Guarantees Acknowledgment Act Certificate for Small Business in Alberta

Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 or Chris@NeufeldLegal.com

The Guarantees Acknowledgment Act is provincial legislation exclusive to the province of Alberta that is designed to protect individuals who provide personal guarantees for loans or other financial obligations. The intent of the legislation is to ensure that a guarantor fully understands the significant legal consequences providing a personal guarantee and being properly informed when signing such an agreement.

As such, to properly understand the Guarantees Acknowledgment Act, it is critical to understand the legal concept of a personal guarantee and why the Alberta Legislature sought to protect individual who provide personal guarantees for loans or other financial obligations. When a small business corporation (the primary debtor) borrows money or takes on an obligation, a lender (or other party) may require the business owner and/or another individual (the guarantor) to promise to repay the debt or fulfill the obligation if the primary debtor defaults. This makes the guarantor personally liable for the debt, often extending to their personal assets. For independent contractors, a personal guarantee is frequently required for a business loan, a commercial real estate lease, an equipment lease or a supply arrangement.

The core purpose of the Guarantees Acknowledgment Act is to prevent fraud and protect individuals from unknowingly taking on substantial liabilities. It sets out specific procedural requirements that must be met for a personal guarantee to be legally enforceable in Alberta. These requirements include:

1. Appearance Before a Lawyer: The individual giving the guarantee (the guarantor) must appear before a lawyer.

2. Lawyer's Examination: The lawyer must examine the guarantor to ensure they are aware of the contents of the guarantee and fully understand its effect and implications. This means the lawyer has a duty to explain the risks, including the potential loss of personal assets.

3. Signed Certificate: If the lawyer is satisfied that the guarantor understands, they must then issue a Guarantees Acknowledgment Act Certificate. This certificate must be signed by both the lawyer and the guarantor.

Crucially, if these steps are not strictly followed, the guarantee has no legal effect in Alberta. This can render a guarantee completely unenforceable, even if the guarantor intended to provide it.

The Guarantees Acknowledgment Act is highly important for several reasons:

• Guarantor Protection: Its primary importance lies in safeguarding individuals, particularly those who might lack extensive legal or financial experience. It acts as a consumer protection measure, ensuring that a serious financial commitment like a personal guarantee is not entered into lightly or without full comprehension.

• Prevents Unfair Surprise: Without the Guarantees Acknowledgment Act, individuals could potentially be held liable for debts they didn't fully grasp, leading to severe financial distress. The Act forces a "moment of reflection" with legal guidance.

• Unique in Canada: Alberta's Guarantees Acknowledgment Act is unique among Canadian provinces. While other provinces have common law principles related to guarantees, Alberta has this specific statutory requirement, making it particularly important for anyone dealing with guarantees in this province.

• Enforceability for Lenders: While it places a burden on lenders (or those receiving the guarantee) to ensure compliance, it also provides clarity. If the Guarantees Acknowledgment Act requirements are met, the lender has a strong basis for enforcing the guarantee. Failure to comply, however, means the guarantee is essentially worthless in Alberta courts.

• Due Diligence Requirement: For lenders and legal professionals, the Guarantees Acknowledgment Act imposes a strict due diligence requirement. They must ensure that the proper process is followed, including the lawyer's examination and the issuance of the certificate, to ensure the enforceability of the guarantee.

In essence, the Guarantees Acknowledgment Act serves as a critical legal safeguard in Alberta to ensure that individuals providing personal guarantees do so with their eyes wide open, fully aware of the potentially far-reaching financial consequences.

Important Note for Guarantors: For anyone considering becoming a guarantor, it's crucial to understand the significant financial responsibility and risks involved. They are legally obligated to fulfill the terms if the primary party defaults, and this can have serious consequences for their own finances and credit history. Consulting with legal and financial professionals before signing a guarantee agreement is highly recommended. .

As such, when you are in need of legal counsel in relation to a personal guarantee that is being sought as a result of your small business corporation's commercial activities and the required Guarantees Acknowledgment Act Certificate, contact our law firm  at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.

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