COURT OF APPEAL FOR ONTARIO

CITATION: Toronto-Dominion Bank v. Konga, 2016 ONCA 976

DATE: 20161223

DOCKET: C61970

Gillese, Benotto and Roberts JJ.A.

BETWEEN

The Toronto-Dominion Bank

Plaintiff (Respondent)

and

Raymond Kuate Konga

Defendant (Appellant)

Ronald F. Caza and Alyssa Tomkins, for the appellant

Fraser MacKinnon Blair and David Elliot, for the respondent

Heard: November 23, 2016

On appeal from the order of Justice Patrick Smith of the Superior Court of Justice, dated March 10, 2016, with reasons reported at 2016 ONSC 1628.

By the Court:

[1] The appellant guaranteed a loan made by the respondent bank to Vertamin Inc. (“the corporation”). The respondent claimed that the corporation breached the terms of the loan agreement. It demanded payment of the loan from the corporation and from the appellant as the guarantor. The respondent moved successfully for summary judgment against the appellant for payment based on the guarantee. The appellant submits that the motion judge erred in law by misinterpreting the guarantee. He further submits that the motion judge erred in failing to consider whether the corporation had been provided with a reasonable time for repayment and in finding that the obligation under the guarantee had crystalized. The appellant also submits that the conduct of the respondent entitles him to an equitable discharge from his obligations.

[2] For the reasons that follow, we see no error in the motion judge’s interpretation of the guarantee and dismiss the appeal.

A. Background

[3] The appellant is a director, the Chief Executive Officer and a majority shareholder of the corporation. In 2012, the respondent began providing loans and credit facilities to the corporation. The appellant signed a personal guarantee of all of the corporation’s obligations to the respondent. In 2013, the parties signed a second loan agreement which superseded and incorporated the earlier agreement. Under this agreement, the credit limit on the corporation’s line of credit was linked to its accounts receivable up to a limit of $800,000. The corporation was also to maintain a tangible net worth of $1,250,000 at all times and to provide the respondent with certain financial information on a regular basis.

[4] The loan agreement was subject to a facility letter which provided that the line of credit would be repayable on demand and that the respondent could accelerate the payment of the loan upon the occurrence of any event of default. Events of default were defined in the “Standard Terms and Conditions” to include the nonpayment of the outstanding principal and the breach of any term or condition in the 2013 loan agreement where the breach was left unremedied for 5 business days.

[5] The appellant guaranteed the 2013 loan agreement. At para. 29 of his reasons, the motion judge stated that the guarantee included the following terms:

a. Section 1: The Guarantor unconditionally and irrevocably guarantees payment of all debts and liabilities, present or future… of [the corporation] to [the respondent].

b. Sections 2 and 4: The Guarantor’s liability under the Guarantee is unlimited and continuing.

c. Section 6: Payment shall be made by the Guarantor upon receipt of a written demand from [the respondent].

d. Section 11: [The respondent] is not required to exhaust its recourse against [the corporation] or under any security before being entitled to demand payment from the Guarantor.

[6] In April 2014, the respondent issued a notice advising that the corporation was overdrawn on its line of credit and had been in breach of the tangible net worth requirement since January 2014. The respondent had issued an initial caution to the corporation in February 2014. The line of credit remained overdrawn into July[^1] and the corporation continued to fail to meet its tangible net worth requirement. The respondent alleged that the corporation also failed to provide certain financial information for August and September 2014, diverted its receivables, and failed to deposit a loan received from the Business Development Bank of Canada. The respondent took the position that these acts constituted breaches of the loan agreement. The corporation denied that it had diverted its receivables as defined in the agreement.

[7] On September 23, 2014, the respondent told the appellant that all sums deposited would be used to pay down the line of credit. The corporation’s account was transferred to the respondent bank’s Financial Restructuring Group on October 6. On October 14,[^2] the respondent confirmed that all money deposited on the operating line would be frozen in order to pay down the account. On October 27, the respondent sent a written caution to the corporation. After several more letters, on November 13, 2014, the respondent issued a formal demand for immediate repayment and a notice to enforce the general security agreement. At the same time, the respondent demanded immediate repayment of the same amount from the appellant as guarantor. The demand letter stated as follows:

The [respondent] hereby demands payment forthwith by the Debtor of all indebtedness and liability owing by the Debtor to the [respondent]. The [respondent] also demands such payment pursuant to the general security agreement and other security held by the [respondent].

