Expert accountants should be aware of the possible application of the Doctrine of Exoneration in any bankruptcy litigation

The Doctrine of Exoneration (the “Doctrine”) can be relevant to expert accountants when considering a bankrupt’s pool of assets. The Doctrine concerns the issue of a loan against a jointly held property. The Doctrine applies when the borrowed funds secured against the property are only for the benefit of one party. The Doctrine may change the respective interests in property ownership when an interest in the asset is created by one party. Accounting experts should refer to the UK decision in Trustee in Bankruptcy of Onyearu) v Onyearu and Anor (2017) as a clear illustration of the Doctrine’s application.

• A married couple jointly owned their family home
• The couple had separate bank accounts
• Both parties contributed to the family’s living expenses. The husband paid for the mortgage and the wife paid for utility bills
• The husband borrowed funds for his business against the family home
• The husband later became bankrupt and a Bankruptcy Trustee was appointed.
• The Trustee wanted to sell the family home but the couple claimed that the Doctrine applied. This would mean that the wife’s share in the home was protected from the Trustee.

The Bankruptcy Trustee argued that the wife had an indirect benefit from the loan and the Doctrine did not apply. The UK court ruled in favour of the couple stating that the indirect benefit to the wife, through the husband’s loan, did not hinder the application of the Doctrine.

Accounting experts should consider the possibility of the Doctrine’s application in bankruptcy litigation.

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