Deed of settlement with creditor does not remove obligation to fellow guarantors
Summary of Lavin & Anor v Toppi & Ors  HCA 4
In this recent unanimous decision by the High Court of Australia it was held that a Director who provided a personal guarantee to a Creditor (Guarantor A) along with other directors and co-guarantors (Guarantors) was not exempt from his/her liability for the debt, despite the fact that Guarantor A and the Creditor entered into a deed of release and settlement (Deed of Settlement) in which the Creditor promised not to sue Guarantor A.
Guarantor A paid the Creditor an amount less than half of the balance owed to it under the guarantee, and in return the Creditor entered into a Deed of Settlement with Guarantor A to discontinue its claim against Guarantor A personally. The other Guarantors subsequently paid out the rest of the debt owed to the Creditor, and then sued Guarantor A for an equitable contribution to the difference between the amounts each other Guarantor paid to the Creditor.
The Courts held that Guarantor A had to pay the other Guarantors equitable compensation to the amount representing half of the difference between the amount that Guarantor A paid the Creditor, and the amount that the other Guarantors paid the Creditor. This amounted to a further $775,000.00.
- A deed of release and settlement with a creditor under the above circumstances does not absolve a guarantor’s liability with all parties involved, it is merely a promise made by the creditor not to take action against the specific guarantor. Creditors typically will only agree not to take action, rather than formally release the guarantor for fear it might release other guarantors in the process.
- Guarantors’ liabilities under a guarantee are joint and several (if not specifically stated otherwise), and the guarantors have legal obligations to each other, as well as to the creditor.
- In circumstances such as the above, and subject to the other guarantors being able to prove they are ready, willing and able to perform their duties and obligations under the guarantee, the guarantors are entitled in equity to a contribution from a guarantor who paid an unequal amount.
- Parties negotiating a settlement of their guarantee obligations should look to negotiate a settlement with all parties, or on a different structured basis.