Robert Armstrong & Ors v Sandra Valerie Harrow

ICC Judge Mullen : Introduction

1. Mrs Sandra Harrow was, together with her then husband, Mr Christopher Russell, the registered proprietor of The Old Manse, High Street, Broughton, Stockbridge (“The Old Manse”). The Old Manse was sold on 31st July 2020 and the proceeds were first applied to settle various secured loans as follows: i) £1,050,675 was paid to MSP Capital Ltd (“MSP”); ii) £106,560 was paid to AIF 1 Ltd (“AIF”); iii) £17,984.65 was paid to Merchant Money Ltd (“Merchant Money”); and iv) £55,976.14 was paid to Access Commercial Investments 4 PLC (“Access Commercial”). The first three of those loans were secured by charges on The Old Manse itself. The fourth loan was secured on a property at 102 Bell Street, Henley-on-Thames (“Bell Street”), which is solely owned by Mrs Harrow. The net proceeds of sale, in the sum of £152,447, were paid to Mrs Harrow.

2. A bankruptcy petition was presented against Mr Russell on 16th September 2020 and he was made bankrupt on 5th November 2020. Ms Joanne Wright and Mr Robert Armstrong were appointed as his trustees in bankruptcy on 18th December 2020. Ms Wright was subsequently replaced as a trustee by Mr Geoffrey Bouchier pursuant to a block transfer order.

3. By an application dated 12th July 2024, the trustees in bankruptcy seek, first, to recover a half share of the net proceeds of sale paid to Mrs Harrow, being £76,223.50, to which they say the bankruptcy estate of Mr Russell is entitled. Secondly, they seek the sum of £27,988.07, being half of the sum paid to discharge the loan made by Access Commercial, which had been secured on Bell Street.

4. In doing so, they seek a declaration that the execution of a deed of trust in Mrs Harrow’s favour on 20th January 2020, by which it was declared that the joint tenancy of The Old Manse was severed and the property was held on trust so that 99.9% of the beneficial interest vested in her, was a transaction at an undervalue or a preference for the purposes of the Insolvency Act 1986. Mrs Harrow does not in fact, as she puts it, “rely” upon the deed of trust, given its proximity to Mr Russell’s bankruptcy. Instead, she says that the charges to which The Old Manse and Bell Street were subject to secured loans for the benefit of Mr Russell and that she is entitled to the whole of the proceeds of sale of the Old Manse by reason of an equity of exoneration. It is that contention that was the subject of the trial before me.

5. There was no substantial disagreement as to the broad principles of the operation of the equity of exoneration. The trustees however say that the equity does not arise here, where the loans secured by the charges were made, not to the bankrupt himself or to his own company, Watercare International Limited (“Watercare”), but to a company called Callian Management Services Limited (“Callian”) of which both Mr Russell and Mrs Harrow were shareholders and directors. The trustees say that that is so even though the loans were in large measure used to discharge prior lending to Watercare, which lending was itself secured on The Old Manse. Mrs Harrow’s case is that, in reality, she had little to nothing to do with Callian. Mr Russell had pressured her into granting the charges and she derived no benefit from the loans.

6. The history of the lending secured on the properties is not in dispute either. The Old Manse was purchased for £935,000 in April 2010 with the benefit of a mortgage loan of £450,000 from Clydesdale Bank. It was registered in the joint names of Mr Russell and Mrs Harrow, who had married in the previous year, and Mrs Harrow’s evidence was that she spent substantial sums on renovating the property, as she had on Mr Russell’s own property, which was sold following their marriage.

7. The Old Manse was subsequently charged to secure loans that were made to Watercare, of which Mr Russell was director and shareholder. It is not alleged that Mrs Harrow was either a shareholder or director of this company. The first two loans for the benefit of Watercare totalled £400,000 and were made by General Asset Management Limited, trading as Accredo, (“Accredo”) on 19th August 2016. These were secured on The Old Manse.

8. Accredo made a further loan on 27th October 2017, this time to a company called Shop At Stocks Ltd, of which Mrs Harrow was the director, or at least a director, at the time. I shall discuss this loan further below, but it is again said that it was taken for the benefit of Watercare as a result of pressure from Mr Russell. This loan was secured on Bell Street and Mrs Harrow gave a personal guarantee. It appears, from the limited bank statements available, that Watercare credited Shop At Stocks Ltd’s account with a sum equal to the monthly repayment instalments on this loan, at least between November 2017 and January 2018. Mrs Harrow’s case is that, following Watercare’s insolvency, enforcement action was taken against Bell Street, which was in due course settled, with Mrs Harrow agreeing to pay over £100,000.

9. Two further loans were taken for the benefit of Watercare, both loans being made by Merchant Money. These were again secured on The Old Manse. The first was a loan of £52,500 made on 17th May 2018 and the second was a loan of £18,375 made on 15th November 2018.

10. The existing borrowing on the property was refinanced, and further loans were obtained, in 2019 and 2020. On 16th August 2019, Callian obtained two loans, which were used to discharge the existing borrowing by Watercare secured on The Old Manse. The first of these loans, in the sum of £945,000, came from MSP and the second, in the sum of £100,000, from AIF. The trustees accept that some of these monies were paid directly to the existing lenders to discharge Watercare’s borrowing. The advances also discharged the Clydesdale Bank mortgage obtained to purchase The Old Manse. This left the sum of £27,562, which was paid into Callian’s bank account and, it would appear, was promptly paid to Mr Russell’s personal account.

11. Merchant Money advanced a further £16,560 to Watercare in 2019. This advance was pursuant to agreement between Accredo and Watercare, not Callian, dated 17th September 2019.

12. Callian then entered into a revolving credit facility of £55,000 provided by Access Commercial on 26th March 2020. This was the loan secured against Bell Street. It is Mrs Harrow’s case that this was used to pay arrears of interest due on the earlier lending.

