Australia: Co-guarantors beware: no general discretion for courts to adjust liabilities for guaranteed debt

Last Updated: 11 May 2017
Article by Danielle Kuti
Services: Banking & Finance
Industry Focus: Financial Services

What you need to know

  • The NSW Supreme Court recently considered a case in which one co-guarantor sought to have his liability for a guaranteed debt varied, primarily based upon the conduct of the other co-guarantor.
  • The Court found that there was no general discretion to adjust liabilities for guaranteed debts, and even if it did exist, the circumstances and evidence in this case would not have justified any apportionment of liability.
  • The decision is a reminder that co-guarantors cannot rely on the fact that they have ceased to be involved in a business to be released from their liability to a creditor under a guarantee.

In a recent decision, the NSW Supreme Court found that even if one co-guarantor appears to have a greater culpability for a guaranteed debt, that does not mean the Court has the power to adjust the monetary obligations of the co-guarantors accordingly.

The decision reinforces the accepted principle that co-guarantors are equally liable for the guaranteed debt, subject to certain exceptions, and the courts cannot subsequently apportion a co-guarantor's liability based upon their conduct.

The facts

The case of AMP Bank Limited v Brown and Kavanagh1 involved two directors of a financial advisory business called Rethink Financial Group Pty Ltd (Rethink). The directors, Mr Brown and Mr Kavanagh, had a shareholding in Rethink of 30:70 respectively. While Mr Brown ceased his directorship in March 2016, his shareholding continued after that date.

The case was heard by Kunc J, who outlined the relevant background as follows:

  • In March 2014, AMP Bank Limited (the Bank) provided a loan to Rethink guaranteed by Mr Brown and Mr Kavanagh.
  • In November 2015, Mr Brown informed Mr Kavanagh that he intended to leave Rethink to start his own business.
  • Mr Brown maintained that the following conduct occurred soon after:
    • he offered to stay on at Rethink for 6-12 months but was locked out of the business
    • staff changes and terminations occurred within Rethink and assets were transferred to other entities, without consultation with Mr Brown
    • Mr Brown received no form of income or entitlements from the business
    • Mr Kavanagh failed to agree to a settlement arrangement with the Bank which would have seen Mr Brown and Mr Kavanagh released from the guarantees, and which would have required Mr Kavanagh to pay $250,000 and Mr Brown to pay $780,000.
  • In March 2016, the Bank issued Rethink, Mr Brown and Mr Kavanagh with a default notice referring to changes which would affect Rethink's ability to meet its loan obligations. Demands for payment were subsequently issued to Mr Brown and Mr Kavanagh on 12 August 2016.
  • On 22 August 2016, the Bank commenced proceedings against Mr Brown and Mr Kavanagh for the guaranteed debt of over $2.7 million.
  • In October 2016, Mr Brown filed a cross claim against Mr Kavanagh alleging that because of Mr Kavanagh's conduct, it would be unconscionable, and not just and equitable, for Mr Brown to bear an equal share of the liability. Mr Brown argued that he should accordingly be indemnified by Mr Kavanagh for a contribution to the debt, in such proportion or amount as the Court saw fit.
  • In November 2016, Mr Kavanagh and Mr Brown reached a settlement agreement with the Bank which resulted in the Bank holding a consent judgment for debt from both Mr Kavanagh and Mr Brown in escrow, pending determination of Mr Brown's cross claim.
  • In December 2016, receivers of Rethink, appointed by the Bank, entered into an asset sale agreement (ASA) in respect to Rethink's client service rights with a company of which Mr Kavanagh was a director, for a purchase price of over $1.2 million. The ASA involved the release of Mr Kavanagh from his guarantee to the Bank.

The law on co-guarantors – general principle and its exceptions

Before considering whether Mr Brown's liability could and should be adjusted as a result of Mr Kavanagh's conduct, Kunc J began by acknowledging that the doctrine of contribution between guarantors is based in equity, not contract, on the ground of equality of burden and benefit.

His Honour referred to four exceptions to the principle of equality to co-guarantors, being circumstances in which:

  1. there is a contract or a common intention to modify a co-guarantor's contribution obligations
  2. only one guarantor has the benefit of the guarantee
  3. a guarantor is guilty of "fraud, illegality, wilful misconduct or gross negligence"
  4. equitable defences, such as clean hands, can be relied upon.

None of these exceptions applied in this case. The question to be determined was whether or not the courts have a general discretion to apportion contribution based on a co-guarantor's responsibility.

Whilst there are no binding decisions on this question, Kunc J carefully considered various authorities which support the view that there is no such general discretion available to the courts. Kunc J noted that leading equity texts also maintain the general proposition that the liability for coordinate obligations cannot be apportioned other than equally. Despite Mr Brown's reliance on select case law to argue otherwise, Kunc J concluded that there is no general discretion to depart from the position of equality as between co-guarantors, unless one of the exceptions clearly applies.

Would the evidence have supported a variation to liability?

Kunc J went on to consider whether, even if he did have general power to modify the co-guarantors' liability, Mr Brown's evidence would have supported an apportionment of liability based on Mr Kavanagh's conduct.

In finding that Mr Brown had failed to provide sufficient evidence, Kunc J pointed to various factors, including:

  • Mr Brown maintained that due to being locked out of the Rethink business, there was an adverse impact on the business which reduced its ability to meet the loan repayments to the Bank. However, little evidence was submitted to support this assertion and rather it was suggested that the Court draw an inference in this regard.
  • Similarly, Mr Brown submitted that the staffing changes at Rethink without his consultation resulted in financial planners leaving, a reduced ability to therefore service clients, and consequently a reduction in Rethink's ability to service the Bank's loan. However, there was no evidence that the staffing changes were unjustified, that Mr Brown's involvement would have given a different outcome and no suggestion made that Mr Kavanagh acted fraudulently or to deliberately cause the business to fail.
  • Mr Brown's complaint that Mr Kavanagh failed to agree to an arrangement with the Bank suffered from a lack of evidence for the Court to conclude that the agreement was a 'reasonable' one which Mr Kavanagh should have accepted. Kunc J also noted that there was no obligation on Mr Kavanagh to settle the matter with the Bank.
  • Finally, Mr Brown had complained about the circumstances upon which the ASA was entered from the perspective that he was no longer involved in the Rethink business and there was a lack of transparency around the ASA. This submission was considered to have been solely based in fairness and there was no evidence that Mr Kavanagh had acted improperly.

Kunc J concluded by saying:

"While Mr Brown's predicament is obviously most serious and unfortunate from his point of view, it is not novel. He has fallen foul of the common commercial risk that in guaranteeing the obligations of a business to a financier, liability under the guarantee can continue after the guarantor's departure from the business unless he or she is able to negotiate a different result. That did not occur in this case. In Australia there is no power or jurisdiction in equity to adjust the right to contribution between co-sureties by reference to general considerations of justice and fairness....[E]ven if such a power or jurisdiction to adjust the rights as between Mr Brown and Mr Kavanagh existed in equity, Mr Brown has not proven sufficient facts which would provide a principled or logical basis for such an adjustment to be made in this case."2

Key takeaways

As Kunc J said, this situation "is not novel".

We often see situations in debt recovery where a co-guarantor believes they are no longer liable for a guaranteed debt after departing from a business, or ceasing to be involved in it.

This decision is a reminder to co-guarantors of the risks associated with not obtaining a release from liability to a creditor under a guarantee upon departing or ceasing to be involved in a business.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions