In Callidus Capital Corporation v. McFarlane, the Ontario Court of Appeal reduced the amount of debt a company's President and CEO owed on a guarantee from $3 million to $250,000. The Court recognized that contractual interpretation is an issue of mixed fact and law, but found that the motion judge made palpable and overriding errors interpreting the contract and calculating the amount owing.
McFarlane, the President and CEO of Xchange Technology Group LLC (Xchange), provided a bank with a personal limited guarantee of the Company's debt, in the amount of $3 million. This debt was purchased by Callidus Capital Corporation (Callidus).
McFarlane and Callidus later negotiated a forbearance agreement, which amended the guarantee. The amendments removed McFarlane's responsibilities for any portion of Xchange's debt that arose from Callidus' fees. McFarlane's exposure would be limited to the lesser of $3 million or the "Deficiency Amount." When the amended guarantee was signed, Callidus charged a facility fee of $2.25 million. A second forbearance agreement was later signed in exchange for facility fee of $250,000.
After the expiry of this agreement, Callidus commenced court proceedings to appoint a receiver for a credit bid agreement and sale process of Xchange. In the report of the proposed receiver, it was noted that Xchange was $37 million in debt to Callidus. The payment of the purchase price would first go to satisfying the Callidus debt, less $3 million. No description was given of the purpose of the $3 million carve out.
In the end, Callidus itself was the successful bidder. After the deal closed, Callidus sued McFarlane on his guarantee and brought a motion for summary judgement. The motion judge held that under the amended guarantee, McFarlane's exposure to Callidus was $3 million. He found that there was still $3 million owing to Callidus after the credit bid. This $3 million carve out in the asset purchase agreement, the judge reasoned, was intended to maintain McFarlane's guarantee obligation. Callidus had applied the purchase price towards the $2.75 million owing from forbearance and facility fees, as it had no obligation to first apply payments received from a debtor to the guaranteed portion of the debt. The motion judge granted judgement to Callidus under the agreement for $3 million.
The Court held that the motion judge made two errors: first, he made an error of law by failing to consider that the amended guarantee had reduced the amount that McFarlane guaranteed to the lower of $3 million and the "Deficiency Amount". Second, he made an error of fact by miscalculating the amount owing under the guarantee. The Deficiency Amount was to be calculated by reducing the forbearance and facility fees ($2.75 million) from the Obligations owing after the completion of the transaction ($3 million). The Court rejected Callidus' argument that the $34 million of debt extinguished after the credit bid included the facility and forbearance fees, as there was no allocation. Since no purpose was given for the $3 million carve out, the debt was to be treated as a whole. The Court accordingly reduced McFarlane's obligation to $250,000.
While the Court did not make a finding on this basis, the defence argued that Callidus had structured the transaction in the way it did in order to avoid reporting a loss to its investors.
This decision is notable to creditors as it suggests the courts will carefully construe the language of a guarantee. Creditors should exercise care when restructuring debts related to guarantees.