The High Court has unanimously dismissed an appeal from the decision of the New South Wales Court of Appeal in Lavin v Toppi. Lavin and Toppi were principals of a company which bought property that financed by several mortgages and guarantees that were initially given separately but later consolidated into a single loan and guarantee. After the bank sought payment of the debt, Lavin, but not Toppi, filed a cross-claim contending that the consolidated guarantee was unconscionable and an unjust contract. These proceedings with Lavin were settled for $1.35 million, and following the sale of the property and the payment by Toppi of the net balance of $2.9 million, Toppi sued to recover the contribution of approximately $800,000 (half the difference between the amounts paid to the bank). The primary judge held that Carr v Thomas [2009] NSWCA 208 required that Toppi was entitled to contribution. In Carr v Thomas, the NSWCA held that a directors’ liability to a company for breach of duties is not released or extinguished by a settlement deed and that where that liability is co-ordinate, another director also liable for the breach is entitled to claim contribution from the first director. The NSWCA dismissed Lavin’s appeal and rejected the invitation to overrule or distinguish Carr v Thomas, concluding that the Bank’s covenant not to sue in the settlement deed did not extinguish but rather assumed the appellant’s ongoing liability for the guaranteed debt.

The Court unanimously held that the NSWCA was correct in this conclusion (see [36]–[37]). The Court also stated that the NSWCA’s conclusions were ‘supported by a broader equitable view of the rights of co-sureties between each other’ (at [3]): equity protects the co-surety’s equity to contribution in a ‘flexible and comprehensive way’ by acting when an overpayment is imminent (at [48]–[50]). Here, once the Bank commenced proceedings it became clear that enforcing Toppi’s liability to the Bank was imminent (at [51]): ‘from the time the appellants and respondents were called upon under the guarantee, the respondents’ equity to recover contribution was sufficiently cognisable that it could not be defeated by the very kind of dealing between creditor and co-surety that the equitable principle seeks to prevent.’: [52].