…the Debtor has ten (10) days from the date of this letter to permanently repay the indebtedness.

[8] The corporation filed a notice of intention to make a proposal in bankruptcy. The respondent moved for summary judgment against the appellant guarantor.

[9] Relying on his interpretation of the guarantee, the motion judge rejected the appellant’s submissions that the corporation had to be in default of payment under s. 6 of the loan agreement as a precondition to the demand for payment on the guarantee. The motion judge found that the corporation was in breach of the loan agreement by (i) being overdrawn on its line of credit; (ii) being in breach of the tangible net worth requirement; and (iii) not providing its accounts receivable listings.

[10] He found that there was evidence that the corporation, despite several warnings, continued to be in default and that “[a]ll these defaults crystalized [the respondent]’s right to demand payment” (at para. 66). The motion judge also rejected the appellant’s submission that the actions of the respondent interfered with his rights of subrogation to and indemnification from the corporation and that he was thus entitled to an equitable discharge.

B. Analysis

[11] In his factum, the appellant argued that the motion judge erred: (i) in failing to find that the respondent had not met the preconditions to making a demand on the guarantee; and (ii) in finding no grounds for an equitable discharge. We will address those submissions but first address the primary submission made by the appellant at the oral hearing of the appeal.

[12] In oral argument, the appellant submitted that the November 13, 2014 demand letter was invalid because it did not include: (i) a reference to the debtor’s entitlement to be afforded a reasonable time to pay; and (ii) a statement as to the precise amount of time that entailed.

[13] We reject this submission.

[14] The jurisprudence since R.E. Lister Limited v. Dunlop Canada, 1982 CanLII 19 (SCC), [1982] 1 S.C.R. 726, confirms that a debtor is entitled to a reasonable time to pay. That determination is fact-specific and dependent upon the conduct of the parties, before and after the demand. It would not be possible, or indeed workable, for the creditor to arbitrarily establish that timeframe for the debtor.

[15] On the facts of this case, the corporation was afforded a reasonable time to pay following the issuance of the demands. The motion judge found that after issuing the demand letter, the respondent took no steps to enforce the demand for many months.

[16] We turn now to a consideration of the appellant’s submissions, as contained in his factum and advanced at the oral hearing of the appeal.

Issue #1 Did the motion judge err in failing to find that the respondent had not met the preconditions to making a demand on the guarantee?

[17] The appellant made a number of related arguments on this ground of appeal. He argued that the corporation had to be given a reasonable time to repay before the respondent could make a demand against the guarantor. He also contended that a demand for payment pursuant to the guarantee was only available if the corporation had failed to make a payment and thereby committed an act of default in relation to a monetary term.

[18] In making these arguments, the appellant relied on s. 6 of the guarantee which reads as follows:

The Guarantor shall make payment to the Bank under this Guarantee immediately upon receipt of a written demand for payment from the Bank. If any Obligation is not paid by the Customer when due, the Bank may treat all Obligations as due and payable by the Customer and may demand immediate payment under this Guarantee of all or some of the Obligations whether such other Obligations would otherwise be due and payable by the Customer at such time or whether or not any demands, steps, or proceedings have been made or taken by the Bank against the Customer or any other person respecting all or any of the Obligations.

[19] The appellant attaches significance to the words “not paid” and “due and payable” in s. 6 and argues that a demand for payment under the guarantee could only be made if the corporation defaulted on a monetary term of the loan agreement. Breaches of the other requirements contained in the loan agreement, according to the appellant, do not trigger the respondent’s right to demand payment from the guarantor (as opposed to the corporation).

