Category: Corporate Law

In the recent case of 2275518 Ontario Inc. v. The Toronto-Dominion Bank, 2024 ONCA 343, the Ontario Court of Appeal cautioned courts from delaying a creditor’s access to summary judgement motions.

TD Bank, the Respondents, appealed a motion summary judgement granted against the Appellants, 2275518 Ontario Inc, the corporate borrowers, and the Guarantors who defaulted on a loan. The Guarantors allege their lawyer, and the lawyer for TD Bank, failed to register the bank’s security in a first priority position thus making the guarantee void and TD Bank was estopped from enforcing the guarantees

Background

This action began with TD Bank who brought a summary judgement motion seeking judgment from the Borrower and Guarantors. Before TD Bank’s summary judgement motion, the Appellants sought to amend their statement of defense to include the lawyer’s negligence in failing to register TD Bank’s security interest in a first priority decision and his misrepresentation regarding the security registration.

When TD Bank’s summary judgement motion came before the motion judge, the judge ordered a mini-trial based on Rule 20.04(2.2). During the mini-trial, the motion judge heard three witnesses, including the lawyer in question, over a three-day period.

The motion judge concluded the lawyer did not mispresent the bank’s security interest and did not find there was a barrier to summary judgement because of the third-party claim.

Issues and Decision

The Appellants raised three issues at appeal in which they essentially assert errors in the motion judge’s use of the enhanced powers in r.20.04(2.2) which are as follows: the motion judge erred by ordering oral evidence from a non-party, the lawyer, in violation of Rule 20.04(2.2), and in the alternative in making findings of fact an credibility relating to the appellants’ third party claim against the lawyer thereby creating a risk of inconsistent findings of fact and effectively granting partial summary judgment and in the further by granting summary judgment in the main action prior to the determination of the third party claim, thereby prejudicing the appellant’s interests. All of which the Court of Appeal rejected.

Discussion: Court of Appeal overturns Lower Court

The judge reaffirmed Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, in which the Supreme Court concluded that the exercise of powers under r.20.04(2.1) attracts deference and a determination that there is no genuine issue for trial should not be disturbed on appeal. A decision to exercise the enhanced powers under the rule is discretionary and, as such, should not be disturbed unless the motion judge misdirected themself or came to a decision that is so clearly wrong that it resulted in an injustice.[1]

Rule 20.04(2.2) states, “oral evidence can be presented by one or more parties.” Further, Rule 1.04(1) and (1.1) state the rules should be interpreted liberally and grants the court the power to make orders proportionate to the complexity of the issues involved.

The Appellants claim the motion judge should not have made findings relevant to the third-party negligence claim when the motion judge did not have all the evidence in front of him. They claim this could lead to a risk of inconsistent findings of fact. However, the Court of Appeal wrote,

“… the summary judgement process is tailor-made to enforce liquidated claims by creditors against debtors and guarantors. Unless there is a genuine issue for trial, the court should be reluctant to delay a creditor’s access to this summary procedure…”[2]

Here, the Court of Appeal is distinguishing the negligence claim from the liquidated claim. This differentiation is important when considering the consequences a prolonged claim would have on creditors. The Court of Appeal highlights the summary judgement’s role in swiftly dealing with creditor claims.

The mini-trial was an appropriate method to hear all necessary witness testimonies and examinations. The Appellants were given the opportunity to merge the third-party action into the main action but chose not to.

Conclusion

In sum, the Court of Appeal’s decision gives creditors a clear picture on how they can effectively use the summary judgement process. It also cautions courts from delaying summary judgement motions and notes the implications that can arise.

This blog was co-authored by Summer Law Student, Barbara Attia.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

Sources:

2275518 Ontario Inc. v. The Toronto-Dominion Bank, 2024 ONCA 343

Rule 20.04(2.2)

Rule 1.04(1) and (1.1)

[1] 2275518 Ontario Inc. v. The Toronto-Dominion Bank, 2024 ONCA 343 (CanLII), at para 38, <https://canlii.ca/t/k4ghx#par38>

[2] 2275518 Ontario Inc v The Toronto-Dominion Bank, 2024 ONCA 343 at para 44.

