Most Read Contributor in Australia, September 2016
It is not unusual for business partners, company directors or
family members to give joint guarantees of their company's
In these circumstances, most people who act as a co-guarantor
might think their only obligation is to the bank. The High Court
has confirmed that this is not the case, with a significant
obligation also existing between the guarantors.
The High Court recently handed down a decision which said that a
co-guarantor who has paid more than his or her share of a guarantee
may seek a contribution from his or her co-guarantor, even if the
co-guarantor has been released from liability by the creditor.
The importance of the decision is that, if a guarantor enters
into a settlement with a bank to pay out less than the amount of
the debt owed, the guarantor may still be liable to their
co-guarantors for contribution if the co-guarantor pays more than
their fair share to the bank.
This may come as a nasty surprise, particularly if the guarantor
has released the bank from a valuable counter-claim in order to
obtain a good settlement.
The recent decision of Lavin v Toppi  HCA 4
arises from a common business practice; business partners act as
co-guarantors to guarantee their company debts. In this case, the
company in question went into liquidation and the bank commenced
proceeding to recover the money owed by the company from the
The appellants did a deal with the bank whereby they agreed to
pay a small amount to the bank and in return the bank agreed to
forbear on suing the appellants further on the guarantee.
However, the bank continued with its proceedings against the
respondents and the respondents eventually sold assets to pay the
full amount that remained outstanding under the guarantee.
Following the discharge of the guarantee, the respondents
commenced proceedings against the guarantors to recover the money
owed by the company.
Contribution is an equitable remedy that seeks to ensure that
one co-guarantor is not unjustly burdened by obligations arising
out of a guarantee. The courts say that the law of equity
recognises that people who agree to take on the same risk should
share any burdens arising from the assumption of the
The decision of the High Court
The appellants' argument at first instance, on appeal and in
the High Court was that by virtue of the bank's agreement that
it would not sue the appellant any further under the guarantee the
co-guarantors' liabilities under the guarantee were no longer
of the same nature and therefore the claim for contribution should
be rejected. This argument was rejected at each hearing.
The High Court returned to first principles in deciding that the
actions of the bank did not affect a co-guarantor's right to
The appellant also argued that, because they received no benefit
from the respondents paying out the remainder of the guarantee,
there was no basis for the respondents to claim a contribution.
This argument was also rejected by the High Court. The High Court
said that, in discharging the guarantee and releasing both parties
from their continued obligation, the respondents inevitably
bestowed a benefit on the appellants. In reaching this decision the
High Court found that the existence of coordinate liabilities and
benefit from payment are not separate and distinct elements of the
right to contribution.
This case serves as a valuable reminder that entry into a
guarantee defines rights not only between the creditor and
guarantors but also between co-guarantors. This should be kept in
mind when negotiating a settlement under a guarantee as a
creditor's actions alone are not sufficient to completely
remove the liability of the co-guarantor.
This publication does not deal with every important topic or
change in law and is not intended to be relied upon as a substitute
for legal or other advice that may be relevant to the reader's
specific circumstances. If you have found this publication of
interest and would like to know more or wish to obtain legal advice
relevant to your circumstances please contact one of the named
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