[20] The short answer to this submission is a factual one: on the findings of the motion judge, the corporation repeatedly failed to meet its financial obligations under the loan agreement and, therefore, had defaulted on its monetary terms. The corporation had failed to stay within its borrowing limits, was repeatedly in excess of its line of credit limit, and was overdrawn every month between January and November of 2014, except for March and April.

[21] More fundamentally, however, this submission must fail because it amounts to an assertion that the motion judge erred in his interpretation of the guarantee. We do not agree.

[22] The interpretation of the guarantee is a question of mixed fact and law, entitled to deference on appeal. The motion judge’s interpretation is, therefore, entitled to deference in accordance with Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 46-53. We accept the respondent’s contention that there is no evidence on the record that the guarantee is a standard form contract. Therefore, it does not attract a correctness standard of review. We note that this accords with the motion judge’s approach in considering the surrounding circumstances and factual matrix when interpreting the guarantee.

[23] At para. 63 of his reasons, the motion judge found the language of the guarantee to be “clear and unambiguous”. He said that ss. 1 and 2 bind the guarantor to pay the unlimited liability of the corporation and s. 11 did not require the respondent to exhaust its recourse against the corporation, or any other security held by the bank in respect of the corporation’s indebtedness, before being entitled to make a demand under the guarantee.

[24] While the motion judge did not expressly advert to s. 6 in his analysis, it is clear that he was aware of it because he referred to its terms in the background section of his reasons and he acknowledged the appellant’s reliance on s. 6 when he set out the parties’ positions on the issue. Further and in any event, in our view, the appellant’s proposed interpretation of s. 6 appears to be inconsistent with the first sentence of s. 6, which states that “[t]he Guarantor shall make payment to the Bank under this Guarantee immediately upon receipt of a written demand for payment from the Bank.” More significantly, it cannot stand in light of the motion judge’s interpretation of the balance of the guarantee. It is trite law that the provisions of the document must be read in a manner which gives meaning to all of its provisions.

[25] Accordingly, we see no basis on which to interfere with the motion judge’s interpretation of the guarantee.

Issue #2 Did the motion judge err in finding that there were no grounds for an equitable discharge?

[26] In the alternative, the appellant submits that the respondent’s conduct entitles him to a discharge. He acknowledges that the motion judge correctly set out the test in Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551, but maintains that the motion judge failed to apply the test and, instead, addressed the issue of an alleged breach of the common law implied duty of good faith.

[27] As the appellant acknowledges, the motion judge set out the correct legal principles on which to decide this issue. However, we do not agree that the motion judge failed to apply those principles. To obtain a discharge from the guarantee, the appellant had to establish that the respondent bank’s demand somehow caused the corporation’s default. It is clear on the findings of the motion judge that he did not accept that had occurred. On his findings, the bank played no role in the corporation’s excessive borrowings, its breach of the tangible net worth requirement, its refusal to submit its accounts receivable reports, and its continuing failures to cure its defaults despite the bank’s warnings.

[28] These findings were open to the motion judge – indeed, they were virtually inescapable on the record.

[29] It is within that context that we consider the motion judge’s statement that, at all times, the respondent acted in good faith with respect to the corporation and the appellant, as guarantor.

[30] In our view, the motion judge was not going off on a tangent in making these findings. On a reading of the reasons as a whole, the motion judge determined that the appellant was not entitled to a discharge because the appellant had failed to meet his onus of establishing that the actions of the respondent had caused the default of the debtor. His comments about the respondent having acted in good faith must be understood in the context of the arguments advanced before him, as well as the legal principles that he articulated.

[31] We see no basis on which to interfere with the motion judge’s determination that the appellant had failed to meet the Wilder requirements.

C. Disposition

[32] For these reasons, the appeal is dismissed, with costs payable to the respondent in the amount of $26,455.05 inclusive of disbursements and HST.

Released: December 23, 2016 (“E.E.G.”)

“Eileen E. Gillese J.A.”

“M.L. Benotto J.A.”

“L.B. Roberts J.A.”

[^1]: Although amended accounts receivable received by the respondent in June 2014 cured the March and April 2014 overdrafts. [^2]: The motion judge referred to October 6, 2014. Nothing turns on this error.