What happens to a seller’s personal guarantee if their company goes bankrupt?

You may be a buyer who holds a guarantee from the owner of a selling company, for example for the company’s indemnities to you, or you may be buying a business whose seller guaranteed its debts. If the seller’s company then goes bankrupt, the guarantee does not simply disappear. How it works depends on its wording and on the insolvency process.

Discharge does not release a surety

Section 179 of the Bankruptcy and Insolvency Act says an order of discharge does not release a person who at the time of the bankruptcy was a surety or in the nature of a surety for the bankrupt. The Office of the Superintendent of Bankruptcy describes discharge as the release of the bankrupt from the obligation to repay, with some exceptions. For a company, s.169(4) adds that a bankrupt corporation may not apply for a discharge unless it has satisfied the claims of its creditors in full.

What happens during a stay

Under s.69(1), on a notice of intention to make a proposal, no creditor has any remedy against the insolvent person or the insolvent person’s property for a claim provable in bankruptcy, subject to the exceptions the section lists. By its terms, it speaks of remedies against the insolvent person and its property. Whether it affects a claim on a guarantor is a question for an insolvency lawyer.

Your own claim as a creditor

Under s.121(1), debts and liabilities, present or future, to which the bankrupt is subject on the day of the bankruptcy, or may become subject before discharge because of an obligation incurred before that day, are deemed claims provable in proceedings under the Act. If you hold an indemnity from the failed company, file a proof of claim in the proceeding and ask the trustee how a future claim is treated. Ask whether the guarantor is also personally able to pay, because the guarantee is only as good as the guarantor’s own assets. Our answer on the personal guarantee covers the basics. The Office of the Superintendent of Bankruptcy supervises estates under the Act.