Double Indemnities … and Exoneration

“Equity of exoneration”. It’s not exactly a phrase that whets the appetite, is it? Nonetheless, you should read on, because  it’s sometimes a weapon of considerable power in advising a client who has acted as a guarantor or surety. A recent case, Day v Shaw & Shaw [2014] EWHC 367 (Ch) (on BAILII here) has extended an existing line of thought that it’s a weapon of particular strength and force when considering “husbands and wives”.¹

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When the principle is correctly applied, the difference to the surety (and also to the disappointed creditor) can be huge. In Day v Shaw, Mrs Shaw’s share of the net proceeds of sale doubled from approximately £22,000 in round figures to about £45,000. Nor was that all. In spite of the fact that there was sufficient equity in the property to repay his debt, a creditor [Mr Day], who had his judgment secured on the property under a charging order, got nothing at all.

Perhaps, therefore, it’s fairer to say that exoneration is an equity with a dull name, but interesting results!

The Facts

On a wide-angle view of the case, Mrs Shaw had acted as a guarantor of the debts of a business run by Mr Shaw and their daughter, Mrs Shergold. Mr Shaw and Mrs Shergold were directors of the company. There was some evidence at trial that Mrs Shaw owned shares in the company, though that point was never seriously pursued.

The story starts back in 1997, when Mr Day loaned a sum of money [not specified in the judgment] to Mr Shaw and Mrs Shergold. The loan was unsecured. No more is said about it than that, but we can assume it was loaned to them for the purposes of the business; it would seem, however, to have been loaned to them personally and not to the company. The repayment date was in 2007.

In 2002, Avon changed its business bankers from RBS to Barclays. On the same day in March 2002, Mr Shaw and Mrs Shergold executed personal guarantees to the Bank in respect of all debts owed by the company, and Mr and Mrs Shaw executed a second mortgage over their home. Avon was also a party to that second charge.

The terms of the charge referred to Avon as “the Principal Debtor” and to Mr and Mrs Shaw jointly as “the Mortgagor”.

The terms identified by Morgan J as material were:

  • Avon covenanted with Barclays that it would repay all monies on demand;
  • Mr and Mrs Shaw covenanted that they would pay to Barclays the sums due from Mr Shaw [including those due from him as guarantor];
  • This covenant expressly applied to any liability of Mr and Mrs Shaw jointly whether “entered into solely or jointly with any other person and whether as principal or surety”;
  • Mr and Mrs Shaw charged the property with the payment of all monies and liabilities covenanted to be paid under the charge whether by the Principal Debtor or by the Mortgagor.

As is fairly common, the Bank was (at least) doubly protected: it had a double indemnity in the personal guarantees of the directors, and it had security for Avon’s debt and any debt of Mr Shaw’s by way of the mortgage.  Continue reading