13. Mrs Harrow therefore contends that, leaving aside the discharge of the Clydesdale mortgage used to purchase the property, for which she was jointly liable with her then husband, she received no benefit from the loans made in 2019 and 2020. Leaving the Clydesdale mortgage out of account, she says that she received no benefit from £596,985 of the loan secured on The Old Manse and is entitled to be indemnified out of Mr Russell’s share of the property in respect of 50% of this amount, extinguishing his interest in the proceeds of sale.

14. More generally, Mrs Harrow contends that, over the years, she paid very substantial sums to Mr Russell. The trustees rely on their analysis of Mr Russell’s bank statements, which show that Mr Russell received in excess of £1 million from Callian and Watercare and over £314,000 being paid from Mr Russell’s accounts to Mrs Harrow, in addition to payments made towards utilities, council tax and mortgage payments on the properties. Indeed, it appears that the receipt of these sums, and the benefit to Mrs Harrow from them, was a significant plank of their case until trial. Mrs Harrow says that the trustees’ analysis of the payments made to her from Mr Russell’s account is wrong and relies on various loans that she, or her own company, took out for the benefit of Watercare. She says that any payments made by Mr Russell are more than offset by payments made from her to him. She has lodged a proof of debt in his bankruptcy for around £1.4 million. The witnesses Mr Robert Armstrong

15. I heard first from Mr Armstrong, one of the joint trustees. He has made two witness statements in these proceedings. In the first, dated 21st February 2025, he replied to the evidence filed on behalf of Mrs Harrow. In the second, dated 30th April 2025, he adopted the evidence set out in the witness statement of Ms Joanne Wright filed with the trustees’ application and confirmed it as “correct and true”. Ms Wright had, as Mr Armstrong put it, been the lead office holder in the bankruptcy of Mr Russell, with Mr Armstrong taking the lead role following her replacement by Mr Bouchier.

16. Mr Hyams, for Mrs Harrow, challenged Mr Armstrong in cross-examination as to the extent to which he could verify the facts stated in Ms Wright’s witness statement and, to the extent that he could, the extent to which he had in fact done so. For example, Ms Wright refers to a meeting on 20th January 2020, at which Mr Russell is said to have admitted creating fraudulent invoices that had induced lenders to make further advances to Watercare. Mr Armstrong was not present at it. In fact, it is not clear whether Ms Wright was present at it either and she does not explain how she knows what happened at this meeting. Mr Armstrong accepted that he had adopted this evidence without checking it for himself, though he had no reason to believe that it was not true and relied upon Ms Wright’s own diligence in preparing her statement. Mr Hyams also criticised the reference in Ms Wright’s witness statement to the facility agreements exhibited to her statement when in fact only one such document was exhibited.

17. There is force in those criticisms. Mr Armstrong took the view that his fellow trustee, as an officer of the court, had satisfied herself as to the facts she set out in her witness statement, but it does appear to me that, in asserting that they were “correct and true”, Mr Armstrong should have checked the underlying documents himself. Nonetheless, the matters on which Mr Armstrong was challenged were limited to issues of tangential relevance to the questions that I have to decide, and it was not suggested that his evidence on those issues, or that of Ms Wright, was inadmissible. What is of course the case is that neither Ms Wright nor Mr Armstrong had any involvement in making of the loans secured on the properties and derive their understanding from the documents that they have examined and the information that they have gathered since their appointment as Mr Russell’s trustees in bankruptcy. There is little first-hand information that they can give as to the events prior to their appointment as trustees. I bear in mind the limitations on the first-hand evidence that Mr Armstrong can give but, in my judgment, he was a fair-minded and honest witness who was seeking to assist the court as best he could. Mrs Sandra Harrow

18. Mrs Harrow made one witness statement, dated 24th January 2025. Her written evidence is that, prior to her marriage to Mr Russell, she was “well off and financially independent” but that their marriage had been “a disaster” which left her “financially devastated”. She says that he prevailed upon her to transfer large sums of money to him to support his business, as well as spending large sums on the renovation of The Old Manse. She said in her witness statement that “with the benefit of hindsight I now realise that he exercised coercive control over me throughout almost all of our marriage”. She said that, shortly after the renovation works at The Old Manse were completed in around 2013, she came under pressure to agree to raise money, secured on the property, which she describes as “horrendous and constant almost every day”. He would “scream and shout” and she feared that he would hit her.

19. She was cross-examined as to her characterisation of the pressure brought to bear on her by Mr Russell, which she tended to describe in terms of persuasion in her witness statement. In her discussions of the making of the loans to Callian in August 2019 she merely says that these were arranged by Mr Russell. Though she signed documents in relation to these loans she does not refer to any specific pressure to do so. In relation to the advance by Merchant Money in September 2019 she says that she was “persuaded” to agree to the further advance being made and secured on The Old Manse. Mrs Harrow said in oral evidence that this was perhaps not the right word to have used and that “forced” might have been better. In relation to the Access Commercial loan in 2020 she does not refer to any pressure or persuasion brought to bear on her by Mr Russell.

20. As to her involvement in Callian, she said in her written evidence: “The Trustees have previously raised an issue about the fact that the MSP loan and the [AIF] loan were advanced to a company called [Callian], a company in which both Mr Russell and I were directors. I explain in further detail at paragraphs 65 to 69 below the nature of my limited involvement in [Callian], but the reason for these advances being made to [Callian] was straightforward: they were commercial loans and were required, therefore, to be advanced to a company and not to individuals. I was required to guarantee the loan on behalf of [Callian], and as can be seen from the August 2019 completion statement… none of the money went to [Callian].” She said that she had resigned as a director on 1st July 2019 and had transferred her shareholding to Mr Russell on 10th June 2019. As I shall explain, I do not accept that this is true, but Mrs Harrow’s evidence was that Mr Russell was responsible for the filings at Companies House and that she had not been involved in this and it was all done over her head. On any footing the filings at Companies House were backdated and Mrs Harrow in fact accepted in her oral evidence, contrary to what she had said in her witness statement, that she had not resigned as a director in July 2019.

