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[1981] HCA 54
High Court of Australia
1981-10-08
Gibbs CJ
Original judgment source is linked above.
MAHONEY v McMANUS [1981] HCA 54; (1994) 180 CLR 370
GIBBS CJ(1), MURPHY(2), AICKIN(3), WILSON(4) AND BRENNAN(5) JJ
Guarantee - Co-sureties - Contribution - Guarantor advancing money to debtor to enable it to pay guaranteed creditors - Money used to pay guaranteed creditors - Whether loan or payment under guarantee.
GIBBS CJ This is an appeal from a judgment of the Full Court of the Supreme Court of Queensland allowing an appeal from Lucas. The question for decision is whether the appellant is entitled to contribution from the respondent in respect of certain payments which the appellant claims were made by him under guarantees given by himself and the respondent as co-sureties.
2. The findings made by the learned trial judge as to the ultimate facts of the case cannot be disputed; the contest that arises is as to the proper inference to be drawn from those facts. In 1973 the appellant, the respondent and one Mundt became the shareholders and directors of a company, Central Timber Enterprises Pty. Ltd. ("the company"), which acquired a business of selling boats, and carried on that business under the name of "The New General Marine". In August 1973, the three directors gave the following guarantees, for the purpose of enabling the company to obtain the finance necessary to conduct the business:
(1) A guarantee dated 14 August 1973 by which the appellant, the respondent and Mundt jointly and severally guaranteed the due payment to Chrysler Marine Australia Pty. Ltd. ("Chrysler") of all moneys which were then owing or which should thereafter become due and owing to Chrysler by the company pursuant to an Authorized Dealer Sales Agreement, made between Chrysler and the company, to which the guarantee was annexed.
(2) A guarantee dated 15 August 1973 by which the appellant, the respondent and Mundt jointly and severally guaranteed to Borg-Warner Acceptance Corporation (Australia) Ltd. ("Borg-Warner") the due payment of all moneys that might then be due and payable or that might thereafter become due and payable to Borg-Warner by the company.
(3) Three several guarantees, each dated 28 August 1973, by which the appellant, the respondent and Mundt respectively guaranteed to Industrial Acceptance Corporation Ltd. ("I.A.C.") and four other companies apparently associated with I.A.C. the due payment of all moneys which then were or should thereafter become due and owing to any of those five companies by the company.
3. On 27 November 1973 the three directors executed a joint and several guarantee in favour of the Commercial Banking Co. of Sydney Ltd. ("C.B.C.") and on 10 January 1974 they executed a further guarantee in favour of C.B.C.
4. In about February 1974 the respondent, who wished to withdraw from the business, resigned as a director and sold his shares to Ambrose Malone. Thereafter, on 15 May 1974, Chrysler and the company entered into a new Authorized Dealer Sales Agreement which, by cl. 16, provided as follows:
"IT IS ACKNOWLEDGED by CHRYSLER and the DEALER (the company) that this Agreement forms the entire Agreement between the parties and that it cancels and supersedes all prior agreements of any nature whatsoever and further that this Agreement shall operate as a mutual release by and between the parties in respect of any rights that may have existed under any prior agreement excepting only the obligations of either party to pay to the other any existing indebtedness."
5. Annexed to that agreement was a guarantee dated 16 May 1974 executed by the appellant, Mundt and Malone who agreed that they were jointly and severally liable for the present and future indebtedness of "The New General Marine Pty. Ltd." to Chrysler.
6. During 1974 the company experienced difficulty in paying its creditors. On 31 May 1974 I.A.C. caused two documents to be delivered to Mundt (who was then managing the company) in the presence of the appellant. One (addressed to the manager of the company) was a formal written demand for payment within seven days of all moneys secured by a deed of covenant which the company had executed in favour of I.A.C. The amount owing was not specified, but it is not in dispute that it exceeded $100,000. The other document was a letter, addressed to "The Manager, The New General Marine" requesting payment of $48,046.72, the amount owing for floor plan stock sold but not paid for and for outstanding wholesale charges. Mundt arranged for a meeting to be held as soon as possible to consider I.A.C.'s demands; the meeting was held either on 31 May 1974 or on the following day. Present at the meeting were the appellant, the respondent, Mundt, Malone and a solicitor, Mr. Cronin. There was some conflict of evidence as to what occurred at the meeting, but it is common ground that someone said that the company "needed an injection of capital" to enable it to pay its creditors, that the respondent said that he was unable to raise any funds, that the appellant agreed to provide $50,000 and that it was agreed that the company should pay him interest on that sum at 15 per cent. The appellant said in evidence that in the course of discussion mention was made of the fact that if I.A.C. was not paid it would take action under the guarantees, and the very presence of the respondent at the meeting makes it clear that the meeting was concerned with the liability of the guarantors, for the respondent, hawing ceased to be either a director or a shareholder in the company, had no other interest in the company's affairs than that of a guarantor of its liabilities. On 4 June 1974 the appellant drew a cheque for $50,000. On the butt of the cheque appear the words "New General Marine No. 1 acc Loan". The receipt of the money is shown in the company's ledger under the heading "Loan a/c J. Mahoney". The company banked the cheque and on the same day drew a cheque for $48,047.08, the amount necessary to obtain a bank cheque for $48,046.72, which was paid to I.A.C.
