The High Court Decides that Negotiating a Better Deal will not Necessarily mean you are Better Off!
It is commonplace for a lender or creditor to obtain a variety of securities to secure a debt or loan, including guarantees from a number of people or entities. For example, where a company is borrowing money, the creditor will often require each of the directors of that company to personally guarantee the company’s obligations.
Guarantees so given will most often be joint and several, which means that the creditor can look to any one of the guarantors, or all of them, to pay the entire debt. That may mean that one guarantor is left footing a disproportionate amount of the guaranteed debt, to their disadvantage and to the advantage of other co-guarantors.
To avoid this sort of potential inequality between co-guarantors, the law generally presumes that co-guarantors should equally bear the burden and guarantors who pay more than their fair share of the debt can seek to recover a proportionate contribution from their co-guarantors.
But what if one guarantor negotiates a better deal for themselves with the creditor? Does this affect the usual right on the part of co-guarantors to recover a contribution?
A recent decision of the High Court in Lavin v Toppi [2015] HCA 4 has considered just this issue.
The Case
The Bank lent money to a company, secured by personal guarantees given by the two directors of that company, Lavin and Toppi. When the company went into receivership and defaulted under the loan, there remained an unsatisfied debt of about $4million owing to the Bank. The Bank looked to the guarantors to pay the remaining debt under the guarantees and sued both of them for recovery of the guaranteed debt.
One of the guarantors (Lavin) negotiated a deal with the Bank, whereby in return for a payment to the Bank of less than half the debt, the Bank agreed not to pursue Lavin for the guaranteed debt. Importantly, the settlement agreed to was not a release by the Bank of Lavin’s liabilities, because a release of one guarantor can operate to release all co-guarantors from liability. The Bank still wished to pursue the remaining co-guarantor (Toppi) for the outstanding debt.
Ultimately, Toppi paid the remaining debt to the Bank. Toppi, having paid more than her fair share, then sought contribution from Lavin so the amounts paid in respect of the company’s debt were proportionate and equal as between the co-guarantors.
Lavin argued that:
- the Bank’s agreement not to pursue her meant that her liability to the Bank was ‘qualitatively different’ from Toppi’s liability to the Bank, in that Toppi’s liability was enforceable by the Bank where Lavin’s was not; and
- as a result, the liabilities between the co-guarantors were not shared co-ordinate liabilities of the same nature and extent; and
- because of this, Toppi had no right to contribution.
- The Court, in rejecting Lavin’s argument, held that:
- the Bank’s agreement not to sue Lavin did not extinguish her ongoing liability for the guaranteed debt, or alter the underlying nature of that liability; it was only a promise by the Bank not to take action against her;
- Lavin and Toppi continued to share co-ordinate liabilities to the Bank both before and after Lavin’s deal with the Bank;
- Toppi had a right to contribution from the time the Bank called for payment under the guarantees, which was cognisable in equity even before she had paid out more than her fair share of the debt, and this right could not be defeated by any separate agreement between the Bank and Lavin; and
- Lavin was, therefore, liable to contribute to Toppi.
Comment
There is no doubt that in negotiating her agreement with the Bank, Lavin thought that was the end of the matter for her.
However, this case highlights that obligations for a co-guarantor may extend beyond any settlement or agreement negotiated with the creditor.
Ideally, any settlement negotiated with a creditor will be entered into by all co-guarantors and resolve entirely all claims by the creditor against them, in contemplation of the contributions to be made by each co-guarantor.
At the very least, co-guarantors should be aware of a potential contribution claim against them, if another co-guarantor foots a disproportionate share, and carefully consider that potential exposure if negotiating a resolution with the creditor directly.
It is always recommended that specific legal advice is sought in respect to the settlement or resolution of claims or disputes, and especially in relation to documenting a settlement.
For further information please contact Anneliese Seymour or Craig Shepherd in our Litigation & Dispute Resolution division at Murdoch Lawyers.
Prepared by Craig Shepherd and Anneliese Seymour.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.
