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CREDITOR-DEBTOR RELATIONSHIP - Debt - What constitutes - Loans

Wednesday, September 20, 2017 @ 8:40 AM  

Lexis Advance® Quicklaw®
Appeal by the plaintiff from dismissal of his action for repayment of cash advances made to the respondent company. The respondent argued that the funds were capital investments rather than shareholder loans. The appellant was one of three founding shareholders of the company. The shareholders’ agreement (Agreement) was drafted by the appellant without legal assistance. The Agreement provided that no shareholder loans would be required. Instead, the company would make cash calls. After having made several advances to the company, the shareholders decided to treat the advances as shareholder loans based on the advice of an accountant. It was not until after the present action had been commenced that the accountant received a copy of the Agreement. It was the accountant’s view that the Agreement prohibited the cash advances to be treated as shareholder loans. The company’s records between 2011 and 2014 reflected the treatment of shareholders’ advances as loans. The trial judge found that, although the shareholders had not followed the Agreement in a number of procedural areas, they had clearly complied with it for substantive issues such as default on the cash call and competition issues and that the Agreement had provided a broad and accepted framework for the company’s business. Based on the accountant’s evidence, the trial judge determined that the Agreement did not permit the kinds of contributions made by the shareholders to the defendant to be called loans and that they were to be considered capital investments by the shareholders.

HELD: Appeal allowed. New trial ordered. The trial judge erred in failing to consider all the surrounding circumstances to determine the substance of the advances made and by imposing an inflexible rule to the effect that all shareholder loans must be supported by a shareholders’ agreement. The judge’s statement that even without the Agreement, there would still be no basis for supporting the contributions of the shareholders as loans could not be correct, given his insistence that a shareholders’ agreement was the sine qua non for any determination that loans were made. Without the Agreement in this instance, there was considerable evidence in favour of the loan characterization. Also problematic was the fact that the judge seemed to have accepted, without question, that it was open to the company or a majority of its shareholders simply to reverse their previous decision, reflected in four years of corporate documents, and somehow transform what were loans into capital contributions.

Ghassemvand v. Premium Weatherstripping Inc., [2017] B.C.J. No. 1732, British Columbia Court of Appeal, M.V. Newbury, N.J. Garson and P.M. Willcock JJ.A., September 1, 2017. Digest No. TLD-Sept182017006