Personal Guarantee Eliminates Corporation's Limited Liability Protection

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

A personal guarantee is a legal promise a contractor or business owner makes to personally repay the corporation's debt if the corporation fails to fulfill its contractual obligation to pay its debt. A personal guarantee is a separate legal agreement from the main contract (like a loan, lease, or supplier agreement); and serves to bypasses the limited liability protection of the corporation (which undertook the main contract), putting the guarantor's personal assets (e.g., their home, savings, and other property) at risk if the corporation defaults.

In most major contract, with banks, financing companies, leasing companies and suppliers, it is an unavoidable requirement - lenders, suppliers, and other parties require personal guarantees to protect themselves from financial risk. It provides them with an additional layer of security and a direct path to recover what they's owed if the contractor's corporation fails. It also gives the contractor / owner a greater incentive to ensure the project or business succeeds because their personal finances are on the line.

A personal guarantee is most commonly required when a contractor seeks:

• Business Loans: Banks and other financial institutions often require personal guarantees for small business loans, especially if the company has a limited credit history or insufficient assets to serve as collateral.

• Credit Accounts: Suppliers and vendors may require a personal guarantee before extending a line of credit for materials or equipment. This ensures they can recover payment if the contractor's business goes under.

• Commercial Leases: Landlords often require personal guarantees from business owners to secure a commercial lease. This protects the landlord from losing rent if the company defaults or goes out of business.

• Subcontractor Agreements: General contractors might ask subcontractors to provide a personal guarantee to ensure that the work is completed and that any potential damages or financial losses resulting from the subcontractor's failure to perform can be recovered from the individual.

In many commercial arrangements, the counterparty will not proceed in the absence of a personal guarantee, such that it is imperative to consider certain key aspects associated with providing the mandated personal guarantee;

• Understand the terms: Know exactly what you're guaranteeing—is it an unlimited guarantee or a limited guarantee? Does it cover just the principal or also interest and legal fees?

• Assess the risks: Consider the worst-case scenario. Are you willing to risk your home and personal savings?

• Negotiate: It may be possible to negotiate the terms of a personal guarantee, such as limiting the amount or duration.

• Seek legal advice: A knowledgeable lawyer can help you understand the full implications of the personal guarantee and the underlying agreement and identify any potential legal loopholes or ways to protect your assets.

• Consider Personal Guarantee Insurance, where available, as some insurance policies can cover a portion of the liability, providing a safety net for the guarantor's personal assets.

• In Alberta, personal guarantees most often require the attainment of a Guarantees Acknowledgment Act Certificate.

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 corporation's commercial activities, contact our law firm  at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.