Can this right be extinguished if the creditor waives its right to demand payment from one co-guarantor?
CASE NAME: Lavin v Toppi  HCA 4
Each co-guarantor at law is generally required to contribute equally to the repayment of a debt and if one guarantor pays more than their share of the debt, they have a right to seek a contribution from a co-guarantor in compensation of the overpayment (see Burke v Lfot Pty Ltd (2002) 209 CLR 282 at 299, ).
However, what confused the usual situation in the case of Lavin v Toppi  HCA 4 was the fact that the Bank had entered into an agreement with one of the guarantors which provided that the Bank would not enforce its rights against the guarantor, provided the guarantor paid a certain amount towards the debt.
1 LEGAL ISSUE IN DISPUTE
Did this agreement extinguish the rights of the other guarantors to seek a contribution from the guarantor who entered into the agreement?
2 BRIEF RELEVANT FACTS
Ms Lavin and Ms Toppi were joint directors and shareholders in a company, Luxe Studios Pty Ltd (“Luxe”). Luxe had a number of loans with the National Australia Bank (“NAB”) which were later consolidated into one loan in the amount of $7,768,000 (“the Loan”).
The Loan was guaranteed jointly and severally by Ms Lavin, a company associated with Ms Lavin, Ms Toppi, Ms Toppi’s husband, and Luxe Productions Pty Ltd (another company jointly owned and controlled by Ms Lavin and Ms Toppi) (“the Guarantors”).
In November 2009, Luxe went into receivership. In March 2010 the NAB made demands upon each of the Guarantors for payment of the balance of the loan. The Guarantors failed to meet those demands and therefore the Bank commenced proceedings against the Guarantors to enforce the guarantee.
A property owned by Luxe was sold in May 2010. NAB retained the proceeds of the sale. Luxe remained indebted to the Bank for an amount of approximately $4 million.
Ms Lavin and the company associated with Ms Lavin filed a cross-claim against the NAB seeking a declaration that the guarantee was unenforceable because they had allegedly been unconscionably procured into the guarantee.
A Deed of Release and Settlement was entered into between Ms Lavin, the company associated with Ms Lavin and the NAB to settle the matter, which provided, among other things that Ms Lavin agreed to pay the NAB:
- $1.35 million for the guaranteed debt; and
- $1.73 million for other personal loans.
(“the Settlement Sum”)
The Deed provided that the Bank would not sue Ms Lavin and the company associated with Ms Lavin (“the Appellants”) in respect of the guarantee, provided Ms Lavin paid the Settlement Sum.
The Settlement Sum was paid by Ms Lavin and the proceedings between the NAB, Ms Lavin and the company associated with Ms Lavin were dismissed by consent.
In early 2011, Ms Toppi and her husband (“the Respondents”) sold their home and used the proceeds of the sale to pay the balance of the guaranteed debt.
The Guarantors’ obligations were therefore discharged under the guarantee.
The Respondents commenced proceedings against the Appellants claiming a contribution of half of the amount paid by the Respondents which discharged the guarantee. The Appellants resisted these proceedings on the basis of the Deed of Settlement entered into between the Appellants and the NAB.
3 PRIMARY JUDGE’S DECISION
The primary judge, referring to the case of Carr and Purves v Thomas  NSWCA 208 (“the Carr case”), held that a creditor’s covenant not to sue a particular co-guarantor had no effect on the rights of guarantors to seek a contribution from the other co-guarantors. The Appellants were therefore ordered to pay a contribution for the amount claimed.
4 COURT OF APPEAL’S DECISION
The Appellants appealed arguing that the Carr case was not supported by case authority and was clearly wrong as a matter of legal principle. This argument was rejected by the Court of Appeal. It was held that:
“In point of principle, a covenant not to sue (in the usual form) does not alter an existing liability. Giving such a covenant means merely that the covenantor is in breach if it does sue.”
The covenant did not extinguish the Appellants’ liability under the guarantee.
Therefore, the Appellants and the Respondents continued to share liabilities of the same nature and extent so as to entitle the Respondents to recover contribution from the Appellants.
5 HIGH COURT’S DECISION
The Court of Appeal decision was appealed by the Appellants to the High Court. The Appellants argued that the Respondents needed to show that their respective liabilities were “co-ordinate” (that is, of the same nature and quality).
Generally guarantors who are jointly and severally liable will have “co-ordinate liability”.
The Appellants argued that their liability was “qualitatively different” from the Respondents’ liability because Respondents’ liability was enforceable by the NAB, while the Appellants’ liability was not.
The High Court dismissed the Appellant’s arguments for the following reasons:
- The NAB’s covenant not to sue the Appellants did not extinguish the Appellant’s ongoing liability for the guaranteed debt because while the Bank could not sue by commencing legal proceedings, the Appellant’s liability remained enforceable by other means such as reliance upon the rights of recoupment under other securities (if any) between the Bank and the Appellants. Therefore the parties did share coordinate liabilities to the NAB under the guarantee both before and after the covenant was entered into. The nature and quality of the parties’ liabilities were not affected by the Deed; and
- The Respondents’ right to contribution from the Appellants arose in equity even before the Respondents made their disproportionate payment to the NAB and could not be defeated by the separate agreement of the NAB and the Appellants. From the moment of Luxes’ default or at the very latest, from the NAB’s demand on the Guarantors, each of the Guarantors shared a “common interest and a common burden” to pay to the Bank the whole of the guaranteed debt. Equity therefore requires a contribution to distribute equally, among those who have a common obligation, the burden of performing it.
The right of contribution among co-debtors is independent of any present right of the principal creditor.
A Bank cannot have the power to “select his own victim; and upon motives of mere caprice or favouritism, to make a common burden a most gross personal oppression”.
Therefore, the Deed could not serve to extinguish the right to a contribution.
Therefore it was ordered that the Appellants make a contribution of some $775,000.00, despite the Agreement with the NAB.
6 IMPLICATIONS FOR GUARANTORS
This case serves as a helpful reminder for co-guarantors, that entering into an agreement with the creditor regarding the sum of money to be paid by the co-guarantor does not necessarily resolve claims made against that co-guarantor by other co-guarantors.
When negotiating agreements in these situations, parties must carefully consider the possibility of other issues and liabilities arising in respect of persons who are not a party to the agreement, even though they may have a close connection to the situation.
Some ways to avoid a situation like this arising:
- Have all relevant persons take part in the negotiation and signing of the agreement;
- Ensure that the terms of the agreement are carefully drafted in a way that adequately protects your interests.
If you require advice regarding a similar situation and/or if you have any concerns or questions regarding guarantees, you should speak to our experienced Commercial Lawyers to assess your options.
If you would like to make an appointment to discuss your situation, please call us on (07) 3252 0011.