Joint and several liability: effect of compromising the debt against one debtor
If a lender agrees to compromise its debt with one debtor who is jointly and severally liable for the debt with another debtor, does this compromise the whole debt? Not if the compromise is appropriately documented.
What is joint and several liability?
Joint and several liability is where each debtor to a common debt is liable to repay the debt both individually and jointly with their co-debtors. This enables a lender to seek payment from either debtor or jointly from all debtors.
Can one debtor be solely pursued for the whole debt?
Yes. Under the several part of the liability, one debtor is liable for the full debt to the lender and can be pursued individually. For example:
- a lender institutes court proceedings against defaulting debtors to the same loan and only one debtor is able to be served and does not file an appearance. In such circumstances, default judgment may be applied for the full debt against the debtor who was able to be served; or
- one of the debtors to a transaction is more solvent than the other(s) and the lender has a greater chance to recover the debt off that debtor.
Lenders should be aware of their obligations under the Code of Banking Practice, which provides at clause 29.2 to ensure that reasonable steps are taken to ensure co-debtors are aware that they can be pursued individually for the whole debt.
Can joint and several debtors seek contributions from a co-debtor if a situation arises where the whole debt is paid initially by one debtor?
The debtor who pays the debt has a right of subrogation towards any other debtor to the transaction commensurate to their share of the monies paid to which they were initially liablei.
A debtor who pays more than their equal share of a debt owed will have this right against the other debtor(s) to sue to recover the difference between what they paid and what they should have paid if each debtor paid their commensurate shareii.
There is an exception to this general rule however, where joint and several debtors borrow the funds and those funds are applied for the purposes of only one of them to the exclusion of the other, they will not be able to seek a contribution from the other debtor(s)iii.
What if an arrangement is entered between the lender and one debtor?
Subject to the arrangement clearly stating it is not compromising the whole debt but only one debtor’s liability, a lender can preserve the ability to seek payment of the balance of the debt from the remaining debtor(s).
If a lender enters into an agreement with one debtor by which they accept partial payment of the debt and agree to not pursue the debtor for the balance, the lender can pursue the remaining debtor(s) for the balance. The agreement to not pursue one debtor for the balance is an agreement that is only enforceable between the lender and that debtor.
Takeout
A lender is able to make commercial decisions as to which debtors to pursue for a debt for which debtors are jointly and severally liable. If a lender compromises a debt with one debtor, it is prudent to have the terms of the compromise reviewed by a lawyer to ensure the whole debt is not being compromised against all debtors.
A debtor who settles a debt with a lender for which they have co-debtors, is able to seek contribution from their co-debtors towards the amount they have paid to a lender.
i Brittain v Lloyd (1845) 153 ER 683
ii Ody v Andrews [2013] TASSC 9
iii Harris v Miller [2013] NSW 1902
Authored by:
Kirsten Ganley, Partner
Brendan Wray, Lawyer
