Legal Updates

A creditor is not obligated to inform a guaranteeing corporation of failure to fulfill an underlying obligation

September 23, 2019

A company shareholder and director signed, personally and on behalf of a company, a cross-guarantee for a sibling company. After selling the company shares, the guaranteed company became insolvent and the guaranteeing company refused to uphold the guarantee as it was not given notice that the guaranteed company was in default on its obligations.
The Supreme Court held that the guarantee is binding. A condition precedent for the validity of a guarantee is that the creditor must notify an “Individual Guarantor” upon default by the debtor, all in order to enable the guarantor to mitigate risks. Nevertheless, unless required by good faith, the notification obligation does not apply where the guarantor is a corporation and not an “individual” (i.e. a person). Here, the guarantee was signed by a corporation and thus there was no obligation to notify the guaranteeing company of the debtor’s default and even had the corporation known of it, it would not have changed the outcome.