21. It was put to Mrs Harrow that she had sought to place distance between herself and Callian as a result of her husband’s financial difficulties and the trustees asserting an interest in the proceeds of sale. The form showing the termination of her directorship was filed at Companies House on 1st September 2020, a little more than two weeks before the presentation of the bankruptcy petition against Mr Russell. The form showing that she had ceased to be a person with significant control was filed on 12th February 2021, a little more than a month after Mrs Harrow had received a letter from the trustees’ solicitors asserting a claim to the proceeds of sale and three weeks after Mrs Harrow’s own solicitors replied to assert the equity of exoneration.

22. I find it difficult to believe that Mrs Harrow was as divorced from the filings at Companies House as she contends, whether or not she was responsible for making those filings herself. She accepted that she was familiar with the role of company directors. She has in fact been a director of at least four companies apart from Callian as well as running her own interior design business as a sole trader. She was certainly involved in the execution of the deed of trust, not least because she executed it, which she acknowledged had been “signed so late in the day it was just useless”. She had “hoped it would do something.”

23. I accept that Mr Russell and Mrs Harrow had an unhappy marriage. I also accept that Mrs Harrow regrets having made a substantial financial investment in that marriage, in terms of the sums spent on improving the property at the very least. It is difficult to avoid the impression, however, as Mr Brown for the trustees submits, that the false filings were made to create distance between Mrs Harrow and Callian. There is no obvious reason why Mr Russell would have done so if their relationship was as acrimonious as Mrs Harrow suggests. The only one of them who could benefit from this was Mrs Harrow. I do not find, and I do not need to find, that Mrs Harrow made the filings herself but, taken with the execution of the deed of trust, the only purpose of which was to give Mrs Harrow a claim to the whole of the equity in the property, it is evident that Mrs Harrow was party, at least to some extent, to attempts to fortify her claim to the proceeds of sale of The Old Manse as a result of Mr Russell’s financial problems. The timing of the filing of the notices that she had ceased to be a director and a person with significant control suggests that they too were part of that attempt. This does not mean that what Mrs Harrow says about the extent of her involvement in Callian is not true or that an equity of exoneration could not arise. It does mean that I treat Mrs Harrow’s self-serving evidence as to her involvement in the company with caution.

24. That caution contributes a similar degree of caution as to how she characterises the pressure that she says that she was subjected to by Mr Russell in agreeing to the loans. In correspondence in June 2021 Mrs Harrow’s solicitors spoke of her being “pressurised”, “influenced and prevailed upon” to provide financial support to Watercare. Her witness statement in January 2025 refers to “pressure” and “persuasion”, while her oral evidence elevated this to having been “forced”. Insofar as Mrs Harrow’s evidence seeks to show that she lacked effective autonomy in deciding whether or not to agree to the loans in 2019 and 2020 I consider it inconsistent and unreliable and I reject it. While I accept that Mrs Harrow’s marriage to Mr Russell was unhappy, indeed very unhappy, I am not persuaded, on the evidence before me, that Mrs Harrow was subject to coercive control in her relationship with Mr Russell, or that she was “forced” to agree to the loans. The evidence that I have comes nowhere near establishing that Mrs Harrow was unable to make her own financial decisions or other decisions freely. She had a number of business interests, was the director of several companies that were unconnected with Mr Russell, not least Shop At Stocks Ltd, and there is nothing to suggest that she lacked effective autonomy in the conduct of her financial affairs or her life generally. There is nothing in her statement, or any contemporaneous documents, to show that she was subject to duress or undue pressure that meant that she was unable to make her own decisions freely at the time that the loans to Callian were made. There are no emails or texts to her family or friends to suggest this in the evidence that I have seen.

25. Again, I stress that this does not prevent an equity of exoneration arising, but the evidence does not provide any basis to find that Mrs Harrow’s consent, as a director of Callian, to the taking of the loans could be vitiated. Indeed, that was not the way in which her case was put. Her written evidence suggests pressure and reluctance to agree to some of the loans by way of context to the support of Watercare but does not go further and squarely assert that agreement to the making of the loans was procured by duress. I cannot find that it was. Mrs Lise Harrow

26. Mrs Lise Harrow is Mrs Harrow’s daughter-in-law and her fellow director at Shop At Stocks Ltd. Her evidence was limited to the making of the loan to that company. She was not privy to any discussions in relation to loans to Watercare or Callian. Her oral evidence departed from that given in her witness statement. In her statement, she said that, during the course of its preparation, it had been “drawn to her attention” that she had ceased to be a director of Shop At Stocks Ltd on 4th October 2017, after which the loan with Accredo was entered into by Shop At Stocks Ltd, acting by its then sole registered director, Mrs Harrow. She says that she did not recall agreeing to resign. In her oral evidence she said that she had not believed herself to be a director at the time that the loan was entered into. She had been asked by Mr Russell to resign and, though she “did not agree”, she “had no choice”. She maintained that her memory of events was “quite clear”.

