Guarantors Beware

Settling with the bank may not be the end of the matter

You are a director of a company. You and the other director provide a guarantee to the bank for the company’s debts.

The company fails and the bank demands payment of the debt, $1million.

You dispute your liability as guarantor and the bank settles with you for $100,000 with the bank covenanting not to sue you for any further amount. You feel relieved to have resolved the demand in this way.

However, the recent decision by the High Court in Lavin v Toppi [2015] HCA 4 has confirmed that this may not be the end of the matter. Your fellow director, who ended up paying the rest of the debt, may be able to recover a further $400,000 from you – being your share of the residual amount of the guaranteed debt.

Under a joint and several guarantee given to a creditor, the creditor can recover all the debt, or any part of it, from any one or more of the guarantors. The creditor is not bound to pursue all guarantors, nor is it bound to obtain an equal amount from each guarantor. Therefore, the bank can settle with you for $100,000 and chase your other director for the balance.

However, between themselves the guarantors are bound to contribute to the debt equally – known as the right to contribution. If they do not contribute to the debt equally then legal action may be taken by an “over payer“ against an “under payer” to recover the amount of the overpayment.

The right to contribution in the matter of Lavin v Toppi was held by the High Court to not be affected by the deal done by the guarantor with the bank.

For more information, please contact:
Christopher Knott

Christopher Knott
Special Counsel
p.  +61 (0)447 082 991
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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