This Student Companion by Joel Manyam appeared in the April 2015 edition of the New Zealand Law Journal [2015] NZLJ 102a.

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COMPANY LAW

Lavin v Toppi  [2015] HCA 4

The High Court of Australia has very recently addressed the question of contribution by parties that have coordinate liability in circumstances involving co-guarantors for a company debt to a bank. The matter was first heard in the Supreme Court of New South Wales. The matter was heard on appeal by the Supreme Court of New South Wales-Court of Appeal. There was then a final appeal to the High Court of Australia, which upheld the judgments of the lower courts.

The first appellant (Ms Lavin) and first respondent (Ms Toppi) were directors and equal shareholders in a company, Luxe Studios Pty Ltd (Luxe). In 2005, Luxe purchased a property in Sydney to conduct a photographic studio business. The purchase was funded by a loan of $4.29 million from the National Australia Bank (the Bank). The loan was guaranteed jointly and severally by Ms Lavin, the second appellant (a company associated with Ms Lavin), Ms Toppi, the second respondent (Ms Toppi’s husband), and Luxe Productions Pty Ltd (a company jointly owned and controlled by Ms Lavin and Ms Toppi) (the guarantors).

On 11 November 2009, Luxe went into receivership. On 3 March 2010, the Bank made demands on each of the guarantors for payment of the balance of the loan. Due to a failure to meet the Bank’s demands, the Bank commenced court action against all the guarantors to enforce the guarantee. The Sydney property was sold with the proceeds of sale used to pay the Bank. However, there still remained indebtedness to the Bank of over $4 million. The appellants filed a cross-claim against the Bank seeking a declaration that the guarantee was unenforceable on grounds that it was unconscionable under the Trade Practices Act 1974 (Cth) or unjust within the meaning of the Contracts Review Act 1980 (NSW). The appellants and the Bank entered into a deed of release and settlement in respect of the cross-claim. Ms Lavin agreed to pay the Bank $1.35million in respect of the guaranteed debt and about $1.73 for personal loans (the settlement sum). The appellants agreed to release the Bank from all claims relating to the guarantee. In return, and under the deed, the Bank agreed not to sue the appellants in respect of the guarantee, provided Ms Lavin paid the settlement sum.

Ms Toppi and her husband had sold their home and used the sale proceeds to pay the balance of the guaranteed debt which amounted to $2.9 million. It was payment of this sum that finally discharged the guarantors’ obligations. The respondents took proceedings against the appellants, claiming contribution of half the difference between the respective amounts paid by both parties in discharging the guarantee. The appellants opposed the claim on the grounds that the appellants and respondents were not under “coordinate liabilities”. This was because pursuant to the deed of release, the appellants’ liability under the guarantee was not enforceable by the Bank whereas the respondents’ liability was.

In the first instance decision by Rein J in the Supreme Court of New South Wales, the appellants’ argument against contribution was rejected. Rein J relied on the decision of the Court of Appeal of the Supreme Court of New South Wales in Carr v Thomas [2009] NSWCA 208 which held that a creditor’s covenant not to sue a particular co-surety had no effect on the rights of contribution of the co-sureties among themselves. The additional observation Rein J made was that Carr v Thomas had the considerable attraction of precluding one surety, with the assistance of the creditor, from burdening other sureties with a disproportionate share of liability. The appellants were ordered to pay the contribution amount that had been claimed. In the Court of Appeal, the appellants had argued that Carr v Thomas was not supported by authority and was clearly wrong in principle. Leeming JA, on behalf of the Court, rejected the argument, the principle being that a covenant not to sue did not change an existing liability. The effect of the deed was that it did not extinguish the appellants’ liability under the guarantee. As the liability subsisted, it followed that the appellants and respondents continued to share liabilities of the same nature and extent. The existence of such coordinate liability entitled the respondents to recover contribution from the appellants.

The appellants applied for and were granted special leave to appeal to the High Court. Their argument was that the Court of Appeal erred in finding that the respondents and appellants shared coordinate liabilities of the same nature and extent at the time the respondents paid the balance of the guaranteed debt. The appellants’ argument that they did not share coordinate liability was based on which party the Bank could take enforcement action against, under the guarantee. The appellants argued that their liability was “qualitatively different” from that of the respondents in that the Bank could enforce the respondents’ liability but could not similarly take action against the appellants. The argument that there was no coordinate liability focused on the date of the respondents’ payment of the balance of the guaranteed debt. It was argued that only at this date could a right of contribution accrue to the respondents. However, on this date, the parties no longer shared coordinate liabilities as the appellants could no longer be sued by the Bank. The High Court opined that there were two answers to the appellants’ argument. The first was that given by the Court of Appeal. This was that the covenant by the Bank not to sue did not abrogate, but indeed assumed, the appellants’ ongoing liability for the guaranteed debt. Secondly, the respondents’ right to contribution from the appellants was cognisable in equity even before the respondents made their disproportionate payment of the balance of the guaranteed amount to the Bank. This could not be defeated by the separate agreement entered into by the Bank and the appellants.

 The full April 2015 edition of the New Zealand Law Journal is available on the LexisNexis research database.

 

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