What happens to my personal guarantee when I sell a distressed business?

If your business is struggling and you have guaranteed its loans, a sale can feel like the end of the problem. Do not assume it is: ask each creditor you guaranteed whether it will release you. If the loan is already hard to service, ask what the lender will need before it lets anyone go. Read the guarantee itself first, then work out which lenders must agree and what each will want in return.

Release is the lender’s decision

The Canada Small Business Financing Program guidelines describe the transfer of a loan to a purchaser as a way to facilitate a sale, with the original borrower released. They say the lender may release the existing borrower if, among other conditions, it approves the purchaser as borrower after due diligence. They also say a lender is not obliged to release, may decide that releasing would affect its ability to collect, and may consider guarantees from the purchaser or its shareholders. Other lenders’ terms may differ.

Good standing matters

The same guidelines say guarantors and guarantees may be released or reduced if the loan is in good standing. That condition is the hard part of a distressed sale. If payments are behind, ask the lender in writing what it needs before it will discuss a release, and whether repaying the loan from the sale proceeds at closing would end the guarantee.

If the business fails instead

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. A guarantee can therefore outlast the insolvency of the business it supported. A licensed insolvency trustee can explain how that applies to your guarantees.

What to ask for in the sale

BDC notes that leases and contracts may need third-party consent to transfer, and these consents can be closing conditions. Treat each release the same way: ask for it in writing before closing. Lease guarantees raise a separate point, covered in releasing a lease guarantee on a sale, and staff obligations are covered in employee liabilities in a distressed business.