Litigation

The End of a Shareholder’s Corporate Duties and the End of Suretyship: an Illustration

May 6th, 2019

By Laurent Debrun

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The end of a shareholder’s corporate duties and his continued suretyship: an illustration.

 

In June 2015, Location, a tool rental company, opened an account for the benefit of a company with which it was doing business, Boréalia. Boréalia obtained a thirty-day term to pay its bills and other benefits. Bussière was a shareholder of Boréalia, via his management company, and a director of Boréalia. Bussière is a party (with the other shareholders) to the standard contract of Location as a surety of Boréalia’s obligations.

In June 2016, Bussière sold his shares to other shareholders and resigned as director. He sent a written note to Location to inform it of the change in the shareholding and Board. A few months later, Boéralia and several shareholders became insolvent and defaulted under the Location Contract. Location claimed from Bussière as a surety the payment of bills issued subsequent to the date on which Bussière sold his shares and resigned. Bussière contested on the ground that his guarantee is valid as long as he remains involved in the company, and that the sale of his shares and his resignation as director had the effect of terminating his suretyship.

Article 2363 Civil Code of Quebec (C.C.Q.) provides that a person’s suretyship attached to the exercise by that person of particular duties within the company ends with the cessation of these duties. Location argued that the status of shareholder is not a duty and that the sale of shares cannot nullify the surety.

The leading case remains that of the Supreme Court of Canada in the case Épiciers unis Métro-Richelieu c. Collin, (2004) 3 R. C. S. 257 which held that article 2363 CCQ should be interpreted broadly and liberally, its purpose being to protect the surety. The Supreme Court noted that this article is not one of public order so that the parties can depart from it, which was not the case here.

In order to determine whether the end of a person’s corporate duties enables him to remove his liability as a surety arising therefrom, it is necessary to consider the common intention of the parties as to the creation of the suretyship in relation with the person’s duties and status within the corporation. Here, the court noted that the opening of the account was based on a verification of the solvency and the commitment of the shareholders, and thus that it is the attribute which took precedence for Location. The end of the shareholder’s status  signified the end of the validity of the surety from that date onward.

Conclusion. If a supplier of goods or services provides credit to a corporation whose shareholders or officers act as sureties, and does not want, as a result of article 2363 CCQ, to lose the benefit of their suretyship in the event of the withdrawal of one or more of such persons as shareholders, directors or officers, it must be clearly provided that the termination of the related status or duties does not put an end to the surety.

Bédard c. Bussière, 2018 QCCQ 10911

 

This publication is of a general nature, is as of the date indicated and is not intended to constitute an opinion or legal advice. The facts and circumstances of your particular situation should be specifically identified and addressed before appropriate legal advice may be given.