Who is liable on a vendor take-back when the buyer is a corporation?

If a buyer buys through a corporation, check whether the promissory note for the seller’s vendor take-back names that corporation as the debtor. Section 15(1) of the Canada Business Corporations Act (CBCA) says a corporation has the capacity and, subject to the Act, the rights, powers and privileges of a natural person. So the corporation can itself sign the note. This page covers the federal Act. A corporation formed under a provincial statute is governed by that province’s law, which this page does not describe.

Shareholders are not liable as shareholders

Section 45(1) of the CBCA says the shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation, except under subsections 38(4), 118(4) or (5), 146(5) or 226(4) or (5). Owning the shares therefore does not by itself make the owner a debtor on the note. The exceptions are specific, so a lawyer should say whether any applies to your facts.

A guarantee is what can add another person

A seller who is worried about a new company’s ability to pay may ask for a guarantee. BDC says that without tangible collateral you will generally be required to sign a personal guarantee to obtain a working capital loan; that is BDC describing bank loans, not a vendor take-back. A guarantee binds the person who signs it, so the signature page shows who gave one. Ask whether the seller wants a guarantee from the buyer’s owner, from a related company, or from both, and read what each one covers. See what a personal guarantee is for the basics.

Alberta and bankruptcy

Section 3 of Alberta’s Guarantees Acknowledgment Act says no guarantee has any effect unless the person entering into the obligation appears before a lawyer, acknowledges executing it and signs the lawyer’s certificate in the lawyer’s presence; section 3.1 allows this by two-way video conference. The Act defines a guarantee as one given by a person, not being a corporation, and excludes some instruments, including a promissory note, so ask a lawyer whether it applies to yours. Our page on the Alberta lawyer’s acknowledgment explains it. If the buyer’s corporation goes bankrupt, 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 surety or in the nature of a surety for the bankrupt. The Act also says a bankrupt corporation may not apply for a discharge unless it has satisfied the claims of its creditors in full. See a seller’s guarantee when a company goes bankrupt.

What to check

• Who the debtor on the note is, by exact legal name
• Whether anyone has signed a guarantee, and whether it is limited or unlimited
• Whether the guarantee needs formalities where it is signed