Legal Blog

Demand

When is a demand not a demand? Usually, anytime a guarantor is trying to avoid payment under a guarantee. An example of this is set out in TD Canada Trust v. B&B Enterprises (London) Ltd., a 2008 decision of the Ontario Court of Appeal. 

Facts 

A corporation (“Corpco”) had two shareholders and directors: x and y. Corpco had a $232,000 line of credit with the bank. x and y guaranteed Corpco’s obligations under the credit agreement.

Corpco had financial difficulties and defaulted under its payments. The bank became concerned. It reduced the line to $200,000 and wrote to Corpco stating that Corpco had a choice: convert the line of credit to a 4-year term loan or repay the balance of the line within 30 days. Corpco chose the first scenario and managed to reduce the loan to $70,000 before final default.

In the meantime, x had resigned as a director 7 months before the restructuring and knew nothing about it until a few months after it had been concluded. Although x had resigned and x and y had discussed the possibility of having x removed as a guarantor, that never happened. Since x was still a guarantor and since y ultimately assigned into bankruptcy, the bank sued Corpco and x for the amount that remained outstanding on the loan.

Restructure 

As a basic rule, a guarantor is not liable under a guarantee if the creditor changes the terms of the debt obligation without the guarantor’s agreement. Accordingly, x argued that when the bank restructured the line to a term loan without notice to x, x’s obligations under the guarantee ended.

However, financial institutions are not stupid – although this statement is subject to debate in view of the American sub prime loans fiasco. They know the law and draft their credit agreements very broadly so that, by contract, they can override the common law. The bank drafted the credit agreement to allow the bank to unilaterally alter the credit agreement without affecting the validity of the guarantee. x argued that, although the bank could amend the agreement, it still had to give him prior notice of that amendment.

The Court acknowledged the argument – for what it is worth, we feel that the argument is ridiculous – and then indicated that it did not have to deal with it. Rather, the Court looked to another term of the credit agreement, which stated that if default occurred, the bank could demand repayment of the debt, in whole or in part. The Court concluded that this is exactly what the bank did. It demanded repayment, but gave Corpco the alternative to pay the indebtedness over time. It did not need to notify x of the demand or the alternative to full repayment.

Security 

x also complained that the bank acted negligently in failing to take steps to preserve the value of the inventory, which, in addition to the guarantees, secured the loan. The credit agreement also dealt with this argument. It stated that the obligations of x were independent of Corpco’s obligations and that the bank did not have to protect any security interest or proceed against any security.

The Court therefore rejected x’s argument because of the wording of the credit agreement and, further, because the bank had never taken control of Corpco’s business and had not appointed a receiver. The bank had no duty to manage or supervise Corpco or its assets.

Result 

On the bank’s summary judgment motion, the motions judge had held that x’s defence raised no genuine issue for trial and, accordingly, the judge granted judgment for the bank. The Court agreed and upheld the judgment.

As an aside, our partner, Ian Latimer, acted for the bank.