I own 25% of a small corporation. My partner (who owns the other 75%) and I took a loan with a bank (TD). We both had to give personal guarantees. Am I only responsible for 25% of the loan? If we go bankrupt can the bank come after me for the full amount in case my partner does not have any personal assets anymore?

Thanks for your help!

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    Do the loan documents not address this? – Hart CO Oct 5 '18 at 19:21
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    "Am I only responsible for 25% of the loan?" - what did you sign? Read it. – TomTom Oct 6 '18 at 8:57
  • Yes, unless you specifically negotiated something different and it is spelled out in the loan docs. It should be noted that this is something the bank will almost never budge on, unless you're a very good customer. – Kryten Oct 6 '18 at 18:56
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    The bank loan was probably a bad idea. Had you each taken personal loans and then loaned them to the company yourselves, you would only have been on the hook for 25% of the money and you could have paid off your part of the loan as it made sense for your finances. This way, you're on the hook for 100% and have almost no control over how and when the loan is paid. It rarely makes sense for individuals to secure a corporate loan, better to just invest in the corporation or loan to it. – David Schwartz Oct 6 '18 at 23:12
  • Thank you everyone! I know have confirmation of what I suspected already. We have enough merchandise to sell and pay both our suppliers and the bank in the next 6 months. I should give a visit to the bank and "lock" our account... – Gerald Oct 8 '18 at 23:22

If the loan documents you signed do not specify otherwise, it is most likely that you have effectively personally guaranteed 100% of the loan, meaning the bank may try to go after you and your partner equally in the event of a corporate bankruptcy. It would be up to you, after the fact, to sue your partner for the extra 25% if you ended up settling the bank loan 50:50 (or, if you end up paying 100% back, in the event the bank finds that your partner has no ability to pay them anything).

Note that this is the same as if you co-sign on a loan for someone - the bank effectively has the right to pursue the co-signer for 100% of the loan balance if it is not being paid on time (even if the co-signer might be, say, a friend who owns 0% of a car purchased with the loan), and it would be up to that co-signer to sue the borrower for payment if they end up paying the bank.

The horse is out of the barn now, but in the future you must make sure you understand what you are signing, when you sign any legal agreement like this. Although it may still be a good idea to have a lawyer review this specific agreement now, in order for you to have the clearest idea of what the worst case scenario might be, and whether you can mitigate that risk.

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    Worth clarifying; the bank may choose to go after OP entirely and not bother with the partner at all. That's their right. – ChrisInEdmonton Oct 5 '18 at 21:50

Because you made a personal guarantee, both of you and the corporation are jointly and severally responsible for 100% of the loan.

That means the bank will dun both of you. If he refuses to pay any, you must pay it all. If he pays 30% and then declares personal bankruptcy, and the company pays 10% of part of its chapter 11 reorganization, you pay the other 60%. That is what "jointly and severally" means.

There's no consideration for the percentage of shares.

Normally the entire point of a corporation is that you are not personally liable for anything more than the investment you initially made (for which you were compensated with shares). With a loan guarantee, your personal liability also includes the amount of the loan.

Watch out; when you guarantee or cosign a loan, often the very first notice you get that the loan is in arrears is when you get a negative mark on your personal credit report. As far as the bank is concerned, part of your responsibility as a guarantor is to remain "in the loop" with the other borrowers, and know that the loan is in trouble. The bank expects that you, under your own recognizance, will intervene with your loan payment ASAP. At least before the loan becomes 30 days past due (the point at which credit reporting bureaus will mar your credit). If you do not do this, they will be heartless.

When you are forced to make someone else's loan payment because of your guarantee, they now owe you, and you can sue them. Good luck collecting. However the corporation could give you more shares instead of cash, for what that's worth.

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  • Yep - I can 100% vouch for the "jointly & severally" bit after my "friend" and business partner bailed out and left the country after helping to get our company into 20k of debt ... fun times. – brhans Oct 8 '18 at 19:28

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