Contributions as between co-guarantors
A guarantor is an individual who agrees to be liable for the debt of another person (principal borrower) if that principal borrower defaults on their debt obligations. There could be one guarantor or several guarantors for the same debt. In a corporate context, it is common for lenders to require directors and/or related entities to guarantee the debts of the company that has insufficient assets/does not have a lot of trading history.
If the principal borrower complies with their debt obligations, the guarantors would not be required to make any payments towards the debt. However, if the principal borrower defaults, the lender could require one or all of the guarantors to pay in place of the principal borrower. The lender is under no obligation to pursue all guarantors at once, and often they would pursue the guarantor that has most assets and/or who the lender finds easiest to pursue.
If the lender recovers payment (or majority of it) only from one of the guarantors, that guarantor can compel other co-guarantors to contribute. The Court of Appeal in Milloy v Dobson [2016] NZCA 25 held that the normal rule as to the right to contribution in equity is that co-guarantors will share the debt equally.
Relief before and after payment
A guarantor’s right to contribution from co-guarantors may arise before or after the guarantor has fulfilled the guarantee.
However, in instances where the guarantor has not fulfilled the guarantee yet, for the right to contribution to arise, the guarantor’s liability must have become unconditional.
For instance, where the lender has obtained judgment against the guarantor (but no payment has been made yet), the guarantor may bring an action against the co-guarantors to compel them to contribute to the common liability.
At this point, there is little authority to demonstrate the exact extent of the guarantor’s ability to seek contribution prior to the payment being made by them and further developments in this area are expected.
In relation to instances where contribution is sought after payment, a guarantor’s right to contribution from any co-guarantors does not arise until the guarantor has paid more than their total proportion or share of the common liability.
Payment of guaranteed debt and amount recoverable
The payment by a guarantor must be made by the guarantor or on the guarantor’s behalf. The guarantor should pay to the person legally entitled to receive it or else the guarantor may not be relieved from liability and may not claim contribution.
The amount recoverable from each co-guarantor is regulated by the number of solvent guarantors and the proportion of the amount each is liable for. The share of the liability which would otherwise have fallen on an insolvent guarantor must be shared by all solvent co-guarantors.
No right to contribution
It has been found that there could be no right of contribution from co-guarantors in the following circumstances:
- If co-guarantors are bound by different instruments for separate portions of the debt or it has been expressly agreed that each guarantor was to be individually liable only for a given portion of the debt.
- Where a person became a co-guarantor at the request of another person, and it can be inferred from the circumstances that only the other person was to be liable for the guaranteed debt.
- If the co-guarantor is not liable to the lender because the guarantee in question has been avoided or liability did not attach.
- If the person seeking to enforce it was guilty of misrepresentation.
Enforcing right to contribution
A guarantor may bring an action in the High Court or the District Court (depends on amount in question) to enforce their right to contribution from the co-guarantors.
The rights and liabilities of all solvent co-guarantors are interlinked. Therefore, a guarantor must ensure that all solvent co-guarantors are joined in the action. If a co-guarantor is deceased, an action may be brought against the estate.
A co-guarantor who has a claim against another co-guarantor may rely on that claim as a defence to a money claim. The right of set-off may be excluded or modified by the agreement where there is an express agreement for contribution and all parties are solvent.
Co-guarantors cannot bring a counterclaim against a lender for breach of warranty without the principal borrower. This is because it is the principal borrower’s claim. Likewise, if a co-guarantor is discharged by the lender, other co-guarantors will also be discharged due to the joint nature of the liability.
Guarantor’s right to securities
A guarantor who pays more than their proportionate share has a statutory right to have all the rights and securities held by the lender transferred to them once the lender receives full payment.
Conclusion
A guarantor may bring proceedings to enforce their right to contribution from the co-guarantors and determine what a just apportionment should be. The amount recoverable from each co-guarantor is determined by the number of solvent guarantors. This is because the share of the liability which would have fallen on an insolvent guarantor must be shared by all solvent co-guarantors. All solvent coguarantors should be joined in the action as the rights and liabilities of all solvent coguarantors are interlinked.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.