GUARANTEE AND INDEMNITY — Contract of guarantee — action to recover debt from guarantor after the defaulting party went into liquidation — whether the defendant raises an equitable defence or a set-off — liability under the terms of the contract
Quick Take
1A creditor owes a guarantor no general-law duty to enforce or realise its security, or to take possession of and preserve secured equipment after the debtor defaults. A mere omission to exercise rights over the security cannot ground a reduction in the guarantor's liability (applying Westpac Banking Corporation Ltd v Kingsland, [name withheld] v Challenge Bank Ltd and Commonwealth Bank of Australia v [name withheld]).
2A guarantor's claim to be credited with the value of security allegedly lost or impaired through the creditor's neglect ([name withheld] v Frayne; [name withheld] v Mercantile Credits) was characterised as a set-off or deduction. It was therefore barred by contractual clauses requiring payment without set-off, counterclaim or deduction, consistently with GE Capital Australia v [name withheld]. Such a clause suspends, rather than extinguishes, the guarantor's rights, which may be pursued once the debt is paid.
3On the facts, the guarantor bore and failed to discharge the onus of proving the defence. There was no evidence that the equipment had been sold or that the registered purchase money security interest had been released. A financier's email to the landlord saying it would not object to a fair-market sale, with any surplus remitted to the financier, did not amount to a release requiring the guarantor's consent. Negligence or wilful misconduct by the financier was not established.