7. At about the same time Mundt received an oral demand from Borg-Warner for payment within seven days of the debt due to it by the company. Mundt approached the respondent, who provided $5,000 which was paid to Borg-Warner. However, a considerable sum remained owing.
8. On 31 May 1974 letters were sent by Chrysler to the appellant and to Mundt. With each letter was enclosed an invoice showing that the amount due by the company as at 30 April 1974, "collectable under personal guarantee", was $75,167.15. The letters (which were in identical terms) stated that Chrysler's alternatives were either to take legal action which would ultimately lead to the company being placed in liquidation or receivership or to exercise Chrysler's right of recourse under the personal guarantees, and that, since Chrysler did not wish to see the company forced into liquidation, it wished "to exercise the personal guarantees". The letters concluded with the following statement:
"Unless we are informed by next Monday morning of alternative financing arrangements we will then proceed to exercise our options under the personal guarantees and will therefore pursue by action against each guarantor, the settlement of the full amount outstanding."
9. The letters did not specifically mention the guarantees to which they referred, but the amount claimed was due as at 30 April 1974, before the second guarantee was executed, and was "existing indebtedness" within the meaning of cl. 16 of the agreement to which the second guarantee was annexed. On 11 June a further letter was sent to the appellant (and presumably also to Mundt) on behalf of Chrysler; this letter referred to the guarantee executed on 16 May 1974 and demanded payment of the outstanding balance of $75,167.15 on or before 20 June and threatened proceedings under the guarantee if the amount was not paid.
10. These demands led to the calling of a second meeting which was held on or about 20 June 1974. At this meeting also the appellant, the respondent and Messrs. Malone, Mundt and Cronin were present. It was again clear that the company needed more funds, and there is no doubt that the appellant believed that he might be called on to make payment under the Borg-Warner guarantee, as well as under the IAC and Chrysler guarantees, if the company did not make sufficient payment. The appellant told those present at the meeting that he had an interest bearing deposit in the sum of $50,000 and agreed to provide it to the company. It was again agreed that he should receive 15 per cent interest. On 20 June the appellant paid a cheque for $48,781.14 to the company; it had cost him the difference between that sum and $50,000 to cash his deposit. The cheque butt shows that the cheque was drawn in favour of "General Marine" for "Loan Guarantees". Receipt of this amount also was recorded in the company's ledger under the heading "Loan a/c J. Mahoney". On the same day the company made payment of $29,000 to Chrysler, $10,000 to Borg-Warner and $4,600 to I.A.C. These payments totalled $43,600, and the balance of the amount provided by the appellant remained in the company's account. The appellant was not at the time aware of the amounts paid to each creditor.
11. The company has since gone into liquidation. On 9 September 1977 the appellant lodged a proof of debt for $181,600, which was described as "Moneys advanced plus interest". The third guarantor, Mundt, is now insolvent.
12. The learned trial judge declared that the following payments made by the company to its creditors are to be treated as if they had been made by the appellant as co-guarantor and that the appellant is entitled to contribution from the respondent in relation thereto to the extent of one half of those amounts: (i) $48,047.08 used to pay I.A.C. on 4 June 1974; (ii) $4,600 paid to I.A.C. on 20 June 1974; (iii) $29,000 paid to Chrysler on 20 June 1974; (iv) $10,000 paid to Borg-Warner on 20 June 1974.
13. The respondent had counterclaimed for a declaration that he was entitled to contribution in respect of payments made by him to C.B.C. and to Borg-Warner. After the company had gone into liquidation, those companies had commenced actions against, inter alios, the appellant and the respondent as guarantors. C.B.C. obtained judgment, the amount of which was satisfied by payment by the respondent. The claim of Borg-Warner was satisfied by a payment made by the respondent apparently without judgment being obtained. The learned trial judge declared that the respondent is entitled to contribution from the appellant in respect of one half of the amount of $162,650 paid by him to C.B.C. and one half of the amount of $20,138.34 paid by him to Borg-Warner. The learned trial judge further declared that the respondent is entitled to an assignment of two bills of mortgage given by the appellant and his wife to C.B.C. as security for the indebtedness of the company, but ordered that no steps be taken to implement the assignment until after 18 January 1980 and that if on or before that date the appellant paid to the respondent the sum of $45,570.63 with interest the respondent's entitlement to an assignment should be extinguished. On an appeal brought to the Full Court by the present respondent it was held that the payments made by the appellant were advanced to the company, and that the appellant was not entitled to contribution from the respondent in respect of them. The appeal of the present respondent was accordingly allowed. The declarations made in favour of the respondent by the learned trial judge were not challenged and were not altered, but the direction that no steps be taken to implement the assignment of the mortgages if the appellant paid $45,570.63 was set aside.
