Anonymised, illustrative composite. The lender’s standard package was perfectly ordinary commercial practice and put the guarantee it was relying on outside the provision that authorises it.
At a glance
Two buyers — an experienced baker and a former retail-operations manager — bought a three-location bakery chain from a founder retiring after twenty-nine years. Price $640,000 on an asset basis: ovens, proofers, refrigeration and fittings $215,000; leasehold improvements across three leases $85,000; brand, recipes and the wholesale customer list $90,000; inventory, prepaid rent and working capital $250,000. They held 50/50 through a jointly owned holding company above the operating company that bought the assets, with the operating company as borrower. The programme term loan was $390,000, comfortably inside the $500,000 maximum for purposes other than real property and the $150,000 nested maximum for intangibles.
Credit approval was clean and the security package was the one the bank uses on every small commercial loan: a general security agreement over the operating company, a full personal guarantee from each buyer for $390,000, and — because one buyer had substantial home equity and the other did not — a $200,000 collateral mortgage over that buyer’s principal residence, described in the credit memo as “additional security for the guarantee”. On a conventional loan that package is unremarkable. Here it created two separate defects, the second of which nobody would have noticed until enforcement. See the personal guarantee glossary entry.
The loan was $390,000. Each buyer had signed a guarantee for $390,000 and neither instrument mentioned the other, so on their face the bank held $780,000 of personal guarantee against a $390,000 loan, plus a $200,000 charge on a house.
The permitted ceiling is the original amount of the loan — $390,000 — plus three further heads usually summarised as interest and costs and in fact four items: judgment interest, taxed costs, and legal fees and disbursements other than taxed costs together with other non-employee costs of the proceedings. The overhang was therefore $390,000 of guarantee the programme does not authorise, on top of a security interest it does not authorise either.
The restructured package was worth more to the bank than the one it started with. The house came out; in its place the buyers’ holding company gave a corporate guarantee secured by a pledge of a $180,000 investment account — collateral the programme permits, on an instrument it permits to be secured, from a guarantor with real assets.
Section 19(1) of the Regulations, marginal note Personal Guarantees and Suretyships, is the entire authority for taking a personal guarantee on a programme loan, and the operative word is in the first line. A lender, in addition to the primary security required by section 14, may take “one or more unsecured personal guarantees or suretyships for an amount of not more than the aggregate of” the four heads that follow. A guarantee supported by a mortgage over the guarantor’s home is not an unsecured personal guarantee. It is not a section 19 guarantee that complies badly; it is not a section 19 guarantee at all.
The quantum head is time-sensitive. Paragraph (a) sets the cap at “in the case of a loan made before April 1, 2014, 25% of the original amount of the loan, and in the case of a loan made after March 31, 2014, the original amount of the loan”. An assumed legacy facility from before that date still carries the 25% ceiling — a trap in the opposite direction, where a full guarantee exceeds the cap fourfold.
Subsection (2) is what the two-guarantor structure breached: “the guarantees or suretyships must state that the aggregate liability of the guarantors or sureties may not exceed the aggregate amount referred to in subsection (1)”. The cap is on the aggregate, not per guarantor, and it must appear on the face of the instruments. Two clean $390,000 guarantees, each silent about the other, do not satisfy it.
The way out is one section later, and it is a genuine asymmetry rather than a loophole. Section 20 provides that a lender may take “one or more secured or unsecured corporate guarantees or suretyships”. Corporate guarantees may be secured, and section 20 states no quantum cap of its own — the arithmetic in section 19(1) applies to personal guarantees, not corporate ones. So the entity a holding-company structure disqualifies as borrower, as a CSBFP application that failed on eligibility shows, is perfectly usable as guarantor, and it can pledge assets to back that guarantee.
One further limit shaped the negotiation. Section 17 lets a lender take additional security and defines where it may look: it “may take additional security in any other assets of the small business in respect of which the loan is made”. Assets of the small business — not assets of the guarantor, and not a house.
The collateral mortgage was discharged before the first disbursement. Both personal guarantees were re-executed as unsecured instruments, each stating on its face that the aggregate liability of the two guarantors could not exceed $390,000 plus the interest and cost heads. The holding company gave a corporate guarantee under section 20, secured by a pledge of its investment account.
Two later mechanics went into the commitment at the same time. Section 21 permits release of a guarantor “only if the loan is in good standing”, so a guarantor cannot be released at the moment the guarantee matters; section 22 permits substitution, but only at equal or greater value.
The Regulations provide for this exact mistake, and the cure tells you what the lender must not do. Section 26(3) provides that where a lender has taken a secured personal guarantee the Minister must still pay the loss if “the lender has inadvertently taken a secured guarantee or suretyship” and “the lender has not realized on, and has released, the security on the guarantee or suretyship”. Both limbs. A bank that enforces the mortgage and then discovers the problem has spent its cure.
Failing that, the fallback for a post-31-March-2014 loan is section 26(2): the Minister pays the loss “less the guarantee and suretyship taken but not realized due to the non-compliance”. Here that would have meant funding a $390,000 loan, holding a defective guarantee and having the claim reduced by its value. The house would have been the most expensive collateral in the transaction.
The tell was a word count. “Unsecured” appears in section 19(1) and nowhere in the bank’s guarantee template — a general commercial form used across the branch network and entirely correct for every loan that is not a programme loan.
The second tell was in the file structure. Two guarantors, only one with home equity, so the security was doing the work of equalising them — the sensible commercial instinct the Regulations channel into section 20 instead. When a lender reaches outside the business for support, the question is which section it comes from.
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