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Posted on December 1, 2001 | Posted in Collections

We have commenced thousands of actions and seen hundreds of defences. The odd few have validity; most are spurious. However, we cannot but admire the ingenuity of some opposing counsel. For this newsletter, we chose two reported cases in which, as we read them, we knew that the defendant would lose but still admired the audacity of the defences. 

Mandatory Settlement 

In HSBC Bank of Canada v. Drapery & Blind Shop Inc., a 2001 decision of the Ontario Superior Court of Justice, the bank had advanced a $100,000 business improvement loan to a corporation. The principal of the corporation guaranteed the loan to a maximum of $25,000. The corporation defaulted when the loan had been reduced to $80,000 and the bank sued the corporation and the guarantor.

Both defended. The defendants relied upon section 18(2) of the then regulations of, we assume, the predecessor of the Canada Small Business Financing Act. It read:

“the lender shall take all of the following applicable steps:

a)   collect the principal and interest on the loan;

b)   obtain security on any assets not secured …;

c)   … realize upon any security …; and

d)   effect a compromise settlement with the borrower …”

The defendants argued that the section is mandatory (e.g. the use of the word “shall”). Accordingly, it reasoned that since the bank refused to even attempt to effect a compromise settlement with the defendants, the bank did not comply with a pre-condition to its ability to commence an action to enforce payment of the debt.

The solicitors for the bank were not impressed with this defence and brought a motion for summary judgment, the test for which is whether or not there is a genuine issue for trial.

The solicitors for the bank argued the obvious. The purpose of the section was to ensure that lenders did all they could do to maximise recovery of the debt before they came back to the government to pay their guaranteed losses. The section was enacted not to aid the debtor but to aid the government.

Nice Try 

The judge agreed. He also noted that the section could not possibly mean that all of the four steps had to be taken because they were contradictory. How could the bank collect the principal and interest and still effect a compromise? When the section refers to “applicable”, it means any one of more of the alternatives, which the lender determines in its discretion.

The judge stated, after he granted judgment to the bank: “I thank counsel for raising a somewhat novel point.” Another judicial understatement!


Sometime the actions of counsel are not only ingenious but also audacious. This was the case in 2923238 Canada Ltd. v. Royal Bank of Canada, also a 2001 decision of the Ontario Superior Court of Justice.

We’re Trying 

A bank granted a revolving demand loan secured by a general security agreement. The credit facilities agreement stated that the borrower would deliver to the bank all financial and other information the bank requested and that there would be default under the loan if there was a material adverse change in the borrower’s financial circumstances. The borrower also agreed to pay all costs associated with periodic bank reviews of the borrower’s financial affairs.

From November 2000 to July 10, 2001, the bank told the borrower of the bank’s concerns about the deterioration of the borrower’s business and suggested means to satisfy its concerns. The bank delivered a demand for payment and a notice to enforce security. It suggested a forbearance agreement on several occasions, on conditions that the borrower rejected; it requested payment towards the indebtedness that the borrower rejected in part. It requested a review of the borrower’s business; the borrower agreed but refused to pay the cost of the monitor and the report. The bank requested additional security. The borrower agreed to this request only if the independent report stated that additional security was warranted; however, the borrower refused to pay for the cost of the report.

Finally, the bank informed the borrower that it would be debiting the account of the borrower by $50,000 towards payment of the $230,000 indebtedness and would be refusing to honour any further cheques of the borrower. The borrower then brought an injunction to restrain the bank from doing so. The debtor argued that removal of the funds would put it out of business and that the bank’s actions had impaired the borrower’s ability to obtain financing elsewhere. We assume that the borrower figured that the best defence was a good offence.


An applicant must pass a number of hurdles to obtain an injunction before the trial of an issue. The first and foremost hurdle – and the threshold is not very high – is that the applicant present sufficient evidence for the court to conclude that the action itself demonstrates a serious issue to be tried; the case cannot be vexatious or frivolous.

The judge noted that she did not need to refer to the other hurdles because the borrower fell flat on its face over the first one. The issue was simple. The borrower failed to provide the documentation that the bank requested and failed to agree to pay for the costs incurred or to be incurred by the bank in enforcing the terms of the credit facilities agreement and its security. The borrower was in default under the credit facilities agreement. The debtor was given plenty of notice of the bank’s intentions to enforce its security, stalled the bank for seven months, and could not complain if, at the end of the seven months, the bank refused to unilaterally forebear any further. The judge denied the injunction.


There are a number of reasons why a borrower defends an action:

1.   There is a real defence (unusual).

2.   Hope springs eternal.

3.   Bad advice.

4.   Stall.

5.   Hope that the lender will settle.

We can understand all of these reasons. Unfortunately, for all reasons other than the first, the borrower will often pay a steep price for the defence. It will pay its own lawyer; it will pay some or all of the legal fees for the lender’s lawyer.

There are occasions when stalling is worth the cost (e.g. the lender is attempting to sell the borrower’s home and the borrower needs more time to move or to sell the house). There are occasions when the hope springs eternal reason makes sense (e.g. I have almost no assets left; it is better to take a flyer on a spurious defence than to give up without a fight).

The most usual reason is the last one, hope of settlement, and sometimes it works – but only if it is apparent to the lender that there may be a good defence on the merits. Most often, the borrower takes its shot, stalls and, ultimately, pays the price.


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