14. There was no contest as to the principles of law applicable to the determination of the main question that arises in the present case. A surety is entitled to contribution from his co-sureties so that the common burden is borne equally and so that no surety is required, as between himself and his co-sureties, to pay more than his due share. The right arises whether the sureties are bound jointly, jointly and severally, or severally, and whether by the same or different instruments, and whether or not the sureties knew of each other's existence, provided that they are liable in respect of the same debt. The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as the creditor has acquired a right to immediate payment from him. The amount of contribution recoverable depends on the number of sureties who are solvent at the time when contribution is sought and on the proportion for which each is liable. As authority for these principles, it is sufficient to refer to McLean v. Discount and Finance Ltd. (1); Albion Insurance Co. Ltd v. Govemment Insurance Office (N.S.W.) (2); Halsbury's Laws of England (3) and Goff and Jones, Law of Restitution (4). There is no doubt that the appellant and the respondent were co-sureties in respect of the liability of the company to I.A.C. and to Borg-Warner. It will be necessary to consider whether the respondent had been released from the obligations under the guarantee given to Chrysler, but it is convenient for the moment to assume that he had not been released. In these circumstances, the learned judges of the Supreme Court correctly considered that the crucial question in the present case was whether the appellant had made payment under the guarantees or whether the true position was that he had lent money to the company out of which it had paid off part of its indebtedness. If the company had itself paid its creditors, obviously the sureties would then no longer have been liable for the amount by which the debt of the company had been thus reduced, and the fact that the company had been enabled to make the payment by an advance made by a person who happened to be a sway would not entitle the latter to contribution, since there
(1) [1939] HCA 38; (1939) 64 CLR 312, at pp. 328, 336-337, 341.
is no principle of law which requires a person to contribute to an outlay merely because he has obtained a material benefit from it (5).
15. There are no doubt persuasive arguments in favour of the view taken by the Full Court that the appellant made advances to the company rather than payments to the creditors under the guarantees. The amounts were in fact paid to the company and not directly to the creditors, and for the appellant to succeed it is necessary to conclude that it was intended that the company should act on behalf of the appellant as an agent or instrument to apply the money in paying the creditors. There are, it is true, a number of circumstances some at least of which appear to be opposed to such a conclusion. The amounts paid to the company by the appellant did not exactly equal the amounts paid to the creditors by the company, and, at least in the case of the second payment, the appellant did not know what amounts would be paid to any particular creditor. The notation on the butt of the cheque drawn on 4 June suggests that the amount paid was a loan to the company; however, the butt of the cheque drawn on 20 June indicates that the payment was in some way related to the guarantees. The facts that the amounts are shown in the company's ledger as loans, and that the proof of debt refers to an advance, support the argument of the respondent, but are hardly conclusive, since, if the appellant, as surety, had paid the company's creditors, he would to that extent had become a creditor of the company. Similarly, the fact that the company agreed to pay interest at a particular rate is not conclusive, since a surety's right to be fully indemnified entails the right to be repaid with interest the amount he has paid to the principal creditor.
16. On the other hand it is clear that the moneys were not paid to the company to be used for its general purposes, but only for the purpose of enabling it to pay the creditors which held guarantees and which, as all those present at the meetings knew, would resort to the guarantees if the company's debts were not paid. The meeting held on or about 31 May was called only because of I.A.C.'s demands, and there is no doubt that the amount of $50,000 provided by the appellant was intended to be applied in satisfying those demands, although there was no arrangement as to how any balance (which in fact amounted to something less than $2,000) was to be applied. The second meeting was called because of Chrysler's demands, which included an indication of intention to proceed against the sureties, and those present were aware that demands had also been made by I.A.C. and Borg-Warner and that the sureties
(5) Ruabon Steamship Co. v. London Assurance, (1900) AC 6, at p 12.
would be made liable if the company did not pay its debts to those companies. Again it was clear that the money was supplied by the appellant for the purpose of paying the creditors of the company whose debts were the subject of guarantees, although it was not arranged how much should be paid to each creditor and nothing was said as to any balance.
