What is a Personal Guarantee?
A personal guarantee is (in most cases) an individual’s promise to repay a corporate debt, but at times a personal guarantee can be security for other things such as investment trading accounts. When a business wants to borrow money from the bank, often times the bank will require a personal guarantee. If the corporate debtor refuses to pay, a personal guarantee agreement allows the bank to enforce that debt against other individuals.
Often times it is the directors of the corporation that are asked to give personal guarantees, but at other times it may be an uninvolved third party, such as a spouse or a parent.
As business lawyers in Sherwood Park, there is hardly a week that goes by where we are not asked to assist clients regarding Personal Guarantees, and our group of lawyers at Ahlstrom Wright are well suited to provide excellent advice about your personal guarantee.
What are the requirements of a Personal Guarantee?
Personal guarantees in Alberta are governed under the Guarantees Acknowledgement Act. Under the Act, it says that:
“No guarantee has any effect unless the person entering into the obligation:
- Appears before a lawyer,
- Acknowledges to the lawyer that the person executed the guarantee, and
- In the presence of the lawyer signs the certificate referred to in section 4”
The certificate referred to above is one that is also signed (and sealed) by the lawyer in which the lawyer declares they believe that the guarantor is aware of the contents of the guarantee and understands it. This certificate is usually attached to the guarantee itself.
Alberta is one of the few places where a guarantee certificate must be used to make the guarantee enforceable. The purpose of the certificate is to ensure that the person was properly advised before taking on the obligation of a debt that they normally would not be legally responsible for.
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What are my obligations under a Personal Guarantee?
The guarantor’s liability under the guarantee is usually “joint and several” which means that the guarantor can be personally, fully liable for the entire debt on their own, notwithstanding that other people may also be guaranteeing the debt.
The guarantor’s liability under the guarantee may also be “limited or unlimited.” If unlimited, there is truly no limit to how large the debt may be if the principal debtor does not pay. Consequently, the risks associated with a Personal Guarantee may be significant.
In cases where the person who is signing the guarantee has nothing to gain by signing, such as a parent or spouse or in cases where the people who are signing guarantees have different interests or risks associated with the guarantee, the lawyer involved may require that the person signing obtains Independent Legal Advice from a separate lawyer at a different law firm. The purpose of Independent Legal Advice is to ensure that the lawyer giving advice on the guarantee is not swayed by the relationship with the borrowing client and so that the guarantor is properly and independently advised.
At Ahlstrom Wright we take pride in breaking down a seemingly-complex personal guarantee into easily understandable packets. If you or someone you know has questions about personal guarantees, corporate financing, or are looking for advice on practical solutions to your business questions, give the lawyers at Ahsltrom Wright in Sherwood Park a call.