Lenders and commercial landlords often ask the owners of a small company to sign a personal guarantee. It is easy to forget until the company cannot pay. Here is how guarantees work in Ontario, for the person who signed one and for the lender or landlord relying on it.
What is a guarantee, and how is it different from an indemnity?
A guarantee is a promise to pay someone else’s debt, here your company’s, if that person does not. It is a secondary obligation: it depends on the company’s debt.
An indemnity is a promise to cover the creditor’s loss directly, as a primary obligation of your own. Several defences below protect guarantors but may not help someone who gave an indemnity, which is why many forms say “guarantee and indemnity”. Courts look at what the document does, not its title.
Does a guarantee have to be in writing?
To be enforced in court, yes. Section 4 of Ontario’s Statute of Frauds says no action can be brought on a “special promise to answer for the debt, default or miscarriage” of another person unless the agreement, or a note or memorandum of it, is in writing and signed by the person being held to it (here, the guarantor) or by someone that person lawfully authorized.
Under section 6, what the guarantor received in return for the promise (the consideration) does not itself have to be written down.
Do I have to pay if the company can’t?
Usually, yes. The company’s bankruptcy does not cancel your guarantee. Under the Bankruptcy and Insolvency Act, a bankrupt company cannot be discharged from its debts unless it has paid its creditors in full (section 169(4)), and even a discharge does not release anyone who was a surety for the bankrupt (section 179). If the company makes a proposal to its creditors instead, a creditor’s acceptance of the proposal does not release anyone a discharge would not release (section 62(3)), and that includes guarantors.
What should a demand on a guarantor say?
Most guarantees require payment “on demand”. A demand should follow the guarantee: who must receive it, how it is delivered, any notice period, and the amount claimed, broken down into principal, interest and costs that trace back to the loan or lease documents. A demand that misses a required step can delay enforcement, though it rarely ends the claim.
How long does the lender have to sue me on a guarantee?
Most Ontario claims must be started within two years of discovery (Limitations Act, 2002, section 4). For a demand obligation created on or after January 1, 2004, section 5(3) starts the clock on the first day there is a failure to pay once a demand is made (section 5(4)). Ontario courts have generally treated a guarantee that requires a demand the same way, so the period runs from the unpaid demand on the guarantor, not from the company’s default. A guarantee worded differently may be treated differently.
A written acknowledgment or part payment can also restart the period, as our guide on acknowledgments and the limitation period explains.
What defences does a guarantor have?
- The deal changed without your consent. A guarantor can be released if the creditor materially changes the guaranteed contract without the guarantor’s consent, a rule the Supreme Court of Canada confirmed in Manulife Bank of Canada v. Conlin (1996), unless the guarantee contains clear language in which the guarantor contracted out of that protection. Many bank and landlord forms include such language, so the exact wording decides the point.
- Security was released or lost. If the creditor gave up or impaired security, or released a co-guarantor, without your consent, your liability may be reduced or ended, again subject to any waiver in the guarantee.
- Misrepresentation by the creditor about what you were signing.
- Non est factum (“it is not my deed”). A rare defence for someone who, without carelessness, did not understand what kind of document they signed.
- Undue influence or lack of advice. No general rule requires independent legal advice for a guarantee, but these arguments are stronger for a guarantor with no stake in the business, such as a spouse. That is why lenders often ask for a certificate of independent legal advice.
- The guarantee’s own limits. Many guarantees are capped at a dollar amount, limited in time, or limited to particular debts.
How do I end a continuing guarantee?
A continuing guarantee covers debts as they arise. Most forms let the guarantor end it for future debts by written notice delivered as the guarantee requires. You generally stay liable for debts that existed when the notice took effect. Resigning as a director or selling your shares does not end it for you.
What about guarantees of commercial leases?
Many commercial lease forms keep the guarantor bound after the tenant assigns the lease and through renewals or extensions. Whether that holds depends on the wording, and an amendment the guarantor never agreed to can sometimes limit what is owed. See our commercial lease disputes page.
What should I do if my guarantee has been called?
- Gather the documents: the guarantee, the loan agreement or lease and any amendments, any security, and the demand.
- Check the numbers and dates: ask for a full statement of account, and work out when the limitation period started.
- Do not move assets. Transfers made to defeat creditors can be set aside under the Fraudulent Conveyances Act.
- Consider negotiating, and put any arrangement in writing, remembering that a written acknowledgment or payment can restart the limitation period.
- Know your rights if you pay. Under section 2 of the Mercantile Law Amendment Act, a guarantor who pays the debt is entitled to have the creditor’s judgments and security assigned to them, and to stand in the creditor’s place to recover from the company. From a co-guarantor, they can recover only that person’s fair share.
- Get insolvency advice early if the amount is beyond reach. A licensed insolvency trustee can explain a personal proposal or bankruptcy.
If you are the lender or landlord
Read the guarantee first: who signed, any cap or time limit, the consent and waiver clauses, and how a demand must be made. Then demand payment from each guarantor in that form, and track the two-year period an unpaid demand starts. Our guide on enforcing a promissory note covers suing on a loan.