17. In my opinion the proper conclusion to be drawn from all the facts is that on each occasion the appellant provided the money, not as a loan which the company might use as it liked, but to be applied in payment of the debts the subject of the guarantees. The learned trial judge was in my opinion right in saying that the interposition of the company between the appellant and the creditors was a mere matter of procedure. In so far as the moneys were used for the purpose of paying the creditors, they were in my opinion payments by the appellant under his guarantees and they should be taken into account in determining the amount of contribution payable as between the appellant and the respondent.
18. It should be remembered that the doctrine of contribution is based on the principle of natural justice that if several persons have a common obligation they should as between themselves contribute proportionately in satisfaction of that obligation. The operation of such a principle should not be defeated by too technical an approach to the question whether a surety has paid the creditor, when he has supplied moneys to the principal debtor for the purpose of making such payment.
19. There remains the question whether the respondent was released from his obligations under his guarantee to Chrysler. The submission was that the execution of the guarantee by the appellant, Mundt and Malone on 16 May 1974 had the effect of releasing the respondent from the guarantee given by him jointly and severally with the appellant and Mundt on 14 August 1973. The respondent was not a party either to the guarantee of 16 May 1974 or to the agreement to which it was annexed. There was no agreement, to which he was a party, which expressly or impliedly discharged his guarantee. However the respondent's submission was that the execution of the guarantee in May 1974 discharged the appellant and Mundt from liability under the guarantee given in August 1973 and that the effect of discharging the respondent's co-sureties was to release the respondent himself from his obligations. It may be mentioned that Chrysler commenced an action against the appellant, Mundt and Malone under the guarantee of 16 May 1974 and against the respondent under the guarantee of 14 August 1973. The action was settled on 30 July 1979, and judgment was given by consent against each of the appellant and the respondent for $12,500 inclusive of costs and against Mundt for a lesser sum. That action of the respondent in consenting to judgment is inconsistent with his present assertion, but it does not determine the matter.
20. The learned trial judge, in holding that the respondent had not been discharged from his obligations under the guarantee to Chrysler, relied on cl. 16 of the agreement to which the guarantee of 16 May 1974 was annexed, which preserved the indebtedness incurred under the earlier agreement which had been guaranteed by the respondent. However, the agreement of which cl. 16 forms part was made between Chrysler and the company, and the sureties were not parties to it. Moreover, cl. 16 refers to "the obligations of either party to pay to the other any existing indebtedness" and this can only refer to the obligations of either the company or Chrysler. Clause 16 therefore does not refer to the obligations of any surety and does not determine the question whether it was intended that the earlier guarantee should remain in force.
21. The guarantee of 16 May 1974 is expressed to be in respect of present as well as of future indebtedness. The parties to it guaranteed payment of the indebtedness which was the subject of the earlier guarantee, and of other indebtedness as well. If all the parties to both guarantees had been the same, it might have been easy to reach the conclusion that they intended, not that there should be two identical guarantees in respect of the same existing indebtedness, but that the latter guarantee was to be taken in substitution for, and to discharge, the former. But the position is different when the parties to the two guarantees are not the same. It is not inconsistent with the continued operation of a joint and several guarantee by A, B and C, that a joint and several guarantee should be taken from A, B and D in respect of the same indebtedness. There is no reason why the two guarantees should not both be effective, so that the creditor can avail himself of either or both, and so that any surety can obtain contribution against all the others. There was no expressed intention to discharge the appellant and Mundt from their joint and several liability under the guarantee of August 1973, and I can see no good reason for implying any such intention; on the contrary, there is every reason to assume that Chrysler would not have intended to discharge the appellant or Mundt, if the effect of so doing would have been to release the respondent from his liability. It is not unreasonable to assume that Chrysler wished to have the benefit of both guarantees. It was not in my opinion established that the guarantee of 16 May 1974 was accepted in substitution for that of 14 August 1973 or that it had the effect of discharging the appellant from his obligations under the earlier guarantee.
22. It is therefore unnecessary to decide whether, if the execution of the guarantee of 16 May 1914 had discharged the appellant from his obligations under the guarantee of 14 August 1973, the respondent would, by operation of law, have been released from his liability under that guarantee. It has been held that when a creditor releases one of two or more sureties who haw contracted jointly and severally, the others are discharged (6). The reason is that "the joint suretyship is the 'essential condition of the liability' of each, or, as the Judicial Committee phrase it, 'part of the consideration of the contract of each"' (7). The American courts appear to have adopted a less strict rule, namely that the release of one of a number of co-sureties who are jointly and severally liable will release the others only to the extent that they suffer prejudice by losing a right to contribution (8). In the present case, if the execution of the later guarantee had discharged the appellant from his obligations under the earlier, the appellant would nevertheless at the same instant have assumed his new obligations under the later guarantee; in those circumstances the respondent would have retained his right of contribution, although the liability of the co-sureties would then have been several, rather Man joint and several. However, these questions need not be considered, since, for the reasons I have given, the appellant and the respondent remained co-sureties of the debt to Chrysler under the original guarantee.