27. It is fair to say that Mrs Lise Harrow’s written evidence on this point is caveated by her observation that it was a long time ago, though there was no explanation as to what had caused her recollection to change. I accept her evidence that she had been opposed to Shop At Stocks Ltd taking the loan and that Mr Russell had told her that she could resign her directorship to enable Mrs Harrow to sign the documents herself. I do not accept her written evidence that she was removed as a director without her knowledge or her oral evidence that she resigned against her will. Her recollection as to the circumstances in which she ceased to be a director is unreliable and is unsupported by contemporaneous evidence. Principles applicable to the Equity of Exoneration

28. The principal case on the equity of exoneration in recent times is Armstrong v Onyearu [2018] Ch

137. As here, the case concerned a property which was jointly owned in equity by spouses. It was subject to a charge securing a loan for the benefit of the husband’s practice as a solicitor. The husband was adjudged bankrupt and his trustee in bankruptcy sought an order for sale of the property. At first instance, it was held that the wife was entitled to an equity of exoneration, which extinguished the husband’s share in the property. The trustee appealed, contending that the doctrine did not apply because the wife had obtained an indirect benefit from the loan which had enabled the husband to continue his solicitor’s practice and meet the monthly interest payments on their original mortgage loan. That was dismissed, the deputy judge being of the view, like the deputy registrar at first instance, that the indirect benefit received by the wife was insufficient to deny the equity of exoneration to her.

29. On a further appeal to the Court of Appeal, David Richards LJ, as he then was, described the operation of the doctrine as follows: “1 Where property jointly owned by A and B is charged to secure the debts of B only, A is or may be entitled to a charge over B’s share of the property to the extent that B’s debts are paid out of A’s share. This is known as the equity of exoneration. Although this label, and its origins in the protection given by equity to married women’s property rights before the Married Women’s Property Act 1882 (45 & 46 Vict c 75), lends an obscure, even archaic, air, it is best understood as part of the relief more generally given to sureties against the principal debtor. It is as much a feature of contemporary law as it was of equity in the 18th and 19th centuries. 2 The most common example of jointly-owned property is a house or flat owned by a cohabiting couple, married or unmarried. For this reason, the cases in which the courts usually encounter the equity of exoneration are those in which, first, an unmarried couple separate and their interests in the property must be determined; second, a cohabitee, whether married or unmarried, becomes bankrupt and the trustee in bankruptcy seeks to realise the bankrupt’s share of the property; and, third, a judgment creditor of one cohabitee, married or unmarried, seeks to enforce the judgment against the property. But the equity is not confined to cohabiting couples and may arise in the case of any joint owners of property: see, for example, Gee v Liddell [1913] 2 Ch 62 and In re A Debtor(No 24 of 1971), Ex p Marley v Trustee of the Property of the Debtor [1976] 1 WLR 952.”

30. The availability of the equity is a question of the intention, usually the presumed intention, of the parties. As explained by Scott J in In re Pittortou [1985] 1 WLR 58, 62: “the equity of exoneration is a principle of equity which depends upon the presumed intention of the parties. If the circumstances of a particular case do not justify the inference, or indeed if the circumstances negate the inference, that it was the joint intention of the joint mortgagors that the burden of the secured indebtedness should fall primarily on the share of that one of them who was the debtor, then that consequence will not follow.” Where it applies, the effect of the equity is to enhance the proprietary interest of the joint owner in the property and not simply to give them a personal right to an indemnity from the debtor who is the other joint mortgagor.

31. The specific question for the Court of Appeal in Armstrong was the effect of the indirect benefit received by the wife from the contribution to the joint living expenses from the husband’s solicitor’s practice which received the loans. David Richards LJ stated the principles as they stood as follows: “43. The position in English law following In re Pittortou [1985] 1WLR 58 can be summarised as follows. First, where jointly-owned property is charged to secure the indebtedness of one of the joint owners, there is an evidential presumption that the parties intended that, as between themselves, the liability should fall on the debtor’s share of the property. Second, the circumstances of the case may be such that this presumed intention does not arise at all. Lindley MR gave some examples in Paget v Paget [1898] 1 Ch 470 and the facts of that case, where the borrowing was incurred by the husband to repay debts incurred to fund the couple’s joint lifestyle and where the conclusion on the evidence was that the wife had for her own good reasons deliberately made provision for her husband’s debts, provided another example. These are cases where the debts to be paid, although in law the debts of one co-owner (A), are in substance the debts of the other co-owner (B) or of A and B jointly. Third, the presumed intention arising under the first proposition above, which follows from the nature of the transaction and the position generally of a surety, may be rebutted by evidence of a different intention. Fourth, in the absence of evidence of an actual contrary intention, evidence that the debt is incurred for the direct benefit of B will rebut the presumed intention. Fifth, while it used to be the case that household expenses were ordinarily the responsibility of the husband, the same is no longer the case, as shown by In re Pittortou where the burden of borrowings by one joint owner to fund the ordinary living expenses of both co-owners is assumed to be shared equally between them. Sixth, the equity applies to borrowings by one co-owner to fund his or her business, even though the other co-owner may derive some indirect benefit from the business, by way of contributions to joint living expenses from the business owner’s income. Seventh, the intention of the parties is to be determined as at the time the charge is given, although subsequent events may be considered for the light they shed on what the intention was: this was agreed between counsel before us, rightly so in the light of what this court said in Paget v Paget [1898] 1 Ch 470,

473. Eighth, the particular facts of each case need careful consideration to determine whether the equity applies.”

32. David Richards LJ went on to consider the Australian case of Parsons v McBain [2001] FCA

376. In that case, the wives of two bankrupts resisted the trustees’ claims to the matrimonial property on the basis of an equity of exoneration. The trial judge rejected their claims to the equity on the basis that they had received a “tangible benefit” from the provision of monies to their husband’s businesses which would, as it was put by counsel, bring “home money to put food on the table and clothe the children”. An appeal to the Federal Court of Australia was successful. That court held: “If a surety receives a benefit from the loan, the equity of exoneration may be defeated. So, if the borrowed funds are applied to discharge the surety’s debts, the surety could not claim exoneration, at least in respect of the benefit received. But the benefit must be from the loan itself. The question suggested by the Lord Chancellor of Ireland is: ‘Who got the money?’: see In re Kiely (1857) Ir Ch Rep 394,

405. In Paget v Paget [1898] 1 Ch 470 both the husband and the wife ‘got the money’ and this prevented the wife claiming exoneration. The ‘tangible benefit’ referred to by the trial judge will not defeat the equity. It is too remote. In any event, the exoneration to which a surety is entitled could hardly be defeated by a benefit which is incapable of valuation, and even if it were so capable, the value is unlikely to bear any relationship to the amount received by the principal debtor.”

