The impact of amalgamation and other fundamental changes on guarantor liability

What happens to the liabilities of an amalgamating company upon amalgamation? The general rule is clear that these liabilities continue as obligations of the newly amalgamated company. As the Supreme Court of Canada held long ago in Black and Decker, "the amalgamating companies continue without subtraction in the amalgamated company, with all their strengths and their weaknesses, their perfections and imperfections, and their sins, if sinners they be."¹ This rule has been reflected in the business corporations statutes in most jurisdictions.

But what about third parties to an amalgamation, such as guarantors? Will a guarantor continue to be liable for the debts and obligations of a debtor company after it has amalgamated? In many cases, a guarantee will contain a clause expressly providing that the guarantee extends to the liabilities of any entity into which the borrower may amalgamate. But what happens if that express clause is missing from the guarantee for whatever reason? This was precisely the question at issue in Andre Tardiff Agency Limited, a recent decision from the Saskatchewan Court of Queen's Bench.²

Owen Scott Bushey (the "Guarantor") arranged for a $3,000 commercial line of credit on behalf of Bushey's Repairs (the "Debtor Company") from Andre Tardiff Agency Limited (the "Credit Provider") for the supply of fuel, oil and other petroleum products. Attached to the initial credit application was a personal guarantee executed by the Guarantor (the "Guarantee").

Three years after the date of the Guarantee, the Debtor Company amalgamated with another company to form Bushey Enterprises (the "Amalgamated Company"). Post-amalgamation, the Credit Provider continued to provide credit to the Amalgamated Company on the same terms as previously arranged. Importantly, the parties failed to execute new lending documents to reflect the amalgamation and the original Guarantee remained in place.

Soon after the amalgamation, the Amalgamated Company's business began to falter. A failed proposal followed by a bankruptcy assignment left the Credit Provider with little recourse to recover its indebtedness aside from realizing upon the Guarantee. However, when the Guarantor subsequently executed a consumer proposal to arrange for the repayment of his outstanding unsecured debt, the proposal made no reference to the Guarantee or the debt owed to the Credit Provider.

In order to protect its interests, the Credit Provider submitted a Proof of Claim in the Guarantor's consumer proposal to recover its debt owing. The Administrator, however, denied this claim citing that the validity of the claim was at issue (i.e. that any obligations of the Debtor Company and the Guarantor were extinguished upon amalgamation).

The Credit Provider subsequently appealed the Administrator's decision.

The principal question before the Court was: 'does the amalgamation of the Debtor Company extinguish the Guarantor's liability under the Guarantee?' In the normal course, the Court noted, the amalgamation of a corporation with another would likely justify the release of a guarantor from further liability under a continuing guarantee. In the eyes of the Court, such a release would be justified because the amalgamation would materially alter the guaranteed risk contemplated by the guarantor in a way that is outside his or her control, and possibly, knowledge.

Interestingly, however, the Court held that this case was outside of the normal course. Here, the Guarantor both consented to and had full knowledge of the risk. At the time the Guarantee was signed, the Guarantor was both the president and a 50% shareholder of the Debtor Company. Upon amalgamation, the Guarantor became the president of the Amalgamated Company and continued the relationship with the Credit Provider in the same capacity as before the amalgamation took place without further documentation.

In other words, where the conduct of a guarantor suggests that the guarantor consents to a material alteration of guaranteed risk, that guarantor will continue to be held liable for the debts of a principal debtor upon the principal debtor's amalgamation.

Although the Credit Provider was ultimately successful, this case should serve as a cautionary tale to creditors holding guarantees in their security packages. The most prudent course of action for creditors is to ensure that all guarantee documents contain an express clause providing that the guarantee extends to the liabilities of any entity with which a borrower may amalgamate. In all cases, whether such a clause is present or absent, creditors should consider, upon any amalgamation or any fundamental or material corporate change involving a borrower, having guarantors either: (i) re-execute a new guarantee of the amalgamated or changed entity; or (ii) confirm that an existing guarantee (and any security provided for that guarantee) remains in full force and effect to secure the liabilities of the amalgamated or changed entity. Had the Credit Provider taken any of these steps it would have avoided costly litigation.