Rights between joint guarantors

Posted on December 19th, 2016

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The NSW Supreme Court recently dealt with a claim for contribution between multiple guarantors.  In simplified form a company “OD” loaned money to an incorporated legal practice.  The loan was guaranteed by three individuals and a further company Trout Hall “Trout”.  The loan was not repaid.  Two of the three individual guarantors became insolvent.  The lender sued the remaining individual guarantor, Mr Robert Clancy, and he cross claimed against Trout. joint guarantors rights

Prior to final hearing Mr Clancy paid an amount to the lender to settle the claim against him.  Ultimately, the Court held that Mr Clancy had paid more than required. Trout argued in its defence that because of the payment by Mr Clancy no amount remained owing from it to the lender.  It seems the lender accepted that argument because the claim between the lender and Trout also resolved.

The only remaining issue was the claim by Mr Clancy against Trout for contribution.  He was ultimately successful.  Three points of interest arise from the decision.  Firstly, the entitlement to contribution between guarantors is not affected by the settlement of any claim by a lender to recover the principal debt – there is an equitable right of contribution that exists independently and arises when a co-guarantor pays more than his fair share of an obligation which is jointly guaranteed.  Secondly, the right only arises when someone pays “more than his fair share“.  In this case, Mr Clancy overpaid the lender.  He could only obtain contribution for what was properly payable, not for the over-payment.  Finally, only solvent co-guarantors are required to make contribution.  In this case two of the four co-guarantors were insolvent.  The Court decided that the date of judgment was also the date on which the issue of solvency should be determined – with the effect that the corporate guarantor Trout had to pay a 50% contribution to Mr Clancy (whereas if all four guarantors had been solvent at that time, it would only have had to pay 25%).

If nothing else the case illustrates that where there are multiple guarantors, it can be unsafe to presume that the liability of each is limited based simply on the raw number of guarantors.  If one or more co-guarantors becomes insolvent the remaining guarantor(s) have to make good the whole of the liability.  Anyone considering becoming a co-guarantor should carefully assess both the present – and the likely future – financial position of their co-guarantors. If circumstances change they could be responsible for up to the whole guaranteed debt:  Obvious Deadline Pty Ltd v Clancy; Clancy v Obvious Deadline Pty Ltd [2016] NSWSC 1837.

Tony Cavanagh Director at Mullane & Lindsay Solicitors NewcastleTony Cavanagh is a Director at Mullane & Lindsay Solicitors and practises extensively in Commercial dispute resolution and litigation, and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle or Sydney office. 

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