33. David Richards LJ noted that the court was not asking, literally, “Who got the money?” but was focussing on whether the wives obtained a benefit from the loan. In the event, the benefit identified was too remote, incapable of calculation and insufficient to displace the evidential presumption as to the intentions of the parties. He concluded that none of the cases cited, either those English cases since Inre Pittortou or the Commonwealth authorities, provided support for the proposition that such an indirect benefit, or the possibility of such benefit, would prevent the equity arising.

34. Mr Hyams says that this is the case here. He contends that the beneficiary of the loans secured on the property was Watercare and any benefit that Mrs Harrow received from the business of that company is indirect and insufficient to alter the presumption that he says arises in this case. He further relies on an article by Gabriel Moss QC entitled “The ‘Equity of Exoneration’ and the Matrimonial Home”, Insolv. Int. 2018, 31(3), 101-104: “Although the equity of exoneration has been held by the Court of Appeal to be an aspect of suretyship, in the context of cohabitees it creates special complexities which are difficult to unravel and may cause controversy and litigation. The only certain point is that short of the Supreme Court the derivation of an indirect benefit from the charge, e.g. by way of contingent addition to the household income, will not be sufficient to rebut the evidential presumption that where a cohabitee charges his or her interests for the benefit of the other cohabitee, he or she does so as surety and will be entitled to an equity of exoneration. It is not clear exactly what circumstances will rebut the evidential presumption, short of a situation where the cohabitees are joint principal debtors (and then only if there is no express or implied agreement between them as to the sharing of the burden) or a situation where the mortgage debt is incurred in order to support the joint extravagant lifestyle of the parties.” I did not understand Mr Brown to disagree with the proposition that a general enhancement of a couple’s lifestyle by monies received from a business owned and controlled by one of them is an indirect benefit which does not prevent the equity from arising.

35. In identifying the person on whom the benefit of a secured loan is conferred in this context, it is not necessary that the loan be made to him personally. In Day v Shaw [2014] EWHC 36 (Ch), one of the authorities reviewed by David Richards LJ, Morgan J considered an appeal from the decision of the district judge that the equity had arisen in favour of a judgment debtor’s wife, so as to extinguish her husband’s interest in the proceeds of sale. Mr and Mrs Shaw had granted a charge to a commercial lender to secure sums due from a company, Avon, operated by Mr Shaw and their daughter-in-law, Mrs Shergold, and from those individuals under a personal guarantee. The district judge treated the loan to the company as being for the benefit of Mr Shaw alone.

36. Morgan J rejected the submission that the equity could not arise where the loan was made to the husband’s company and not the husband. The issue was what was equitable between the husband and wife. In his judgment, it did not matter whether the debt was undertaken to fund the business of the husband as a sole trader, or a business in which he is a partner, or a business run by a company owned and controlled by him. In that case, there was some doubt as to whether the wife was a shareholder of the company. The district judge had found that she was, though Morgan J doubted that the exchanges in evidence justified that finding, but it was not argued on the appeal that the wife had in fact had any benefit from the loan to Avon and the district judge had regarded any shareholding she had as insignificant.

37. Morgan J considered the response of equity to the apportionment of liability in various circumstances as follows: “33… Take first the case where the principal debtor is a company which is equally owned and controlled by a husband and a wife and where they mortgage their jointly owned house to secure the debt of the company; in such a case, there is no reason to move from the default position of equal liability. Take next the case where the principal debtor is a company owned and controlled by a friend of the husband and wife, who are persuaded to mortgage their house to secure the debt of the company; a more probable version of this example would be the case where the company is owned and controlled by their son or daughter; in such cases, there would again be no reason to move from the default position of equal liability. Lastly, take the case where the company is owned and controlled by the husband alone and he persuades his wife to join in a mortgage of the jointly owned house to secure the debt of the company.” Mr Brown relies on Morgan J’s first example here. This is a loan to a company equally owned and controlled by a husband and wife there should be no equitable reapportionment of liability between them. He similarly points to the observations in Mr Moss’s article as follows: “In some cases, the co-owner of the home will also be a co-owner of the business or at least a paid employee or shareholder. That is a direct benefit from the business.” Mr Hyams’ submission is that one must ask “Who got the money?”. The answer is that it was Mr Russell’s company.

38. It is whether Mrs Harrow’s directorship and shareholding in Callian is fatal to her claim to an equity of exoneration that is important here. In my view it is not, but I approach the question in this case broadly as follows – i) There is a presumption, as between co-owners of property, that they intend that the burden of the indebtedness secured on the property should fall primarily on the share of that one of them who was the debtor. ii) If the loan is not made directly to one of the co-owners but instead made to a company or other entity owned and controlled by him, he is treated as “the debtor” for these purposes just as if the loan had been made to him personally. iii) The presumption will be rebutted by an express or implied agreement as to the apportionment of the loan between the debtor and the other co-owner or if it is shown that the other co-owner benefitted from the loan. iv) The exercise is not necessarily to determine “who got the money” but to consider whether the other co-owner obtained the benefit, or at least a benefit, from the loan but indirect benefits in the form of the financing of the co-owners’ joint living expenses do not prevent the equity from arising. v) Where the loan is made to both co-owners as joint principal debtors the presumption does not arise, and the default position is that they are equally liable. vi) Consistently with (ii) above, where the loan is made to a company or other entity jointly owned and controlled by both co-owners of the property then they should be treated as joint principal debtors just as if the loan had been made to them both personally. vii) The equity might nonetheless arise where it is shown that a co-owner’s apparent joint ownership and control of a company arising by reason of their shareholding and directorship is in fact insignificant or illusory so that they can be said not to have been the recipient of the benefit of the loan in that capacity. It seems to me that the onus must be on the co-owner to prove that is so in order to justify a departure from default position.

