June 2011

Guarantor obligations once a business is sold

To what extent is an individual who guarantees the obligations of his/her business responsible for the business' debts after the business is sold? The Court of Québec recently addressed the issue in Pétroles Bélisle & Bélisle inc. v. Grenon (2010 QCCQ 11139 (CanLII)). In this case, the defendant, as the president and administrator of a business, set up a commercial account with the plaintiff, guaranteeing all obligations. However, the account application form did not state that the defendant guaranteed the obligations as the company's administrator.

The defendant eventually sold the business to another individual. Because of a bad credit record, the new owner was not able to open a commercial account with the plaintiff and therefore continued to use the old account. Soon after the sale, the plaintiff started to receive only partial payments, and the amounts past due began to add up. The business closed a short time later in 2008. The plaintiff then launched a suit against the defendant, who was still the guarantor of the account.

In its ruling, the Court of Québec considered article 2363 C.C.Q.: "A suretyship attached to the performance of special duties is terminated upon cessation of the duties."

This article comes into effect when it is proven that the suretyship was granted based on an individual's duties. Therefore, when a person stops carrying out these duties, the suretyship ends. In fact, a clause to this effect is not even required in the surety contract. However, the court must be convinced that the suretyship stems from the guarantor's role as the business' administrator or president. If the court is not convinced, then the suretyship remains valid and the guarantor will be forced to pay the amounts owing. In the aforementioned case, the court confirmed that the suretyship was clearly based on the defendant's role as the company's administrator, also stating, however, that the article was not public order and could therefore be overridden.