The Long-Awaited Implications of Fraudulently Obtained COVID-19 Business Loans Posted onJune 10, 2024June 3, 2024/ Gabriella Schneider 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: Whether summary judgment should be granted allowing the Bank’s counterclaim; Whether summary judgment should be granted dismissing the plaintiffs’ action against the Bank. Analysis: 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: A false representation made by the defendant; Knowledge of the falsehood of the representation (whether knowledge or recklessness); The false representation caused the plaintiff to act; and 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. 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.” Authors Gabriella Schneider 416-446-5099 416-446-5099 gabriella.schneider@devrylaw.ca