39. On that basis, it seems to me that 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. I will consider however whether it can be said that Mrs Harrow had no interest, or no significant interest, in Callian. Callian and Mrs Harrow’s role in it

40. Callian was incorporated on 9th May 2011. Both Mr Russell and Mrs Harrow were appointed as directors on incorporation and held one share each. It filed small company accounts for each year until 2021, when it filed dormant accounts for the year ending 31st May 2020. The company took its name from the village in France where Mrs Harrow had had a house, and it had its registered office at her solely owned property at Bell Street. She nonetheless says that she was not involved in it and had derived no benefit from it. The monies loaned to it were of course all applied for the benefit of Watercare or Mr Russell.

41. There are a number of obstacles presented by the trustees in relation to Mrs Harrow’s contentions as to her role in the company – i) the first is that Mrs Harrow was a shareholder and director of Callian, signing documents in the latter capacity when the loans were taken; ii) the second is the existence of an “Executive Secondment Agreement”, dated 12th April 2011, between Callian and Watercare whereby Mr Russell and Mrs Harrow were seconded to Watercare and which provides for a contract fee of £12,000 per month to be payable by Watercare; and iii) the third is the receipt of monies by Mrs Harrow from the Callian bank accounts. Shareholder and director

42. On incorporation of Callian, Mr Russell and Mrs Harrow subscribed for one share each and were the sole shareholders thereafter. There were also the de jure directors. Mrs Harrow’s written evidence was that she ceased to be a shareholder in June 2019 and a director in July 2019. She says that she was not an “active director” in any event. I reject those contentions.

43. A debenture was executed on 16th August 2019 by Callian in favour of MSP Capital Ltd. It provided for security to be granted by grant of a charge by way of legal mortgage over The Old Manse, described in the body of the deed as property “owned by the Company”, as well as fixed and floating charges over the assets of the Company described in the document. Mr Russell and Mrs Harrow executed it as directors of Callian. Mrs Harrow said that she had agreed to execute this under pressure. This document was signed after Mrs Harrow is said to have resigned as a director according to the backdated form filed at Companies House in 2020. It is plain from her signature of this document, and her oral evidence, that she was a director at the time.

44. Mr Russell and Mrs Harrow also signed a “Fixed Cost Loan Agreement” with AIF, dated 19th August 2019, on behalf of Callian, providing for a loan of £100,000, with lending costs of £59,840, from AIF. The agreement set out the security documents required as follows: “Personal Guarantee and Indemnity to be taken from: • Christopher John Russell and Sandra Valerie Harrow. 2nd ranking charge over The Old Manse, High Street Broughton, Stockbridge, SO20 8AE (title numbers HP480505 and HP493895). Cross Corporate Guarantee between the borrower and Watercare International Ltd.” Again, the signature of this document by Mrs Harrow on behalf of Callian is consistent with her continuing directorship.

45. The legal charge dated 16th August 2019 granting a charge over The Old Manse in favour of AIF included a warranty that the property was free from encumbrances other than that created by the charge and prior registered charges. Mr Brown relied on this as indicating that Mrs Harrow did not believe herself to have an equity of exoneration. I have to say that I do not think there is anything in this point. It is not obvious to me that an equity of exoneration would fall within the definition of “encumbrance” set out in the charge, still less that it would have occurred to Mrs Harrow that it would. The warranty was undoubtedly included to protect AIF’s security, and that security was unaffected by the existence of an equity of exoneration as against Mr Russell and Mrs Harrow.

46. The AIF charge further included, at schedule 3, a declaration by both Mr Russell and Mrs Harrow for the purposes of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 that they were “entering this agreement wholly or predominately for the purposes of a business carried on by us or intended to be carried on by us”. Mr Brown again relied upon this as indicating that Mrs Harrow was involved in the carrying on the business. I do not think that it carries quite such significance. The purpose of the declaration is to demonstrate that the agreement is an exempt agreement for the purposes of the Order. It does not tell me a great deal as to the extent that Mrs Harrow was involved in that business.

47. I should briefly mention here that the next loan in time, The Merchant Money loan dated 17th September 2019, is made between Merchant Money and Watercare and was signed only by Mr Russell. It refers to equitable mortgages entered into at around the same time over The Old Manse and Bell Street. Mrs Harrow was not involved in obtaining this loan on behalf of the principal debtor. She was not a director of Watercare.

48. The revolving credit agreement with Access is made by Callian as borrower. The copy in the trial bundle is undated. It provided for security in the form of a legal charge from Mrs Harrow over Bell Street and personal guarantees from Mrs Harrow and Mr Russell. There is no indication as to who would have signed it and as an agreement under hand it cannot be assumed that it was signed by both directors.

49. While the documentation is limited, these documents are consistent with Mrs Harrow acting as a director. It is apparent to me that the filing of the backdated notice of resignation on 1st September 2020 was prompted by Mr Russell’s impending bankruptcy and did not reflect reality. Mrs Harrow accepted that she did not resign as a director on 1st July 2019. I find that she was in fact a director of Callian at the time of the entry into the loans secured on The Old Manse and Bell Street. I am similarly satisfied that she did not cease to be a shareholder on 10th June 2019 and remained a shareholder at the time of the loans. The confirmation statement filed at Companies House as at 9th May 2020 does not show any change in the shareholding since 9th May 2019 and no documentation evidencing a transfer of Mrs Harrow’s share has been produced. Again, I am satisfied that the notice of showing the cessation of Mrs Harrow as a person with significant control as from 10th June 2019 was prompted by the trustees’ letter before action and did not reflect reality.