23. I should add that it was not suggested, either in the notice of appeal to the Full Court of the Supreme Court or in argument before us, that if the learned trial judge was correct in holding that the appellant had a right to contribution from the respondent, and that the respondent remained liable under the Chrysler guarantee, any exception could be taken to the declaration that the respondent was bound to contribute to the extent of one half. It appears to have been assumed that Malone was not liable to make contribution. In the action brought by Chrysler to which reference has already been made, in which Malone was joined as a defendant, the claim against him was withdrawn. It may be that Malone had raised some defence, such as non est factum, which if accepted would have meant that he was not liable under the guarantee, that this led Chrysler to withdraw its claim, and that the respondent accepts that
(6) Ward v. National Bank of New Zealand (1883), 8 App Cas 755, at p 764; Walker v. Bowry [1924] HCA 28; (1924), 35 CLR 48, at p 57.
(8) Corpus Juris Secundum, vol. 72, Principal and Surety, par. 231; American Jurisprudence 2d, vol. 38, Guaranty, par. 91; American Jurisprudence 2d, vol. 74, Suretyship, par. 83.
Malone was not a co-surety. Whatever the reason, however, it has not been submitted on behalf of the respondent that Malone was a co-surety whose existence affects the proportion in which the respondent should contribute to the Chrysler debt, if he is liable to contribute at all. The other co-surety, Mundt, being insolvent, does not affect that proportion.
24. I would allow the appeal, and would restore the judgment of the learned trial judge.
MURPHY J When money is paid by a debtor to the creditor in respect of a guaranteed debt there is a presumption that it is intended as a discharge of the debt by the debtor himself rather than a payment on behalf of the guarantor to meet his obligations under the guarantee. While it is possible to use the debtor as agent or conduit for payment under the guarantee, this is such a departure from normal that care should be taken to make clear the legal basis on which payment is being made.
2. The trial judge found that the intention of the guarantor appellant was to use the debtor as agent for discharge of the appellant's obligations under the guarantees, not to advance moneys to the debtor so that the debtor could meet its own obligations to the creditors. He found that the debtor's payments to the creditors were not on its own behalf, but on behalf of the appellant as guarantor. Although I have considerable reservation, produced by the confused and careless way in which these transactions were conducted, I accept the analysis and conclusion of the Chief Justice.
3. The appeal should be allowed and the decision of the trial judge restored.
AICKIN J I have had the advantage of reading the reasons for judgment of the Chief Justice. I am in agreement with his reasons and there is nothing that I can usefully add. I would therefore allow the appeal and restore the judgment of the trial judge.
WILSON J I have had the advantage of reading the reasons prepared by the Chief Justice. The facts of the matter and the two questions that are raised for decision are to be found therein. I shall confine my attention to the first and principal question, namely, whether the payments which the appellant made to Central Timber Enterprises Pty. Ltd. ("the company"), of which he was a shareholder and director, were made in his capacity of a guarantor of the liabilities of that company. If that question is answered in the affirmative, then I agree with the Chief Justice that the second question should be answered in favour of the appellant for the reasons given by him, and the appellant is entitled to have the decision of the trial judge restored.
2. As the Chief Justice has said, the principles of law that govern the entitlement of a surety to a contribution from his co-surety are not in dispute in this case. The problem lies in their application to the circumstances.
3. The appellant paid two sums to the company. The first was a sum of $50,000, paid on 4 June 1974. The second, a sum of $48,781.14, was paid on 20 June 1974. At the time, the company was in financial difficulties, with a number of creditors pressing for payment. On 31 May 1974 one of these creditors, Industrial Acceptance Corporation Ltd. ("I.A.C.") served two demands for payment on the company. One was addressed to the company and constituted a formal demand for a sum apparently in excess of $100,000; the other was a request to pay the sum of $48,046.72, addressed to the Manager of "The New General Marine", the business conducted by the company. It is noteworthy that no formal demand was made on any of the guarantors. Nevertheless, it is obvious that those present at the meeting which was held in response to these demands were conscious of the cloud hanging over the guarantors by reason of the company's lack of funds. This is borne out by the fact that the respondent attended the meeting although at that time his only interest in the company was as a guarantor of certain of its liabilities.
4. There were then two possible courses of action open to the guarantors: one was to put the company in funds, enabling it to meet the demands that were being made upon it and then, hopefully, to trade its way out of its difficulties; the other was for the guarantors or any of them to pay I.A.C. If the latter course were adopted, then as a result of payment under the guarantee the payor would be entitled to an immediate indemnity from the company. It might be expected, if the latter course were adopted, that the guarantor entitled to such an indemnity would take action at that stage either to put the company into liquidation or to terminate any guarantee in respect of liabilities incurred by the company in the future. A failure to take some such action could be justified presumably only by faith in the eventual profitability of the company.
