USEFUL REMINDER – COURTS HAVE NO GENERAL POWER TO ALTER RIGHTS TO CONTRIBUTION BETWEEN CO-GUARANTORS
The recent decision of the NSW Supreme Court in AMP Bank Limited v Brown and Kavanagh [2017] NSWSC 313 provides a useful reminder that the Courts have no general power or jurisdiction in equity to adjust the right to contribution between co-guarantors to reflect what might be seen as one co-guarantor’s greater “culpability” or “responsibility” for the guaranteed debt.
A key principle of guarantees with equal co-guarantors is that, as between themselves, the co-guarantors are liable in equal shares. To the extent that one co-guarantor pays more than half of the guaranteed debt, that co-guarantor is entitled to contribution from the other co-guarantor in the amount of the excess paid.
In this case, the co-guarantors, Mr Brown and Mr Kavanagh, were directors and shareholders of the borrowing entity, which had acquired funding from AMP Bank Limited. Mr Brown was a 30% shareholder and Mr Kavanagh was a 70% shareholder of the borrowing entity.
Mr Brown and Mr Kavanagh did not dispute that they were each jointly and severally liable for the entire guaranteed debt owed to the financier.
However, Mr Brown (the 30% shareholder) argued that, in the exercise of the Court’s equitable jurisdiction, the Court should adjust his contribution liability by reference to general considerations of justice and fairness, even though there was no agreement between the parties to that effect. Mr Brown asserted that it would be unjust and inequitable for him to be required to bear an equal share for the liability, because he had a lower shareholding, because he had received less benefit than Mr Kavanagh in respect of the debt and because Mr Kavanagh’s conduct made him more responsible for the debt (noting that Mr Brown had been excluded from the operation of the borrower’s business for some time leading up to the time the debt was called upon).
The Court concluded that it had no power or jurisdiction to vary the right of contribution between co-guarantors in the way suggested by Mr Brown. It was noted that, in cases of co-guarantees, the concern is to ensure that the common burden of that guarantee is borne equally between the co-guarantors, so that the exercise by a creditor of its rights to recover from one co-guarantor does not leave that co-guarantor to bear a disproportionate share of the burden.
The Court recognised that there were certain limited exceptions to the general principle of equality as between co-guarantors, including where:
- The co-guarantors expressly agree to modify the rights to contribution;
- One co-guarantor obtained the whole of the benefit of the guarantee; and
- One co-guarantor is guilty of fraud or illegality or other equitable defences like “clean hands” apply.
However, the above “accepted” exceptions were found to have no application in this case. The Court concluded that it had no discretion (outside these exceptions) to adjust contributions by reason of some perceived difference in responsibility of the co-guarantors. This was contrasted with, for example, the position in relation to the right of contribution amongst joint tortfeasors under statute.
Whilst it was acknowledged that Mr Brown’s predicament was unfortunate from his perspective, it was noted that Mr Brown had simply fallen foul of the common commercial risk involved in co-guaranteeing the obligations of a business to a financier.
The decision is not surprising, in so far as it is consistent with well established principles about a co-guarantor’s liability to contribute. That said, it will serve as a useful reminder to guarantors about the significance of providing a joint and several co-guarantee and the very limited circumstances in which rights regarding contribution can be challenged.
This article was written by Sam Dundas, Partner.