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As Canada’s largest oil and gas producer with billions invested in its innovation and technology industries and strong financial sector, Alberta is home to a range of companies across all industries. It also offers a wealth of opportunities for individuals looking to enter the market as potential business owners or investors. However, due to the COVID-19 pandemic and various other external economic factors, operations have stalled. Whether you are one of the many businesses that have entered into a loan agreement, an investor looking to sell or buy a business, or an individual considering the possibility of a loan, it is important that you familiarize yourself with the law familiarize yourself with personal guarantees.
What is a personal guarantee?
If an individual needs financing and decides to enter into a loan agreement with a lender, the lender may require a personal guarantee to mitigate the risk of default. A personal guarantee in Alberta is a personal promise by the guarantor to be responsible for the debts of another business, most often a seller or lender. If the guarantor defaults, the personal guarantee gives the lender a contractual right to repayment from the guarantor’s private assets.
Procedural requirements for effecting a personal guarantee
Alberta law requires only one procedure for the execution of a personal guarantee. According to the Guarantee Recognition Act (GAA) of Alberta, a personal guarantee provided by a person (the guarantor) rather than a corporation, requires that person to appear before an attorney. Since the guarantor loses protection and creates a legal obligation that may lead to personal consequences, the attorney must be satisfied that the guarantor understands the content of the guarantee. If the attorney is satisfied, they will issue a Guarantee Acknowledgment Act (GAA) certificate, which is a legal document that must then be signed by the attorney and the guarantor.
Although the GAA previously required the GAA certificate to be signed by the guarantor in the presence of an attorney, due to the unpredictability of the COVID-19 pandemic, a change was made to allow for confirmation via video conference. Regardless of whether the guarantor and lawyer meet in person or via video conference, the content of the processes is the same.
Obligations from a personal guarantee
The guarantor’s obligations under a personal guarantee vary depending on the terms of the contract and the nature of the liability assumed by the guarantor. If the guarantor agrees to joint and several liability, he alone can be held liable for the entire debt obligation. This is especially important when two or more people are borrowing and guaranteeing the debt, as the lender may be able to choose a borrower to collect all of the debt from.
The guarantor should also understand the difference between limited and unlimited liability. If the guarantor defaults after agreeing to unlimited liability, the amount of the liabilities is unlimited. The lender also has the right to confiscate the guarantor’s personal assets to settle any financial obligations. If the guarantor agrees to limited liability, the lender has the right to charge a fixed dollar amount or percentage of the outstanding balance at any given time. For example, if there are four guarantors, the lender can collect 25% from each.
Change in underlying debt
Once a claim has been made to get the guarantor to pay their financial obligations, the guarantor will often 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 from the old English case of Holme versus Brunskill, which summarizes that any contract change must be made after consultation with the guarantor. Derived from modern Canadian jurisprudence, the rule states that the guarantor is released from his obligations unless one of four exceptions apply:
- the change is “clearly insignificant”;
- the change is “necessarily beneficial” to the guarantor;
- the guarantor has withdrawn from the protection of the rule; or
- the guarantor has agreed to the change.
Of course, personal guarantees have their hurdles and involve significant risks. It is advisable to seek legal advice to overcome the nuances associated with warranty law and mitigate the risks involved.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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