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Didn’t Know

Posted on June 1, 2020 | Posted in Collections

We always enjoy reading collection action decisions in which the defence is somewhat unique or, in some cases, utterly ridiculous. These decisions have usually been decided on a summary judgment basis. In this regard, we report on Business Development Bank of Canada v. VDF Wine Importers, a 2019 decision of the Ontario Superior Court of Justice.

An individual holding a pen and signing documents.


The initial facts were not at all unusual. The bank loaned $100,000 to a corporation and the sole shareholder of the corporation guaranteed the loan. The corporation defaulted and the bank sued the guarantor for payment. By the time of the motion for summary judgment, the amount outstanding was only $25,000.

Although the shareholder contended that the guarantee could not be enforced “because it is incomprehensible,” it was no more incomprehensible than any other guarantee. It may have been incomprehensible to the shareholder subjectively, but it was quite clear. Its “incomprehensible” words included the following: “the guarantor(s) agree(s) to guarantee the obligations of the Borrower under the Loan.”

Not Me

In June 2013, the shareholder executed his guarantee and, on behalf of the corporation, executed the loan agreement. The shareholder had purchased all of the shares of the corporation in 2012 and was, therefore, seemingly the sole shareholder when he arranged for the loan and signed the guarantee. In February 2017, a few months before the corporation defaulted on the loan, the shareholder transferred his shares back to the original shareholder.

In August 2017, the shareholder and the corporation commenced an action against the original shareholder alleging fraud and misappropriation. This action was resolved by minutes of settlement in November 2017. The minutes recognised the bank’s action and required the original shareholder to pay $25,000 of the outstanding loan amount. Further, the corporation agreed to indemnify the shareholder for all claims in respect of the guarantee. The old shareholder duly paid the $25,000 settlement amount.

So what defence did the shareholder advance in the bank’s action? Aside from his assertion that the guarantee was incomprehensible, he claimed that he did not receive independent legal advice and that, had he received ILA, he would have discovered that he was not a director, officer, or shareholder of the corporation in 2013 and would therefore have not guaranteed the loan. He also claimed that the guarantee was unconscionable. We will deal with each defence.

Non Est Factum

Although not stated as such, the shareholder was using the non est factum defence (i.e. he signed the guarantee under a mistake as to its nature and character as a result of a misrepresentation and was not careless in doing so).

The first problem with this defence deals with the essence of his allegation. Even though the original shareholder stated, without facts to back up that statement, that the shares had never originally been transferred in 2012, the judge did not accept that evidence. How can either shareholder allege that the shareholder was never a shareholder, given that the shareholder subsequently transferred his non-existent shares back to the original shareholder in 2017?

It gets worse. The guarantee was not conditional upon the shareholder having an ownership interest in the corporation. A non-shareholder can guarantee a corporation’s loan. Further, how would the bank know that the shareholder was not actually a shareholder? Finally, even assuming that the shareholder never was a director or officer and subsequently discovered this, why is this relevant to the enforceability of the guarantee?

Independent legal advice is not necessary in the absence of an allegation of undue influence, fraud, misrepresentation, or non est factum. The shareholder alleged only non est factum. But that defence could not apply on the facts of this case. The shareholder did not sign the guarantee under a mistake as to its nature and character; at best, he signed the guarantee under his own mistake as to his role in the corporation. This mistake was of his own making, based on information within his own capacity to discover. Accordingly, not only was there no mistake as to the nature and character, any mistake arose out of the shareholder’s own carelessness and, certainly, not from a bank misrepresentation.


To demonstrate that the loan was unconscionable, the shareholder had to lead evidence both as to inequality in bargaining power and an improvident bargain. Even assuming that there was an inequality of bargaining power between the shareholder and the bank, the shareholder never demonstrated that the guarantee was an improvident bargain. He guaranteed a loan in which his corporation received $100,000. Why is this improvident?


As a last resort, the shareholder trotted out the old argument: Bank, you did not comply with your own internal policies when you granted the loan and, therefore, I do not have to repay you. The bank’s policies were to ensure the bank’s ability to comply with anti-money laundering and anti-terrorist financing laws. The shareholder alleged that had the bank followed these policies, it would have determined that the shareholder was not an officer or director of the corporation. And if the shareholder knew he was not an officer or director, he would not have signed the guarantee.

The judge noted that, in essence, the shareholder was arguing that the bank ought to have discovered the true state of affairs of the corporation’s ownership and control (whatever that was) regardless that the shareholder had represented his ownership status to the bank. The judge gave short shrift to this defence – as judges have done many times in the past. This argument never works.


The judge allowed the motion and granted judgment for the amount due and, we assume, costs of the action.


Image courtesy of Free-Photos.

Jonathan Speigel


Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.


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