Earlier this year we successfully argued that exoneration applied, in a case where the husband and wife had kept their financial arrangements separate. Clearly it is a complex area, and insolvency advice should be taken on a case by case basis.

We are grateful to our friends in the insolvency teams at Ashfords, Solicitors and Guildhall Chambers for bringing this case to our attention.