50. Mrs Harrow was thus a director and shareholder of Callian when the loans to it were made. As I have said, I am not at all satisfied that there is anything to suggest that she did not agree to the loans or sign the loan documents that she signed voluntarily or was no more than as a cypher for Mr Russell. Mrs Harrow accepted in her oral evidence that she had agreed to the MSP and AIF loans being made and also to the proceeds of the loans being given to Watercare. While Mrs Harrow may have felt under some pressure to agree to the making of these loans, as I have explained I am not satisfied that her consent can be vitiated, and it was not argued that on Mrs Harrow’s behalf that it was procured in circumstances that would allow it to be.

51. Mrs Harrow accepted in her oral evidence that she had similarly signed personal guarantees for Callian’s indebtedness. These are not in evidence. The giving of a personal guarantee of the debt of a company is a form of surety and I reject Mr Brown’s submission that it, of itself, makes Mrs Harrow a principal debtor, rather than a surety. Nonetheless, the giving of such personal guarantees is suggestive of an active participation in the affairs of Callian and the assumption of liability as director of the company, rather than a surety at one remove from the affairs of the principal debtor company.

52. What is clear is 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 Executive Secondment Agreement

53. The Executive Secondment Agreement between Callian and Watercare is dated 1st April 2011. Under its terms Mr Russell and Mrs Harrow were seconded to Watercare for a contract fee of £12,000 per month to be paid to Callian and for Mr Russell and Mrs Harrow to devote their whole time and attention to the provision of the services of managing director and personal assistant and senior secretary to Watercare is signed on behalf of Watercare by a Mr Bond. It was put to Mr Armstrong that Mr Bond was not a director at that time, although the agreement does not say that he was. Mr Armstrong accepted that he had no evidence that Mrs Harrow ever carried out any work for Callian under this agreement. Mrs Harrow maintained that she had not. I accept her evidence on that. There is no evidence that I have seen of such work being carried out or of Mrs Harrow receiving payment for such work.

54. There is no explanation as to the circumstances in which this document was created. It does however suggest that the Callian may have been intended, at least at some point, to receive a benefit from Watercare’s continued trade, even if Mrs Harrow did not, for her part, provide the services described in the agreement. Indeed, the bank statements in evidence, which are not complete, do show Callian receiving regular payments from Watercare, although whether they were made pursuant to this agreement is not clear. Monies received from Callian

55. Mr Armstrong accepted that, on the evidence provided, Mrs Harrow did not appear to have received any monies from Callian from its Clydesdale Bank account ending 011, although one can see some payments, for example there appears to be a payment to Mrs Harrow on 2nd October 2013 in the sum of £1,740.15, and another of £4,000 on 28th November 2013, £2,733.45 on 19th June 2015, £1,558.47 and £3,302.29 on 8th July 2015, to identify only four figure payments. The transactions on that account reduced markedly in April 2016, but, prior to that, substantial sums passed through it, including payments from Watercare. The last payment to Mrs Harrow that I have identified is on 13th February 2019 in the sum of £784.53.

56. The account ending 279 seems to have become moribund in early 2020, but prior to that point was receiving regular and substantial payments from Watercare. Again, there are payments out to Mrs Harrow. By way of example, there is a payment out to her of £6,000 on 13th February 2019, with a receipt from Watercare of £15,000 on the same day, £9,000 on 5th March 2019, with a credit from Watercare in the same amount, £3,000 in June 2019, although the date is not clear. Mrs Harrow says that these were payments for interior design services, which she routed through the company and this second account was set up for this purpose. I have seen nothing to corroborate that. Mrs Harrow has conducted her interior design business through a limited company since 2021, but prior to that she says that she was a sole trader.

57. It is right to say that Mrs Harrow herself was not cross-examined on the nature of these payments, and I accept therefore that Mrs Harrow used Callian’s account as a conduit for her interior design business, rather than those payments being, for example, a salary or dividend. I similarly accept that Mr Russell administered the accounts. The use of Callian’s accounts, albeit for her own business purposes, again show that Callian was not a company with which Mrs Harrow had no engagement. Conclusion on Mrs Harrow’s role in Callian

58. I am not persuaded that Mrs Harrow’s role in Callian was illusory or insignificant. 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 effect of the payment of the monies to Watercare

59. The monies loaned to Callian were paid almost entirely to discharge the prior lending to Watercare, save for a modest sum paid to Mr Russell. There is no evidence of a formal loan agreement between Watercare, or Mr Russell, and Callian or any suggestion that Watercare or Mr Russell would pay interest on the monies made available to them. The exercise however is to determine who had the benefit of the loan, which is not the same question as asking, “Who got the money?”

60. The benefit from the loans, in the sense of the use of the monies and the ability to decide how to apply them, subject to the exception that I shall mention below, accrued to Callian. It decided to apply them to Watercare and Mr Russell. It should make no difference in principle that the decision as to the application of the loans were taken in advance of obtaining them, and the monies were paid directly to Watercare, rather than the monies being paid to Callian and a decision then being taken as to their application being made at a later date. The decision was taken by the directors.

