Legal Updates

Oppression of a minority shareholder does not cancel guarantees given unless the minority actively cancels them

June 26, 2018

Four brothers, shareholders in a company, guaranteed all company's debts to a bank with a perpetual guarantee, unlimited in amount. Three of the brothers canceled the guarantee and the bank demanded the debts from the fourth shareholder, who contended that at some point he was stripped from his rights in the company when he was dismissed from his position as CEO and stripped of his rights as a shareholder and therefore he enjoys the protection given to an “individual guarantor” and also that the bank did not notify him of the cancellation of the guarantees by his brothers.

The Court held that when an shareholder guarantees the debts of a corporation, "individual guarantor" defenses do not apply to a person who holds five percent or more of the issued share capital of the corporation or of the voting rights therein, whoever is entitled to appoint one or more of the directors of the corporation or its general manager or a person who serves as a director of the corporation or as its general manager. Thus, even if the shareholder is stripped of his rights, he remains a guarantor who does not enjoy "single guarantor" defenses unless notified the bank of the cancellation of his guarantee. A notice to the bank need not be in writing, but it was not proven here that such notice was given. However, because the bank did not notify the guarantor about the state of the company and the cancellation of the other guarantees, the guarantor's guarantee does not apply to linkage and interest charges that would have been avoided had he known about the debt on time.