In this article, we delve into what a Shareholders’ Agreement is, its key components, and the risks it addresses.

When two or more individuals go into business they often incorporate a corporation, elect directors, issue shares, and start operations without further thought to the rules that will govern their business. But what happens if someone wants to leave the business? Or if someone takes the corporation’s idea and starts their own business? It’s best to address these questions and mitigate such risks at the outset of the business and while parties are friendly.

What Is a Shareholders’ Agreement?

A Shareholders’ Agreement is a legally binding contract among the shareholders of a corporation. It serves as a roadmap for the management and operation of the company and outlines the rights, responsibilities, and obligations of the shareholders. While not a mandatory requirement under Ontario’s corporate law, having a Shareholders’ Agreement is highly recommended for any corporation with more than one shareholder.

Do I Need a Shareholders’ Agreement?

Some of the key risks addressed by a Shareholders’ Agreement include:

1. Disputes Among Shareholders: By providing clear guidelines for resolving disputes, a Shareholders’ agreement helps prevent conflicts that could disrupt the business operations and damage shareholder relationships.

2. Exit Strategy: In the event of a shareholder’s desire to exit the company or in case of unforeseen circumstances such as death or incapacity, a Shareholders’ Agreement promotes a smooth transition and protects the interests of the remaining shareholders. 

3. Protection of Minority Shareholders: Minority shareholders are particularly vulnerable to being marginalized in decision-making processes. A well-crafted Shareholders’ Agreement can include provisions to safeguard their rights and promote their fair treatment. 

4. Preservation of Confidential Information: Confidentiality clauses protect sensitive information from being disclosed to competitors or unauthorized parties, safeguarding the corporation’s property and competitive advantage.

Contents of a Shareholders’ Agreement.

The contents of a Shareholders’ Agreement vary depending on the specific needs and circumstances of the corporation and its shareholders. However, some common provisions typically found in a Shareholders’ Agreement include:

1. Shareholder Rights and Obligations: This section outlines the rights and obligations of each shareholder, including voting rights, dividend entitlements, and obligations to contribute additional capital.

2. Management and Decision-Making: The agreement specifies how the company will be managed and the important decision-making processes, such as the appointment of directors, approval of budgets, and major business transactions.

3. Transfer of Shares: This section addresses the circumstances under which shareholders can transfer their shares, including any restrictions on transfers and rights of first refusal. It may also create circumstances where an individual must sell their shares, such as upon leaving the employ of the corporation, and the share value of such repurchases.

4. Dispute Resolution: A crucial aspect of any Shareholders’ Agreement, this section outlines mechanisms for resolving disputes among shareholders, such as mediation or arbitration, or mandatory buy-sell provisions, to reduce the risk of litigation.

5. Confidentiality and Non-Competition: This clause protects the corporation’s sensitive information and prevents shareholders from competing with the company during and after their tenure.

A Shareholders’ Agreement is a vital legal document for corporations, providing clarity, structure, and protection for shareholders. Our corporate law team can help you draft or review a Shareholders’ Agreement so that it accurately reflects your intentions and protects you from risks.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

Throughout the COVID-19 pandemic, many businesses were struggling. The federal government implemented various programs to assist and support Canadian businesses that were suffering from economic loss as a result of the pandemic. To name a couple, the Highly Affected Sectors Credit Availability Program (HASCAP) and the Canada Emergency Business Account (CEBA) were implemented. The lending banks were responsible for authorizing and administering the loans. The loans were backstopped by the Business Development Bank of Canada.

A recent decision, 7572042 Canada Inc. v. The Bank of Nova Scotia, 2023 ONSC 3405, touches on the consequences of doing so.

