Lenders should be aware that one of the waivers found in most standard form guarantees of certain statutory rights is not effective under the British Columbia Personal Property Security Act (“BCPPSA”).
This was the result in the recent BC Supreme Court decision HSBC Bank Canada v. Kupritz. The facts of that case are unremarkable. A trucking company went out of business leaving an unpaid debt to the bank of approximately $1 million. The bank was unable to recover that amount from the company’s assets and therefore sued the two principals of the company on their unlimited guarantees. One of the principals defended the claim on the basis that the bank had breached its obligations to him under the BCPPSA by failing to secure the company’s assets, improvidently realizing on the collateral seized, failing to provide notice of the impending sale of the collateral and failing to provide an accounting.
The guarantee contained the usual provision that no loss in security by the bank would lessen the guarantor’s liability under the guarantee. The bank therefore argued that the guarantor was precluded from asserting as a defence that the bank failed to properly realize on the collateral. However, the BCPPSA states that provisions in a security agreement or other agreement (such as a guarantee) that purport to exclude a duty under the Act are void, and that certain rights of a debtor cannot be waived by agreement. The court found that the prohibitions against contracting out of the protections under the BCPPSA apply not just to primary debtors, but also to guarantors. Based on this analysis, the court held that a guarantor cannot contract out of his or her statutory rights under the BCPPSA, and therefore the specific waiver of improvident realization in the guarantee did not prevent the guarantor from raising that defence against the bank.
The court then considered all of the circumstances surrounding realization by the bank and its receiver, and found that none of the bank’s obligations to the guarantor under the BCPPSA that were the subject of the waiver had actually been breached. As a result the guarantor was found liable to the bank on his guarantee, and judgment was rendered against him for the full amount of the primary debt remaining unpaid.
The important lesson for lenders from the case is that guarantors cannot waive the statutory rights given to them under the BCPPSA. A similar argument can probably also be made by guarantors in other Personal Property Security Act jurisdictions, but the court in this case did note some differences in the wording of the Ontario Personal Property Security Act which make the result less clear in that province. Despite that, lenders should be aware that not all provisions of a guarantee are enforceable as written, and that in BC in particular, a waiver of improvident realization claims by a guarantor of rights under the BCPPSA will not be effective.