Vol 9 (2012) - Issue 5

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Using Family Homes as Security for Business Lending in England and Wales: High Time for Change?

Introduction
Those who stand as surety for their spouses’ loans by providing their matrimonial home as security under the undue influence of their spouses have time and time again failed to obtain any redress from the courts of England and Wales in the event of the spouse’s default and subsequent foreclosure of the family home.1 Despite resulting in the harsh outcome of losing the family home, the pro-creditor stance of the English and Welsh courts has largely eluded the light of critical analysis. The aim of this article is to provide some insight into the rationale behind the availability of family homes as security for business loans and the strict protection of creditors in the United Kingdom. The first section will demonstrate through the case-law how the judiciary has consistently tipped the scale in favour of the creditors over the interest of the debtor’s spouse/partner, even where the consequence was gravely unjust for the spouse/partner and/or other family members. Observations will be made on the policy reasons and orthodox principles that underpin the judicial tendency to strictly protect creditor rights, primarily based on arguments linked to the availability of credit. The second section will evaluate the harsh impact of losing a home on family members. It will also be argued that, regardless of the wealth caught up within it, a family home ought not to be available as security for business loans. Furthermore, it will be argued that the policy reasons and principles on which the judicial pro-creditor stance is premised are questionable and factors that are instrumental to the overall efficient supply of credit in the economy do not include strict protection of creditor rights. Finally, the third section will outline the current protection afforded to the debtor’s spouse/partner under the House of Lords case of Royal Bank of Scotland v Etridge (No 2), which yet again unduly tips the scale in favour of the creditors. Suggestions will be made for reform which affords substantial protection for the debtor’s family with the hope of discouraging banks to accept matrimonial homes as security for loans.

I. The court’s pro-creditor stance
Prior to 1996, the court usually considered a creditor’s application for sale of a secured property under section 30 of the Law of Property Act 1925. The general legal trend was almost always to grant an order for sale in favour of the creditors, unless the circumstances were truly exceptional. As Lord Justice Parker in the Court of Appeal observed in Lloyds Bank plc v Byrne & Byrne, the voice of the bank will generally prevail over the voice of the spouse and a sale of the property will be ordered within a short period. Furthermore, the threshold for exceptional circumstances was high and could not be easily achieved. Lord Justice Nourse in Re Citro made it abundantly clear that it was not uncommon for a wife with young children to be evicted and such circumstances, while engendering a natural sympathy in all who heard of them, could not be classified as exceptional circumstances.