Home > News > Risks for joint creditors doing individual deals with lenders

Risks for joint creditors doing individual deals with lenders

Spread the love

By Philip Colman, Principal, MST Lawyers & Kaye Griffiths, Senior Associate, MST Lawyers

Imagine this situation:

  1. You form a company with a business associate.
  2. The company borrows $4M from a lender.  You and your business associates give joint and several guarantees to the lender.
  3. Your company goes broke.
  4. The lender demands the $4M from you and your business associates pursuant to the guarantees.
  5. You approach the lender and negotiate a deal whereby:

                (a)           You pay the lender $1.5M;

                (b)           In return, the lender promises it will not sue you.

  1. You pay the $1.5M and the lender then seeks the remaining $2.5M from your business associate.
  2. Your business associate then pays the $2.5M to the lender.

Now, having discharged your obligations to the lender you might think you are in the clear!!… Not so!

If your business associates sued you seeking contribution from you of half of the difference between the amount they paid and the amount you paid (in this example that would amount to $500,000), he or she would succeed.

This right (which has been longstanding) was recently confirmed in the decision of the High Court in Lavin v Toppi [2015] HCA 4 which was handed down on 11 February 2015.

So, if you are placed in this situation, what can you do?

If the prospect of your business associates paying the lender a greater sum than the amount you paid is remote, the risk of your business associate suing you is just as remote. 

Your business associate’s right only arises if they pay a disproportionate amount of the guaranteed debt that is larger than the amount you paid. 

If your business associate paid less than the amount you paid you would have rights to sue your business associates (of course if they have no assets there will be no point doing this).

Maybe, when settling with the lender you could attempt to negotiate an indemnity from the lender in respect of any contribution claim that might be made by your business associates under the above principle.  Whether the lender will do this will depend on how desperate the lender is to get some repayment from you.

The moral of this story is that if, as a joint and several creditors you do some favourable deal with the lender that sees you pay a disproportionate amount of the debt, there may still be a risk that the other creditors who are jointly and severally liable might bring a claim of the type referred to above.

The lawyers in our dispute resolution and litigation team are experienced in advising both lenders and guarantors in relation to their respective rights.

For further information, please contact our Dispute Resolution & Litigation team by email litigation@mst.com.au or by telephone +61 8540 0200.