Credibility Contributes to Piercing of Corporate Veil in Loan Litigation
January 10, 2022
There’s an old saying that goes, “A friendship founded on business is better than a business founded on friendship.” The reason sayings like that stick around for a long time is because people sometimes find truth in them. When friends enter into a business contract or relationship they may not feel the urge to treat their contract with the same formalities they would with a business they didn’t have a personal relationship with. As we see in a recent decision from the Alberta Court of Queen’s Bench, a failure to set out responsibilities and obligations when doing business with friends can lead to litigation, which brings the risk of lost friends as well as considerable financial costs.
One friend provides the other with $1.8 million business loan
The issue before the court originated when two friends entered into a business relationship together. The plaintiff (“WW”) was at one point married to the sister of the wife of the defendant (“GB”). WW had worked throughout his career as an elevator technician and had saved some wealth. He would occasionally lend money to friends and family and tended to do so in an informal fashion.
GB was the sole director and shareholder of a business (“the corporation”) that primarily made its money by leasing vehicles and equipment which it in turn leased at a higher rate to its customers, which were in the commercial or construction industries. At some time in 2007, one of the parties (they disagree about which one) raised the idea about WW lending GB $1.8 million in cash as well as over $500,000 from a loan from WW’s RRSP.
The documentation concerning the loan was limited to a promissory note, though it took a year for that to be drafted. Over time, GB would direct that his interest payments be redirected to the loan, thereby increasing the principal of the loan. WW was not a savvy computer user and updated various versions of the promissory notes over time, sometimes writing over old ones, and sometimes saving new versions of the note.
The corporation was not successful in its business endeavours, and by 2014 it was clear to WW that GB would not be able to pay the money back. GB listed a number of people to whom he assigned blame for the business, primarily the person he hired to manage the day-to-day operations of the corporation as well as the corporation’s bookkeeper. When WW made attempts to recover the loan, a dispute arose over to whom the loan was made. GB stated that the loans were made to the corporation, while WW said the funds were advanced as a personal loan to GB.
A settlement meeting is held to outline how the loan would be paid back
In October 2015 the parties participated in a settlement meeting. During this meeting, GB asked WW if they could keep the meeting “off the record” and hold it without prejudice, which means anything the parties agreed to would not override any existing legal right. Unbeknownst to WW at the time, GB recorded the meeting and later provided it to the court as evidence; behaviour which we will soon see was detrimental to his position.
During the meeting WW repeatedly referenced that the loan was made to GB personally. GB agreed to this in all but a small number of instances, in which WW was quick to correct him, reasserting that the loan was personal in nature.
The parties came to an agreement that the corporation would pay WW $2,000 per month for a period of 75 months and that GB would have an accountant help WW with his taxes in order to reduce his tax liability to the extent of $1.8 million. WW was very hesitant to commit to this and stated that he would only agree to drop litigation if the tax approach worked.
WW eventually pursued the matter in court after neither GB nor the corporation paid back any money. In addition, no accounting or tax services were provided to WW.
Who is ultimately responsible for the loan?
The main issue the court was tasked with determining was whether the loan was made personally to GB or whether the loan was made to the corporation. The only way for the court to land with one option or the other was to believe WW or instead believe GB, and which version of events is more likely to have occurred.
The court referenced a 2006 decision from the Supreme Court of Canada, which stated that the assessment of credibility is not a science, and requires the consideration of impressions people leave, what witnesses say, and how different versions of the events can be reconciled. The court also listed a number of factors outlined in a 2003 Ontario Superior Court of Justice decision, including the honesty of witnesses, whether witnesses have an interest in the outcome, the reasonableness of a witness’s version of events, and more.
In this matter, the court determined that GB, who had a background in business, was quick to blame others for his troubles. The court referenced a break-in to WW’s home, in which the only thing is stolen was the promissory notes, and accusations of fraud he lobbed at WW when he presented evidence. Furthermore, the court was very critical of GB’s recording of the settlement meeting and later use of it as evidence. Funnily enough, it was GB’s use of the settlement meeting recording that the court learned he seemed to accept that the loan was personal. The court ordered that the money loaned was payable by GB personally and ordered him to do so with interest.
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