Lavin & Anor v Toppi & Ors [2015] HCA 4: Co-surety Liability

In Lavin & Anor v Toppi & Ors [2015] HCA 4 (11 February 2015), the High Court of Australia has unanimously dismissed an appeal from a decision of the NSW Supreme Court of Appeal, Lavin v Toppi [2014] NSWCA 160 (23 May 2014). In that case it had been held that Ms Paola Toppi (Toppi) and another respondent, as sureties who paid a creditor a disproportionate amount of a guaranteed debt, were entitled to recover contribution from their co-sureties, Ms Dolores Lavin (Lavin) and the other appellants, notwithstanding that the creditor (the National Australia Bank (NAB)) had covenanted not to sue Lavin and the other appellants for payment of the guaranteed debt.

Background

Lavin and Toppi were directors and equal shareholders of Luxe Studios Pty Ltd (Luxe), which had obtained a loan from the NAB. The Loan was secured by way of a written guarantee which meant that Lavin, Toppi and others associated with them (including the other parties to the High Court's decision) were guarantors of Luxe’s obligation to repay the loan. Luxe defaulted on the loan and the NAB sued the guarantors.

Lavin subsequently reached an agreement with NAB in the form of a Deed of Release and Settlement (the Deed). Under the Deed, Lavin paid NAB an amount less than half of the balance owed to it by Luxe under the loan. NAB in return covenanted not to continue its claim against Lavin or to make a new claim against Lavin. NAB's claim against Lavin was then dismissed by consent.

Toppi subsequently paid out the rest of Luxe’s debt to NAB and then sued Lavin for an equitable contribution to the difference between the amounts they had each paid to NAB, Lavin contending that the Deed had limited her liability as a co-surety such that her liability to the NAB was no longer co-ordinate with Toppi’s.

At Trial

On 18 September 2013 in Paola Toppi v Dolores Lavin [2013] NSWSC 1361 (12 September 2013), Justice Rein ordered Lavin to pay Toppi equitable compensation of $726,000, the amount representing half of the difference between the amount of Lavin’s payment to NAB and the amount paid by Toppi.

Court of Appeal NSW

On 23 May 2014 the NSW Court of Appeal (Macfarlan, Emmett & Leeming JJA) unanimously dismissed an appeal by Lavin. The Court found that none of the terms of the Deed amounted to a release of Lavin from her liability to the NAB. There was merely a promise not to sue, which "in no way constrained the rights of other guarantors as against Lavin". As a result, the NSW Court of Appeal held that Toppi was entitled to equitable contribution from Lavin as a co-surety.

On Appeal to the High Court

On appeal to the High Court the grounds of appeal included:

• Whether the NSW Court of Appeal erred in holding that co-sureties were subject to co-ordinate liabilities of the same nature and to the same extent, notwithstanding the receipt by one co-surety from the creditor of a covenant not to sue and the dismissal as against that co-surety of the proceedings brought by the creditor against the co-sureties; and
• Whether the NSW Court of Appeal erred in concluding that the payment by the Toppi to the NAB entitled them to contribution, when Lavin derived no practical benefit from that payment because, by reason of the covenant not to sue, they could not be required to satisfy any remaining liability to NAB.

In its unanimous dismissal of Lavin's appeal the High Court has held that the NSW Court of Appeal was correct in holding that the NAB's covenant not to sue did not extinguish the appellants' liability under the guarantee.

Further, Toppi and the other respondents, subject to proving their readiness and ability to perform their own obligations under the guarantee, were entitled in equity to contribution from the time Lavin and Toppi were called upon to satisfy the guarantee, and that entitlement could not be defeated by the NAB giving the Lavin a covenant not to sue.

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• Lavin v Toppi [2015] HCA 4 (11 February 2015)
• Lavin v Toppi [2014] NSWCA 160 (23 May 2014)
• Paola Toppi v Dolores Lavin [2013] NSWSC 1361 (12 September 2013)
• Lavin v Toppi (S258/2014) Case Outline