ONTARIO
SUPERIOR COURT OF JUSTICE
SMALL CLAIMS COURT
BETWEEN:
MERCHANT OPPORTUNITIES FUND LIMITED PARTNERSHIP by its general partner merchant opportunities fund ltd.
Plaintiff(s)
– and –
1000489131 oNTARIO INC., sHIMA JAVAHERI & raul mauricio gomez Villarroel
Defendant(s)
Haigh, M., Paralegal for the Plaintiff(s)
Self-Represented
HEARD at Richmond Hill: April 13, 2026
REASONS FOr JUDGMENT
Deputy Judge F. Jamal Karmali
1The plaintiff is a limited partnership that provides merchant cash advances to small and mid-sized businesses which may have difficulty obtaining funding from other sources. It entered into an agreement to purchase future receivables from the defendant corporation, called Purchase and Sale for Future Receivables – Fixed Solutions and dated March 14, 2024 (the “Contract”). A guarantee was signed by the individual defendants as guarantors for the amount to be paid under the Contract, dated March 14, 2024 (the “Guarantee”).
2Future receivables are defined in the Contract as “future sales receipts and contract rights arising from or relating to future receivables of the Merchant”.
3Such agreements are commonly referred to as Merchant Cash Advance Agreements. The “Merchant” is the defendant corporation, which obtained a cash advance from the “Purchaser” (the plaintiff.)
4In this case, the plaintiff advanced $50,000.00 to the defendant corporation to purchase future receivables of $60,500.00. Payment of $1,163.47 was to be made weekly until the amount purchased had been fully paid. Although there was a process outlined in the agreement for the adjustment of the weekly payment, adjustment would only occur if the Merchant requested it within a limited timeframe and, otherwise, the amount of $1,163.47 would be charged. If the Merchant requested an adjustment, the Purchaser would reimburse or request additional funds as the “Variable Amount” and could only do so for that month (not previous months).
5A schedule was attached to the Contract which stated the “Specified Percentage” as 8.4% (“Specified Percentage”). That term was defined in the agreement as the percentage of future receivables the Purchaser is entitled to withdraw from the Merchant’s deposit account subject to variation as described in paragraph 3 above and in accordance with clause 6 of the Contract and the schedule attached to the Contract.
6Clause 6 of the Contract provides the process by which the Purchaser withdraws funds from the Merchant’s bank account, and notes that, if there are insufficient funds in the account to fund the weekly amount of $1,163.47, and administrative fee of $50.00 (or such other amount as that Purchaser may decide) will be charged for each failed withdrawal. There are other provisions which allow the Purchaser to access bank records and other bank accounts of the Merchant, and an agreement that the Purchaser waives notification of withdrawal amounts from the bank account.
7The Contract and testimony of Colin Chisholm, the plaintiff’s only witness and Chief Collection Officer for 11 years, confirmed that the weekly amount was determined by historical data, specifically the amount of deposits over the last 6 months, if those statements were provided by the Merchant to the Purchaser. There seemed to be some flexibility in advancing funds even when those bank statements were not provided, and clause 7 of the Contract provides a formula for calculating the weekly amount if bank statements are not provided by the Merchant.
8In practice, the plaintiff deducted $1,163.47 per week from March 18, 2024 to October 17, 2024. The withdrawal attempted on October 24, 2024 could not be made due to insufficient funds, and thereafter, withdrawals of $581.73 were attempted several times but bounced due to insufficient funds. Four NSF charges of $45 each were added to the account. There were no other adjustments to the amount withdrawn. When asked how the amount of $581.73 was calculated, Mr. Chisholm, stated that when Merchants experienced financial difficulties, the plaintiff would try to help them out by withdrawing, in this case, about 50% of the usual weekly amount. There was no evidence provided of any attempt to evaluate actual revenues of the Merchant.
9The Contract also provided for a monitoring fee of $500.00 per month after an event of default (defined as insufficient funds in the deposit account for 2 or more banking days, or for 2 or more banking days in a month), despite the fact that there is another provision which states that there are no fees being charged in the Contract. Mr. Chisholm testified that this was a way to motivate Merchants to maintain the weekly required amount in their account, or there would be serious consequences.
10The Contract includes a liquidated damages amount that includes the amount owing plus legal fees, the monthly monitoring fee (which increased based on the amount advanced) and other fees related to collection (the “Liquidated Damages Amount”). It is deemed in the Contract to be a genuine pre-estimate of damages, and not a penalty.
11The Contract includes a provision that it is not a loan, and also a “saving” provision that indicates that if it is construed as a loan with interest, the interest would be adjusted to ensure that it complied with s. 347 of the Criminal Code, which is the provision relating to illegal rates of interest.
12Despite provisions in the Contract indicating that disputes will be resolved by arbitration in British Columbia and that the laws of British Columbia will apply, both parties appear to have submitted to the jurisdiction of this court and neither party raised these issues.
13The guarantee was signed by both guarantors but not the plaintiff. It guaranteed the indebtedness of the defendant corporation to the plaintiff (the “Guarantee”).
ISSUES:
14The issues in this case are:
(a) Is the Contract a Merchant Cash Advance Agreement – that is, an agreement to purchase future receivables – or is it a loan?
(b) Is the Contract illegal? If not, are any of the relevant clauses unenforceable?
(c) What amount (if any) is payable to the plaintiff?
(d) Is the Guarantee enforceable?
ANALYSIS:
Issue #1: Is the Contract a Merchant Cash Advance Agreement or is it a loan?
