The High Court's recent Judgment in Lavin v Toppi
contains useful reminders and guidance on the liability of
co-sureties. Litigation & Insolvency Associate, Adam Khan,
looks at the broader implications of the case.
Mrs Lavin and Ms Toppi guaranteed a loan advanced by a bank to a
company. Mrs Lavin and Ms Toppi were directors of the company.
After the company went into receivership, the bank sued the
guarantors. Mrs Lavin sought a declaration from the Court that the
guarantee was unenforceable, but then settled the matter by payment
of $1.35M. The settlement deed contained a covenant by the bank not
to sue Mrs Lavin for the balance of the guaranteed debt.
Ms Toppi then sold her home and the proceeds of sale were used
to pay the balance of the guaranteed debt to the bank, which was
about $2.9M. The bank then discharged the guarantors from their
obligations under the guarantee.
Ms Toppi successfully brought proceedings to recover a
contribution from Mrs Lavin for the difference between the
respective amounts paid by Mrs Lavin and Ms Toppi in discharging
the guarantee. That decision was upheld on appeal. Mrs Lavin
appealed to the High Court.
THE APPEAL TO THE HIGH COURT
On appeal, Mrs Lavin argued:
her liability was different to Ms Toppi's because Ms
Toppi's liability was enforceable by the bank whereas, because
of the covenant not to sue, Mrs Lavin's was not;
Ms Toppi had not benefited from Mrs Lavin's discharge and
that was fatal since the purpose of contribution is to prevent the
unjust enrichment by one co-surety at the expense of another;
at the time when Ms Toppi sought a contribution, there was no
coordinate liability because Mrs Lavin could no longer be sued by
The High Court dismissed the appeal and each of Mrs Lavin's
The following principles emerge from the Judgment:
The rationale of the right to contribution is one of natural
justice that ensures that persons who are under coordinate
liabilities must share the burden pro rata.
Once the company had defaulted on repayment (or once the bank
had made a demand), the guarantors had a common obligation to pay
the whole guaranteed debt. A covenant not to sue does not operate
as a discharge of the guaranteed liability.
The covenant not to sue meant the liability of Mrs Lavin was
not enforceable by legal proceedings, but it was enforceable by
other means such as reliance on rights of recoupment under other
Without a right of contribution, the co-surety who pays less
than his or her fair share in discharging the shared liability is
On equitable grounds, the Court will step in to correct an
imbalance if the creditor, who can demand payment from all
guarantors, fixes one party with liability for all of the
WIDER RELEVANCE AND IMPLICATIONS
There are a number of points to take from this decision:
Co-guarantors should be wary before entering agreements with
creditors unless the position with respect to the liability of
other guarantors is fully understood.
If a full and final agreement between a coguarantor and a
creditor contains, or is properly understood to be, a covenant not
to sue, then it is unlikely to affect the co-guarantor's
liability to other guarantors.
A co-liability to a creditor is not discharged until it is
fully paid or the creditor provides a full discharge and
Creditors should be wary of the effect of entering an agreement
with a single coguarantor and providing full discharges for part
payment of a debt when all that is really intended is a covenant
not to sue.
It is advisable, prior to entering into an agreement with
respect to a shared liability, that legal advice is sought and
taken on the possible implications of the agreement.
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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