Facts

The plaintiffs in this case are without counsel and Mr. Barake was granted leave to represent the corporate plaintiffs. From March 2021 to November 2022, Mr. Barake applied for HASCAP loans from Scotiabank (the “Bank”) on behalf of the corporate plaintiffs in the amount of $3,861,000.00. The bank advanced additional loans to the plaintiffs under the CEBA program for $720,000.00. Both of these loans were based on the strength of the plaintiff’s representations to meet the qualifications, which included various financial statements from 2018-2020, portraying the plaintiffs (business) as operating with significant assets, revenues and expenses. The 2020 financial statement for the plaintiffs showed, in aggregate, assets over $11 million and sales revenue of over $14 million.

The plaintiffs borrowed about $4.581 million from the Bank and represented the single largest group of loans made by the Bank under these programs. The Bank therefore conducted a review of the plaintiffs and their loans, which raised serious concerns about the intentions of Mr. Barake and the other Borrowers. The Bank froze the plaintiffs’ bank accounts and the Bank’s investment arm, Scotia Capital, also froze certain investment accounts where Mr. Barake had transferred most of the funds borrowed from the Bank using the HASCAP and CEBA programs.

This claim was initiated by the plaintiffs against the Bank for unlawfully freezing their account and claiming damages of $80 million. The Bank moves for summary judgment dismissing the plaintiffs’ action and granting their counterclaim denying the plaintiffs’ allegation and suing for the amounts owed under its loans with interest and costs. The Bank also sought a Mareva injunction against the plaintiffs, which was granted. The plaintiffs therefore could not move around any assets in their control.

Issues

The court had various issues to consider in this case. Two of the main issues at bar were the following:

1. Whether summary judgment should be granted allowing the Bank’s counterclaim;
2. Whether summary judgment should be granted dismissing the plaintiffs’ action against the Bank.

Analysis:

1. The Counterclaim

To consider whether summary judgment should be granted, the court considers whether or not there is a genuine issue requiring trial under Rule 20.04 of the Rules of Civil Procedure. With respect to the Bank’s counterclaim, it was therefore considered whether the loans advanced to the plaintiffs were obtained by means of fraudulent misrepresentation. A claim for fraudulent misrepresentation requires there to be proof of four elements:

1. 1. A false representation made by the defendant;
   2. Knowledge of the falsehood of the representation (whether knowledge or recklessness);
   3. The false representation caused the plaintiff to act; and
   4. The plaintiff’s actions resulted in a loss

Mr. Barake on behalf of the Borrowers represented and warranted to the Bank that the borrowers met the requirements to quality for both a HASCAP loan and a CEBA loan. The four elements above were considered and the evidence was found to prove each of these four elements on a balance of probabilities. The business accounts opened at the time of the loans reveal no income, revenue or business expenses and the domain names for the Borrowers were all created immediately prior to the loan applications being made yet the plaintiffs had no business premises. As well, the Bank advanced funds in the amount of $4.581 million and the funds were misused even with the Bank’s efforts to prevent the loss. The funds were obtained based on fraudulent misrepresentations by Mr. Barake on behalf of the corporate plaintiffs.

2. The Plaintiff’s Claim

The court also considered whether there was a genuine issue requiring trial with respect to Mr. Barake’s Plaintiff’s Claim. Mr. Barake brought his initial claim alleging that the Bank unlawfully froze the plaintiffs’ accounts and that as a result, the plaintiffs suffered losses. The plaintiffs did not produce any evidence in support of their claims and the Borrowers had acknowledged in the banking agreements for the loans that the Bank may freeze any funds in any account at any time without notice in the event of: default, any representation being untrue, and in circumstances where the Bank has reason to suspect that the Borrowers have engaged in any improper or unlawful activity. The Bank had conducted an investigation that raised issues about the validity of the loans and the transfer of their loans to Mr. Barake’s self directed investment accounts and therefore it was not unlawful for the Bank to freeze the plaintiffs’ bank and investment accounts, nor did the plaintiffs offer any evidence in support of their claims.

Conclusion

Judgment was granted for the two main issues as the court was satisfied that there was no genuine issue requiring a trial. The plaintiffs’ claim was dismissed and are ordered to pay back their loans obtained under false pretences, including interest and costs to the Bank.

This blog was co-authored by articling student Samantha Lawr.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”