61. If the directors of Callian made an unwise decision, or indeed a decision in breach of duty, to (i) obtain the benefit of the loans and (ii) agree to their application to a related company, or others, then that does not mean that the benefit of the loans themselves did not accrue to Callian in the sense that I have described. Nor, I should say, is it possible to say that Callian and its shareholders could not have received any benefit from its support of Watercare, given that it appears to have received substantial sums through its accounts from that company. However that may be, the central point is it was Callian that took the benefit of the loans to apply them as its directors had decided. It was the debtor. Conclusion

62. It will be apparent from the above that I am not satisfied that Mrs Harrow, despite being a director and shareholder of Callian, was not involved in that company in any real sense. On the contrary, not only was she a director but she acted as such in the execution of documents, and she used the company’s account for her own purposes. Mrs Harrow accepted that she understood the obligations that appointment as a director entailed, and indeed she was a director of other companies, independently of Mr Russell, at the time. 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.

63. That is subject to one exception in relation to the secured loan from Merchant Money in September 2019. This was pursuant to an agreement between Merchant Money and Watercare. Here I have to consider whether the presumption arising from the loan being made to Mr Russell’s company has been displaced. It has not. While I am not satisfied that Mrs Harrow had no real interest in the jointly owned company, Callian, so as to displace the default position of equal apportionment of liability, by the same token the trustees have not satisfied me that Mrs Harrow derived any tangible benefit from this small loan made to Watercare, a company in which it is accepted she had no interest. Any indirect benefit that she might have obtained from it is intangible and impossible to quantify. It follows that Mrs Harrow is entitled to an equity of exoneration in respect of the £17,984.65 paid to Merchant Money from the proceeds of sale.

64. While Mrs Harrow did not rely on the deed of trust it is nonetheless a document executed by the co-owners purporting to reallocate their equitable interests in The Old Manse and must be addressed. The trustees contend that it is a transaction at an undervalue or a preference.

65. Section 339 of the Insolvency Act 1986 deals with transactions at an undervalue as follows: “(1) Subject as follows in this section and sections 341 and 342, where an individual is made bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt’s estate may apply to the court for an order under this section. (2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction. (3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if— (a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration, … (c) he enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.”

66. As for preferences, section 340 provides: “(1) Subject as follows in this and the next two sections, where an individual is made bankrupt and he has at a relevant time (defined in section 341) given a preference to any person, the trustee of the bankrupt’s estate may apply to the court for an order under this section. (2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not given that preference. (3) For the purposes of this and the next two sections, an individual gives a preference to a person if— (a) that person is one of the individual’s creditors or a surety or guarantor for any of his debts or other liabilities, and (b) the individual does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the individual’s bankruptcy, will be better than the position he would have been in if that thing had not been done. (4) The court shall not make an order under this section in respect of a preference given to any person unless the individual who gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b) above. (5) An individual who has given a preference to a person who, at the time the preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4).”

67. Section 341 explains what the relevant time is: “(1) Subject as follows, the time at which an individual enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into or the preference given— (a) in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the making of the bankruptcy application as a result of which, or (as the case may be) the presentation of the bankruptcy petition on which, the individual is madebankrupt, (b) in the case of a preference which is not a transaction at an undervalue and is given to a person who is an associate of the individual (otherwise than by reason only of being his employee), at a time in the period of 2 years ending with that day… (2) Where an individual enters into a transaction at an undervalue or gives a preference at a time mentioned in paragraph (a), (b) or (c) of subsection (1) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in paragraph (a)), that time is not a relevant time for the purposes of sections 339 and 340 unless the individual— (a) is insolvent at that time, or (b) becomes insolvent in consequence of the transaction or preference; but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by an individual with a person who is an associate of his (otherwise than by reason only of being his employee). (3) For the purposes of subsection (2), an individual is insolvent if— (a) he is unable to pay his debts as they fall due, or (b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities.”

68. No consideration was given for the transfer of equity provided for by the deed and Mr Russell, it is accepted, was insolvent at the time. Indeed, he is presumed to be in the circumstances here. The deed was entered into within the relevant time. It appears to me, and no argument was made to the contrary, that I should declare that the deed is a transaction at an undervalue. The proper order for restoring the position to what it would have been had the transaction not been entered into is to direct that the deed is not to have effect insofar as it reapportions the beneficial interest in the property. It is of course true that I have identified a limited equity of exoneration in Mrs Harrow’s favour in relation to the Merchant Money loan. That equity of itself gives Mrs Harrow an enhanced interest in the property and the deed is unnecessary to protect it.

69. The deed is not expressed to be in discharge of any liability owed to Mrs Harrow, and she contends that she remains a creditor of Mr Russell, but to the extent that it could have been argued that the transfer of the beneficial interest was in part satisfaction of a debt due to her, it would plainly amount to a preference. Mrs Harrow was an “associate” of Mr Russell for the purposes of section 340 and 341 and the statutory requirements are presumed to be met in this instance. No attempt has been made to rebut that presumption and, indeed the elements of the sections are amply made out. I would again order that the deed should not have effect.

70. In the context of Mrs Harrow’s claim to be a creditor I should say that I have a spreadsheet, marked “SH2”, to which I was not referred in any detail at trial, which is intended to show the payments and receipts between Mr Russell and Mrs Harrow in support of Mrs Harrow’s claim that she is a creditor of Mr Russell and expended large sums of money for his benefit or that of Watercare. Whether or not that is the case, I should say that the nature of the application before me was not to consider Mr Russell and Mrs Harrow’s respective contributions to their lives together but to consider the narrow question of whether Mrs Harrow was entitled to an equity of exoneration. The question was whether Mrs Harrow could be regarded as having received a benefit from the making of the loans, not whether, on considering the whole course of dealing between Mrs Harrow and Mr Russell, one or other of them emerges better or worse off.

71. It follows that the trustees’ application succeeds, and they are entitled to one half of the net proceeds of sale of The Old Manse received by Mrs Harrow, together with one half of the monies paid to release the charge on Bell Street, save that Mrs Harrow is entitled to be exonerated in respect of the £17,984.65 paid to Merchant Money.

72. I will invite counsel to agree a draft order reflecting my decision and calculating the sum now due to the trustees.