This is all the more important where the guarantors are not directly related to each other and have come together for a common business activity, arrangement or purpose. A few simple safeguards should be considered by all guarantors BEFORE they agree to provide their guarantee.
What is the usual co-payment rule?
For joint and several undertakings under a guarantee and indemnity, the position at law and equity for co-guarantors is that if a Bank chooses to enforce a right it has under a guarantee against a particular guarantor only, (and there may be many reasons why a Bank may wish to do this, such as readily identifiable assets of one guarantor that can be quickly sold), then that guarantor has rights of co-contribution from the other co-guarantors to obtain, by legal process if necessary, payment of an amount such that all guarantors end up having paid an equal share of the amount paid to the Bank.
What can happen to side step the usual co-contribution rule?
It is not uncommon for one or more co-guarantors to attempt to do a deal with a Bank when a demand is made under a joint and several guarantee, especially where there is a shortfall on recovery from security provided by a borrower.
One such deal might be for one or more guarantors (but not all of them) (Group 1) to reach a settlement with the Bank whereby claims and cross claims are settled between the Bank and Group 1 in exchange for a nominal payment by Group 1 on account of the amount sought by the Bank in exchange for an agreement from the Bank not to sue Group 1 for the full amount owing to the Bank.
At first instance, the above deal looks like a good deal for Group 1. They struck a deal and walked away having paid substantially less than was originally claimed. However, the Bank is still keen to recover all its money and continues to pursue the other guarantors (Group 2) that were not party to the deal struck by Group 1. Eventually the Bank succeeds in recovering the balance of all its money from Group 2 which is substantially more than the amount Group 1 paid to the Bank.
Does the side stepping deal really work?
Under the above settlement example, Group 2 is naturally unhappy about the outcome and finding out about the co-contribution rule, Group 2 seeks payment from Group 1 to recover some of the money Group 2 paid to the Bank with the aim of each guarantor paying an equal share of the amount originally claimed by the Bank. In an action seeking such a co-contribution, it was recently held (on appeal all the way to the High Court of Australia) that Group 2 was entitled to such a co-contribution. The initial advantage obtained by Group 1 is lost with the subsequent action taken by Group 2. Group 1 ends up paying an equal share of the guarantee debt but also additional legal costs for its defence and the legal costs of Group 2.
What should I do?
If you are likely to be a Group 1 guarantor, if considering a strategy reflected in the High Court decision, you should way up the risk of a likely rear guard action by a Group 2 guarantor.
If you are likely to be a Group 2 guarantor, based on the High Court decision, it would appear to be a no brainer. You would pursue a co-contribution payment from a Group 1 guarantor subject to a cost benefit analysis of the amount of the co-contribution sought versus the costs involved to recover that amount.
If you wish to know more about the above scenario, see the High Court decision or if you wish to see if you can benefit from entering into such an arrangement with a financier, contact Sebastian Saccuzzo.