5. The fact which confronts the appellant with his greatest difficulty is that he paid the money, not to the creditor to whom he was liable under the guarantee but to the debtor company. The difficulty may be overcome if the evidence led to a conclusion that the company was no more than his agent to make the payment to I.A.C. But there is no evidence which expressly supports such a conclusion. Is it to be inferred? The meeting was held in the office of Mr. Cronin, the solicitor for the company, and in his presence, so one might reasonably assume an appreciation on the part of those present of the legal implications of the discussion. The appellant said that he could contribute $50,000, an offer which was accepted by the others who were present and it was agreed that he should receive interest on the money. It is conceded by the respondent that the appellant intended the money to be paid by the company to I.A.C., and that he knew of that intention. But there is no evidence of any agreement that the payment was made by him in the capacity of a guarantor. Indeed, the evidence of the appellant himself tends to deny such a conclusion. He says in effect that the meeting was concerned with injecting fresh funds into the company so that it could satisfy its creditors and thereby relieve the threat hanging over the guarantors. He says that Mr. Cronin said they would require $100,000, and that the respondent said that if Mr. Mahoney would put in $50,000, he and Mr. Mundt would raise $50,000. Although the trial judge found against the appellant in respect of the alleged agreement, the evidence lends no support to the notion that here was one guarantor offering to meet under his personal guarantee the whole of the debt of $48,046.72 payment of which had been demanded from the company. Unless one can find such a conclusion reasonably open on the evidence I am unable to see any foundation for the proposition that the company in making the payment to I.A.C. was acting merely as agent for the appellant.
6. The matter may be tested from another angle. Suppose that shortly after the payment was made to I.A.C., another creditor had put the company into liquidation. Is it conceivable that the liquidator's claim to void the payment as a preference would have failed because the payment was made not by the company in As own right but on behalf of a guarantor?
7. Similar considerations attend the second payment made to the company by the appellant. This payment was preceded by a second meeting at which the guarantors and Mr. Cronin were present. On this occasion the company was being pressed verbally by BorgWarner Acceptance Corporation (Australia) Ltd. ("Borg-Warner") and had received a written demand from Chrysler Marine Australia Pty. Ltd. ("Chrysler"). Both companies held guarantees executed by the appellant, the respondent and Mr. Mundt. The former demand was made on the manager of the company, while the Chrysler demand was made by letter addressed individually to those directors of the company who had also signed personal guarantees. Apparently, the respondent did not receive a letter because although he was a guarantor he was no longer a director of the company. The letter, having expressed a Ash to exercise the personal guarantees, continued as follows:
"I believe this current liquidity situation can be overcome if a sensible and business like approach is adopted. I am sure that individually the guarantors of the debt are personally capable of injecting sufficient capital into the business in order to make it once again a going concern. In the opinion of the directors of Chrysler Marine Australia Pty. Ltd., the location of The New General Marine at Southport, and its business potential indicate that under proper management the business could become highly profitable. I would therefore urge you to consider very carefully the potential of the Dealership at Southport and decide by Monday the 1st June, what your intentions will be.
I am enclosing an Invoice Statement for the sum of $75,167.15. Unless we are informed by next Monday morning of alternative financing arrangements we will then proceed to exercise our options under the personal guarantees and will therefore pursue by action against each guarantor, the settlement of the full amount outstanding."
8. An invoice was enclosed with the letter showing the amount due by the company as at 30 April 1974 "collectable under personal guarantee" as $75,167.15.
9. I have quoted from the letter at length because it seems to me to have set the tone of the second meeting. The appellant says that Mr. Cronin opened the discussion by saying something to the effect that there would have to be another $100,000 injected into the company to meet the Chrysler demand. The appellant offered to provide another $50,000, and it was agreed that he should receive interest at 15 per cent. On this occasion he did not know the precise manner in which the money was to be disbursed. In fact, the company paid $29,000 to Chrysler, $10,000 to Borg-Warner and $4,600 to I.A.C. The balance, amounting to approximately $5,120 remained in the company's account, and presumably was used for general purposes.
10. I pause to remark, in passing, that no attention appears to have been paid to the question whether, assuming that the appellant established that the payments he made to the company were made by him under the guarantee, he was entitled to contribution from his co-guaranton It is established principle that such an entitlement would arise only if he paid more than his fair share, in this case more than half of the amount demanded under the guarantee in question. The point may be illustrated by reference to the Chrysler demand. The invoice set out the sum of $75,167.15 "collectable under personal guarantee". Yet only $29,000 was paid by the company to Chrysler out of the moneys provided by the appellant.
