This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 326.— A gives a bank a guarantee securing advances made to C. A afterwards enters into co-partnership with C under the style of C & Co. How does this affect the guarantee? Is A held for all advances to C previous to the partnership, and equally liable afterwards as a partner with C for the indebtedness of C & Co.? Is his connection as C's partner as equally binding for C & Co.'s debts as his guarantee would be? Does his guarantee carry some additional security after he becomes a partner?
Answer.—The formation of the partnership does not affect the guarantee. A continues to be liable as guarantor for C's indebtedness, and becomes liable as one of the principal debtors for the obligations of C & Co. He might also become liable on the same debt as a guarantor or endorser, and the effect of this would be that in the event of an assignment by the partners of their joint and separate estates, the bank would have certain ranking rights against A's personal estate, which might give it a decided advantage over the creditors of C & Co. who had not A's separate liability. We would therefore certainly think it well, if he has considerable means outside of the partnership assets, to take Ms guarantee for the firm's debts; this is a very common precaution.
It should be remembered that the partnership estate of C & Co. would not be liable for C's indebtedness to the bank, unless there was a novation—that is, unless they agreed with the bank to assume and pay the debt. The mere fact that there was such an understanding between themselves would not make the bank a creditor of C & Co. for advances to C, and under some circumstances this might be an important point.