What is a personal guarantee? – Financial services

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Due to being the largest oil and gas producer in Canada, having invested billions of dollars in its innovation and technology industry and its strong financial sector, Alberta is home to an array of companies that cover all sectors. It also offers an abundance of opportunities for people who want to enter the market as business owners or potential investors. However, due to the COVID-19 pandemic and various other external economic factors, business activity has weakened. Whether you are one of the many businesses that have entered into a credit agreement, an investor looking to sell or buy a business, or an individual exploring the possibility of a loan, it is important that you know the law on personal guarantees. .

What is a Personal Guarantee?

When a person needs financing and decides to enter into a credit agreement with a lender, the lender can ask for a personal guarantee to mitigate the risk of default. A personal guarantee in Alberta is a personal promise by the guarantor to be liable for the debts of another entity, most commonly a seller or lender. In the event of default by the guarantor, the personal guarantee gives the lender a contractual right to demand repayment from the personal assets of the guarantor.

Procedural requirements for making a personal guarantee

Alberta law only requires a process to make a personal guarantee. According to Collateral Recognition Act (GAA) of Alberta, a personal guarantee provided by a person (the guarantor), not a company, requires that person to appear before a lawyer. Because of the guarantor’s loss of protection and the creation of a legal obligation that may have personal consequences, the lawyer must be satisfied that the guarantor understands the content of the guarantee. If the solicitor is satisfied, they will issue a Certificate of Acknowledgment of Collateral Act (GAA Certificate), which is a legal document that must then be signed by both the solicitor and the guarantor.

Although the GAA previously required that the GAA certificate be signed by the guarantor in the presence of a lawyer, due to the unpredictability of the COVID-19 pandemic, a modification has been made to allow recognition by videoconference. Whether the guarantor and attorney choose to meet in person or via videoconference, the processes are much the same.

Obligations under a personal guarantee

The guarantor’s obligations under a personal guarantee will vary depending on the terms of the agreement and the type of liability assumed by the guarantor. If the guarantor agrees to be jointly and severally liable, he may be held solely liable for the entire debt. This is especially important when two or more people are borrowing and guaranteeing the debt, as the lender may be able to choose one borrower to collect all of the debt.

The guarantor must also understand the difference between limited and unlimited liability. If the guarantor defaults after accepting unlimited liability, there is no limit to the amount of debt it can face. The lender will also have the right to seize the personal assets of the guarantor to settle any financial obligation. If the guarantor accepts limited liability, the lender has the right to demand a fixed dollar amount or a percentage of the outstanding balance at any given time. For example, if there are four guarantors, the lender may collect 25% from each.

Modification of the underlying obligation

Often, once a claim has been made to compel the guarantor to settle its financial obligations, the guarantor will state that the lender has changed the terms of the personal guarantee as a defense. In 1996, the Supreme Court of Canada adopted a rule drawn from the old English case of Holme v. Brunskill, which, in summary, specifies that any modification of the agreement must take place after consultation with the guarantor. The rule drawn from modern Canadian case law is that the guarantor will be released from its obligations, unless one of the four exceptions applies:

  • the change is “manifestly non-substantial”;

  • the modification is “necessarily beneficial” to the guarantor;

  • the guarantor has withdrawn from the protection of the rule; Where

  • the guarantor has consented to the modification.

Needless to say, personal guarantees have their hurdles and come with significant risks. It is advisable to seek legal advice to overcome the nuances associated with warranty law and to mitigate the associated risks.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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