11. In the case of I.A.C., the payment of $48,046.72 from moneys provided by the appellant would appear to have satisfied the whole of a distinct debt and the payment would thus establish a right to contribution under the principle to which I have referred. The position regarding the second payment to I.A.C. and the payment to Borg-Warner appears to me to be unclear. Whether by way of concession or otherwise, the case appears to have proceeded on the basis that if an entitlement to contribution were established by the appellant, then the quantum of that entitlement was half of each payment made by the company from funds provided by him. In any event, having regard to the conclusion to which I have come, the point is of no consequence in this case.
12. It seems to me, with great respect to those who think differently, that in the absence of a specific agreement that would give a different complexion to the objective facts, the probabilities weigh heavily in favour of a conclusion that the appellant made advances to the company in order to help it meet its commitments, rather than that he used the company as a conduit through which to discharge his personal obligations as a guarantor. Nor can I think that there was any such specific agreement. Furthermore, the probabilities as they arise from the circumstances to which I have adverted are strengthened by the documentary evidence consisting of cheque butts, company's ledger account, and the proof of debt. There is no doubt that the advances were made as a response to the threat by the several creditors to have recourse to the personal guarantees, and with the object of putting the company in funds with which to stave off that threat. But that is not in my opinion sufficient to give a different character to the payments.
13. I appreciate that the doctrine of contribution is based on the principle of natural justice that if several persons have a common obligation they should as between themselves contribute proportionately in satisfaction of that obligation. But it seems to me to be fundamental to the establishment of such a right of contribution that the guarantor should pay the creditor, unless a different procedure unmistakeably bears the character of a payment in discharge of the liability not of the principal debtor but of that guarantor. Any relaxation of that principle can only be destructive of that certainty which it is the purpose of the law to provide.
14. For these reasons I find myself in respectful agreement with the view expressed by the Full Court. I would therefore dismiss the appeal.
BRENNAN J The Chief Justice, whose judgment I have had the advantage of reading, has stated the facts of the case. I need not repeat them. The contentions set out in the grounds of appeal to this Court are that certain payments made to the creditors of Central Timber Enterprises Pty. Ltd. ("the company"), namely, the payment made on 4 June 1974 of $48,047.08 to Industrial Acceptance Corporation Ltd., and the payments made on 20 June 1974 of $4,600 to the same corporation, of $29,000 to Chrysler Marine Australia Pty. Ltd. and of $10,000 to Borg-Warner Acceptance Corporation (Australia) Ltd., are to be regarded as payments by the appellant pursuant to his several guarantees in favour of those respective payees, and are to be treated as if they had been made by the appellant as co-guarantor with the respondent of the company's debts to those payees, so that the appellant is entitled to contribution from the respondent to the extent of one-half of the total of those payments.
2. Lucas J found that those payments were made by the company to its respective creditors on the dates stated. Indeed, the statement of claim alleged - expressly in the case of the first payment, impliedly in the other cases - that the payments were so made. The funds to make the payments had been provided by the appellant in order to enable the creditors to be paid. It is apparent, as W. B. Campbell J said in delivering the reasons for judgment of the Full Court, that in providing the funds the appellant "was motivated by the desire to avoid action being taken by the creditors against the directors, of whom he was one, under the personal guarantees should the principal debtor (the company) fail to pay the pressing debts."
3. The company received the funds provided by the appellant upon terms, accepted by the company and insisted on by the guarantors, that those funds should be applied to pay out the creditors who were pressing and who were expected to call upon the guarantors for payment. The payments then made by the company relieved the guarantors pro tanto of their liabilities to the creditors. Of course a payment to a creditor relieves a guarantor of his liability to the creditor whether the payment is made by a guarantor or by the principal debtor. The relevant question in the present case is not whether the payments relieved the guarantors of their liabilities to the creditors, but whether the payments made by the company went in discharge of its liabilites to its creditors or in discharge of the guarantors' liabilities.
4. A valid payment by a principal debtor of his debt extinguishes the liability to the creditor of both the principal debtor and of his sureties, for the payment discharges the debt upon which the obligations of suretyship depend (9). When the debt is thus discharged there is no liability resting on the principal debtor to indemnify his sureties.
5. Conversely, there can be no payment to a creditor in discharge of a surety's liability unless the liability of the principal debtor is undischarged Subject to any countervailing contract, the principal debtor must indemnify the surety for what he pays; the surety becomes entitled to the benefit of the creditor's securities against the principal debtor and the surety, on offering the creditor a proper indemnity, may sue the debtor in the creditor's name (10). A payment to a creditor cannot at once discharge the principal debtor's liability to the creditor and leave that liability on foot; it cannot at once extinguish the principal debtor's liability to his surety, and oblige the principal debtor to indemnify the surety for what he has paid. A payment to a creditor may discharge the principal debtor's liability and thereby extinguish the surety's liability, or it may discharge the surety's liability and thereby oblige the principal debtor to indemnify the surety. It cannot do both.
