Most secured lenders have the benefit of a full slate of negative covenants in their formal loan and security documents to restrict the actions of their borrower that might jeopardize the borrower’s ability to repay the loan. Thus, there is seldom any need for them to resort to the oppression remedy (typically a tool available to shareholders) as a method to recover a loan. A recent decision of the Ontario Superior Court of Justice has confirmed however that the oppression remedy will be available to creditors with informal loan arrangements lacking negative covenants in certain circumstances to reverse actions taken by a borrower that would impair its ability to repay the loan.
In Hayat, the creditor had advanced funds to a corporation controlled by the debtor, a friend and business associate, but became increasingly concerned that the corporate funds were being diverted for the personal benefit of the debtor (a suspicion that turned out to be true). The relationship between the parties worsened and the creditor commenced an action to recover the loan amount. With no formal written agreement to rely on, the creditor sought relief under the oppression remedy provisions of the OBCA. Section 248(2) of the OBCA provides that the court may grant relief to a complainant where the court is satisfied that actions by the corporation or its directors are oppressive or unfairly prejudicial to, or unfairly disregard the interests of any security holder, creditor, director or officer of the corporation.
Beginning with general principles, Justice Stinson canvassed certain key themes from the law of oppression remedy, including that the remedy is an equitable remedy protecting “the reasonable expectations of parties – in their capacities as shareholders, directors, creditors and other proper parties – beyond their strict legal rights”. While typically advanced by shareholders, Justice Stinson highlighted a past decision of the Ontario Divisional Court, Sidaplex Plastic Suppliers Inc. v Elta Group Inc., where the court stated that it was “well established now that a creditor has status to bring an application as a complainant [under the oppression remedy provisions of the OBCA].” Justice Stinson further noted the two-part inquiry set out by the Supreme Court of Canada in BCE Inc., Re, namely (1) whether the evidence supports the reasonable expectations asserted by the claimant and (2) whether the evidence establishes that these reasonable expectations were violated by conduct that could be described as oppressive or unfairly prejudicial towards, or that unfairly disregards the relevant interests of, the complainant. He concluded that both parts of this test were met in Hayat.
As noted by Justice Stinson, a claim of misappropriation of corporate funds by a director would ordinarily be brought by way of derivative action by the corporation against the director. However, in the context of closely-held corporations, misappropriation of corporate funds can give rise to both a derivative claim and an oppression claim. He reasoned that the creditor’s interests in this case were specifically and particularly affected, apart from the interests of the corporate body, since the debtor’s misappropriation benefited the only other corporate stakeholder (the debtor) at the expense of the creditor, and that this prejudicial treatment formed the basis for an oppression claim. Ultimately, Justice Stinson affixed the debtor with personal liability, ordering him to pay back the full amount of the loan.
Lenders might be encouraged by the decision in Hayat, which suggests that the oppression remedy – typically used by shareholders – is available for creditors in certain circumstances. However, the facts in Hayat are fairly specific, and the impact of its holding should not be overstated. For lenders looking for peace of mind, formal loan and security documents with comprehensive covenants and remedies are still the way to go!