Debtors Extending a Limitation Period by using Email Signature Line
In a recent BC case, a lender loaned a borrower $250,000 by way of a promissory note. The loan was not repaid by its due date and over several months many emails were exchanged between the lender and borrower regarding the default. In one of these emails, the borrower said he would pay back the loan and interest out of an expected sale and it included the borrower’s email signature: name, title, employer and contact information.
Ultimately, the borrower did not pay the funds as promised and the lender sued. The borrower claimed the lender was out-of-time because he failed to sue before the 2-year limitation period expired. The lender claimed that the email was a signed and written acknowledgment of debt which extended the expiry of the limitation period.
The Court considered BC’s Limitation Act and Electronic Transactions Act and followed the precedent set by a 2017 Saskatchewan decision that Courts have long accepted non-electronic deviations from handwritten signatures. The borrower could have chosen not to attach his email signature to the email but he did and that constituted a signed and written acknowledgment extending the time for the lender to sue.
Alberta has similar legislation as its neighbors, Saskatchewan and BC and as such Alberta borrowers can inadvertently extend a limitation period by email correspondence with their lenders.
From First to Last: Court finds a Shareholder Loan secured by GSA was an Equity Contribution
In the bankruptcy of a BC corporation, its shareholder and sole director and officer, filed a secured proof of claim in respect of shareholder loans secured by a general security agreement executed several years before the bankruptcy. The largest unsecured creditor challenged the validity of the shareholder’s secured claim with the hope that it would fall behind all unsecured claims against the corporation.
Notwithstanding the fact there was a GSA granted several years before the bankruptcy, the Court found that the shareholder’s claim was an equity contribution and not a debt claim; therefore, subordinating the shareholder’s claim to the claims of other creditors under the Bankruptcy and Insolvency Act. The Court relied on the facts that: (a) the interest payments made by the corporation to the shareholder were irregular; (b) there was no repayment schedule and no formula to determine interest; (c) when the “shareholder loans” were made the shareholder increased his shareholdings in the corporation with little to no other consideration; and (d) the financial statements of the corporation did not describe the “shareholder loans” as secured loans.
This is a good reminder that a transaction can be challenged to see if it really was as it appeared or something else.
Guarantors’ Rights in a Lender’s Realization on Borrower’s Assets
In a 2017 Alberta case, Alberta Financial Services Corporation (AFSC) had made loans to a borrower to buy out leased equipment and provide working capital. Among the security that AFSC took were personal guarantees. The borrower defaulted on loans to another lender and a receiver was appointed by the Court. The receiver sold the assets of the company by auction, the recovery of which was much less than expected and AFSC ended up claiming against the guarantors for the shortfall.
The guarantors argued that the receiver’s sale was not conducted in a commercially reasonable manner and that was required in order for AFSC to enforce on the guarantees. The Court dismissed the guarantors’ argument on the basis that (a) there was no evidence that the sale was improper – a sale that generates less proceeds than anticipated is not proof of an improvident sale; (b) the guarantors had notice of the sale and an opportunity to object but did not do so; and (c) the guarantee agreement specifically released AFSC from any duty that the borrower’s assets were to be realized in a commercially reasonable manner.
The key principles for lenders and guarantors arising from this case are that:
- a contract of guarantee is an independent contract between a lender and guarantor, separate and apart from agreements between a lender and borrower;
- a guarantor’s claim of an improvident sale is to be assessed in accordance with the terms of the guarantee, not agreements between the lender and borrower; and
- a lender owes a duty to a guarantor to not do anything wilful or reckless with the borrower’s pledged assets.
 Johal v Nordio, 2017 BCSC 1129.
 IDH Diamonds NV v Embee Diamond Technologies, 2017 SKQB 79.
 Re Tudor Sales Ltd., 2017 BCSC 119.
 Agricultural Financial Services Corporation v Luthra, 2017 ABQB 403