Cross-Border Guarantees

The issue of the appropriateness of Canadian subsidiaries guaranteeing obligations of affiliated U.S. entities in insolvency situations has recently received significant comment in the Ontario Superior Court of Justice. In particular, the situation where proposed DIP financing has been conditional on a guarantee by a Canadian debtor of U.S. debtors' obligations has been considered in Re A & M Cookie Co. Canada¹, Re InterTAN Canada Ltd.², Re Smurfit-Stone Container Inc.³, and most recently in Re Indalex Ltd.⁴

Generally, the issue that has been causing concern for the Canadian Courts is when the Canadian debtor agrees to guarantee obligations of an affiliated U.S. entity such that if there was a shortfall on the realization of U.S. assets, the assets of the Canadian debtor would not be available to the current creditors of the Canadian debtor.