6. A co-surety's right to contribution cannot arise out of a payment of the former kind; the right to contribution does not arise because We sureties all derive a benefit from the payment made (11). The right to contribution arises because in the view of equity a creditor ought not exercise his legal rights inequitably, enforcing disproprotionate contributions from co-sureties. Starke J in McLean v. Discount and Finance Ltd. (12) stated the foundation of the co-surety's equity: "But it is the unequal contribution so enforced that establishes the right to contribution on the part of the party who has provided more than his just proportion."
7. That is not to say that the right to contribution arises only when the creditor sues or otherwise takes an initiative to obtain payment. A payment by a surety of more than his just proportion in discharge of a liability resting upon him and his co-sureties suffices. The guarantor who relies upon a payment as entitling him to contribution from his co-sureties must show that the payment discharged "the burden imposed on him by his guarantee and to a greater extent than is just" (13). But if payment is made not in
(9) Commercial Bank of Tasmania v. Jones, 11893) AC 313, at p 316; McDonald v. Dennys Lascelles Ltd. [1933] HCA 25; (1933), 48 CLR 457, at p 480.
(10) The Mercantile Acts 1867 to 1896 (Q.), s 4; Duncan, Fox and Co v. North and South Wales Bank (1880), 6 App Cas 1, at p 19; Ward v. National Bank of New Zealand (1883), 8 App Cas 755, at p 765.
(11) See Ruabon Steamship Co. v. London Assurance, (1900) AC 6, at pp 12, 13.
(12) [1939] HCA 38; (1939) 64 CLR 312, at p. 347.
discharge of the sureties' liability but simply in discharge of the debtor's liability, there is no question of the creditor's rights against co-sureties being enforced or satisfied inequitably: those rights are extinguished by the discharge of the principal debtor's liability.
8. It is not the common benefit derived by co-sureties from the payment made but the inequality of burden resulting from the enforcement or satisfaction of the creditor's rights against the sureties which gives rise to the equity.
9. In the present case, I can find nothing in the evidence or in the judgment of Lucas J to suggest that the payments by the company to its creditors in respect of its debts were made and accepted otherwise than in discharge of them. So far as the evidence goes, when the company made any of the payments in question it did not purport to make an arrangement with any creditor that the creditor should accept the payment in discharge of the sureties' liability and not simply in discharge of the company's debt. Moreover the appellant, the co-sureties and the company intended that the funds provided by the appellant should be applied by the company to pay the debts it owed and thereby to avert the threat of creditors' actions to enforce the guarantees.
10. Had the respondent been able to show that the funds provided by the appellant were loans to the company, the respondent would have demonstrated that the payments made by the company to the creditors were the company's payments of its debts. However, the factors relied on to show that those funds were lent to the company are not conclusive, in my opinion. When considered in isolation, they are consistent with the company acting as a conduit to pay out the sureties' liabilities to the creditors, a course which would have created a liability in the company to indemnify the appellant, and to pay interest upon the amount owing to him. Nevertheless, when the payments made by the company to its creditors are considered in the context of those factors the only satisfactory conclusion is that, by making the payments in question, the company paid its debts.
11. Lucas J, observing that the appellant would be entitled to contribution from the respondent A he had made the payment direct to the creditors in each case, was of the opinion that the interposing of the company between the plaintiff as surety and the creditor was "a mere matter of procedure and cannot affect the application of the equitable principle". But if the interposition of the company was for the purpose of and resulted in the company paying its debts, the interposition is determinative of this appeal. Although his Honour distinguished between the provision of funds by the appellant and their payment out by the company, he made no express findings as to the liabilities which the payments respectively satisfied. A finding that the relevant payments by the company to the creditors were made and accepted in discharge of the sureties' liabilty and no in payment of the company's debts would have evoked an express finding, had his Honour formed that view. I do not understand him to have done so.
12. In the absence of that Ending and evidence to support it, the appellant has no equity to contribution arising from the payments made by the company.
15. Order of the Full Court of the Supreme Court of Queensland set aside and in lieu thereof order as follows: "Appeal dismissed with costs.
16. Solicitors for the appellant, Morris, Fletcher and Cross.
17. Solicitors for the respondent, McLaughlin, Gordon and Lennon.
# Mahoney
McManus \[1981\] HCA 54;
(1981) 180 CLR 370
(1994) 180 CLR 370
(1939) 64 CLR 312