Ms Lavin and Ms Toppi were directors of Luxe Studios Pty
Ltd (Luxe). Luxe had borrowed more than $7 million from its
Those borrowings were supported by joint and several guarantees
Ms Lavin and a company controlled by her;
Ms Toppi and her husband.
In 2009, the Bank appointed receivers to Luxe. After asset
realisations were completed, a residual debt of $4 million remained
owing to the Bank. The Bank commenced proceedings against the
guarantors to recover that shortfall.
Ms Lavin and her company counterclaimed against the Bank in
those proceedings, and, in September 2010, Ms Lavin, her associated
company and the Bank entered into a settlement deed. The key terms
of settlement were that $1.35 million would be paid to the Bank (in
respect of the guaranteed debt) and, in turn, the Bank would not
sue Ms Lavin and her company in respect of the guarantee provided
In 2011, Ms Toppi and her husband paid the Bank the balance of
the debt of around $2.9 million. This meant that all amounts owing
to the Bank by Luxe and all guarantors had been satisfied.
THE CONTRIBUTION PROCEEDING
In 2012, Ms Toppi and her husband commenced proceedings against
Ms Lavin and her associated company seeking contribution in the
amount of around $775,000. That amount represented the midpoint
between the amount paid by Ms Toppi and her husband to the Bank and
the amount paid by Ms Lavin and her company – being the
amount recoverable under the well recognised right of
The trial Judge found in favour of Ms Toppi and her husband. On
appeal, the NSW Court of Appeal affirmed that decision.
APPEAL TO THE HIGH COURT
The appeal brought by Ms Lavin and her company in the High Court
was based on the grounds that the Court of Appeal erred in holding
that the various guarantors shared liabilities of the same nature
and extent at the time Ms Toppi and her husband paid the
balance of the guaranteed debt. It was argued that:
The liabilities were "qualitatively different" in
that the liability of Ms Toppi and her husband was enforceable by
the Bank, whereas the liability of Ms Lavin and her company was
The discharge of the guarantee by Ms Toppi and her husband
provided no real benefit to Ms Lavin and her company, as by the
time the guarantee was discharged, the Bank had already provided
the covenant not to sue.
In rejecting the appeal, the High Court noted that Ms Lavin and
her company's arguments were "both novel and unduly
technical". The Court made the following findings:
Coordinate liabilities – A covenant not to sue
does not result in a 'qualitative alteration' to a
co-guarantor's obligations under a guarantee. The Bank's
covenant not to sue did not discharge the liability under the
guarantee. As the liability remained, all guarantors shared
'coordinate' liabilities, which in turn entitled Ms Toppi
and her husband to seek contribution.
Equity – As soon as a creditor calls upon a
co-guarantor to pay a guaranteed debt, the right of the
co-guarantor to contribution is enlivened and cannot then be
defeated by a dealing between the creditor and other co-guarantors,
such as a covenant not to sue. Unlike the common law, the equity of
contribution can be called upon before actual payment is made or
loss sustained, provided that such payment or loss is
This decision is important as it reinforces the effectiveness of
covenants not to sue in dealings between creditors and guarantors.
In circumstances where a guarantor makes part payment of a debt, it
is common practice for creditors to provide covenants not to sue
instead of a release, so as to ensure that the creditor's
rights against the remaining guarantors are preserved. This
decision makes it emphatically clear that this approach does not
prejudice the substantive rights of the guarantor.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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