A recent decision of the High Court has highlighted a big trap for unwary guarantors of business debts.

The Case

Ms Lavin and Ms Toppi gave joint and several personal guarantees to NAB for a loan it made to their company Luxe Studios. Luxe defaulted on the loan, so NAB pursued the guarantors for the debt.

Ms Lavin did a deal with NAB where she paid it some of the debt and NAB promised not to sue her for the balance. Cue sigh of relief.

Ms Toppi was not a party to the deal and NAB then went after her for the rest of the debt, which she had no choice but to pay.

The bank’s been paid in full so here ends the story right? Nope.

Ms Toppi, who ended up paying much more than Ms Lavin to NAB, commenced proceedings against Ms Lavin for her equal contribution to the debt.

The High Court unanimously held that Ms Lavin and Ms Toppi as co-guarantors were equally responsible for the debt and Ms Lavin was ordered to pay Ms Toppi the difference. The fact that Ms Lavin had done a deal with NAB made no difference as she still had an obligation to her co-guarantor Ms Toppi to contribute at least her share of the debt.

What you need to remember about guarantees

1. Get a release. Long after a business has broken up, any guarantees given by you are likely to be valid and you may still be liable for the company's debts unless you get a release from your co-guarantors and the bank.

2. Be careful. The bank will want to give you a "covenant not to sue", so that it can still pursue the other guarantors. This is not the same as a release. If you can't get the other guarantors into the settlement deal, you need a release in order to be free and clear.