15The distinguishing feature of a Merchant Cash Advance Agreement is that the purchaser assumes the risk of variable payments, based on the fluctuating sales receipts and receivables of the merchant, until the amount owed is satisfied. As a result, risk is shared by the purchaser and the merchant. If a merchant has less sales in a particular week, the purchaser receives less money, but if sales improve, the purchaser receives more money towards the amount purchased, as it has a right to withdraw a specified percentage of sales. Despite clauses in the Contract that suggest an adjustment mechanism to weekly payments, I find that the practice of the plaintiff was simply to charge a specified amount weekly, and in fact, it penalized the Merchant if less funds were in the account. Even the name of the Contract refers to a “fixed solution”. This practice – although stated as being for the convenience of the Merchant – shifts the risk of fluctuating sales entirely to the Merchant. It creates, in effect, a loan agreement where the borrower must pay a specified amount to the lender until the loan is paid off.
16The presence of a guarantee also supports the finding that this is a loan agreement, as does the absence of evidence supporting a practice whereby amounts are regularly adjusted based on actual revenue receipts by the Merchant. In practice, the plaintiff received a specified weekly amount for monies advanced to the defendant corporation. There was no evidence provided of any attempt to make withdrawals correspond to revenue.
17In Ural Link Ltd. V 2380210 Ontario Inc., [2022] O.J. No. 5870, Justice Akbarali raises concerns about a Merchant Cash Advance Agreement and states at paragraph 8, “[t]he contract indicates that it is not a loan, and that the funds the plaintiff is to receive under it do not include interest. I am not sure that by saying it, the parties can make it so for purposes of the criminal rate of interest provision in the Criminal Code, or for purposes of determining the legality and enforceability of agreements.”
18It is the substance of the transaction, and not its form, that should determine its nature and enforceability.
19Based on the oral testimony of both the plaintiff’s witness and the defendants’ witnesses, I find that the Contract was, in substance, a loan agreement.
Issue #2: Is the Contract illegal? If not, are any of the relevant clauses unenforceable?
20The defendant’s position was that the loan had an interest rate of 42% APR, and that this violates s. 137 of the Criminal Code, RSC 1985, c. C-46. The criminal rate of interest was significantly reduced from 60% Effective Annual Rate (EAR) – which roughly equates to 48% APR – to 35% APR, effective January 1, 2025. The new criminal rate of interest is not intended to apply to payments received under loan agreements compliant with s. 347 prior to January 1, 2025.
21Moreover, there are new regulations and exemptions that apply as of January 1, 2025, including an exemption for commercial loans between $10,000 and $500,000, for a business purpose to a non-natural person (such as a corporation) which caps the criminal rate of interest at 48% APR (approximately the same rate as applied before January 1, 2025). See Criminal Interest Rate Regulations, SOR/2024-114
22Based on the defendants’ position that the interest rate on this commercial loan for $50,000 was 42% APR, the Contract does not charge an illegal rate of interest.
23However, the Interest Act, RSC 1985, c. I-15 requires that contracts which specify payments on a daily, weekly or monthly basis must also provide the equivalent interest rate per annum. If no annual interest rate is expressed, the rate of interest shall be 5% per annum.
24I find that the Liquidated Damages Amount is not a genuine pre-estimate of damages, and is in fact a penalty and not enforceable.
25I also find that, based on the testimony of the Mr. Chisholm and the Contract, the Monitoring Fee is also a penalty and not enforceable.
Issue #3: What amounts (if any) are payable to the plaintiff?
26The fact remains that the defendant corporation received $50,000 from the plaintiff when it needed those funds. The defendant corporation is a business that, based on the defendant, Mr. Gomez Villarroel’s testimony, generated between $50,000 to $60,000 per month when it was doing well, and between $20,000 to $30,000 per month when it was facing difficulties. By his own admission, he was able to pay the amounts owing to the plaintiff corporation. It appears that he chose not to do so when he was advised that he was paying 42% APR. It would not serve the interests of justice to allow the defendants to obtain a windfall profit, when they were businesspeople who are expected to do their own due diligence when they freely enter into a contract of any kind. They were also advised to obtain independent legal advice in the Contract and Guarantee.
27In the totality of circumstances and considering documentary and oral evidence provided in this case, it would be appropriate for the plaintiff to receive the balance owing on the account, with 5% interest per annum over 1 year. The amount already paid by the defendant corporation is $36,067.57. A loan of $50,000 payable in 1 year with interest of 5% per annum amounts to $52,500.00. The balance remaining is $16,432.43, plus $180 NSF fees ($45 per transaction for 4 failed payments) which have not been disputed by the defendants and appear to be reasonable.
Issue #4: Is the Guarantee Enforceable?
28The defendants have argued that the Guarantee is not enforceable because, while it was signed by the individual defendants, it was not signed by the plaintiff.
29The Statute of Frauds, RSO 1990, c. S.19 requires that a guarantee of a debt be in writing and that the parties agreeing to be bound (held liable) by the guarantee sign the agreement. In this case, both individual defendants signed the Guarantee, and as a result, it is enforceable against them. Moreover, there was no argument made that they did not know that they were signing a guarantee, or any other basis on which the guarantee could be legally set aside. The Guarantee also included a clause that advised the guarantors to seek independent legal advice before signing the agreement. I find that the individual defendants knowingly guaranteed the debt of the defendant corporation, and the absence of a signature on behalf of the plaintiff does not render the Guarantee void.
JUDGMENT
30Judgement is granted in favour of the plaintiff. The defendants are jointly and severally liable to pay the plaintiff the amount of $16,432.43 plus $180.00 for NSF fees, for a total of $16,612.43, by May 31, 2026, failing which 5% interest per annum shall accrue on this amount as of June 1, 2026.
31An award of costs is discretionary. The plaintiff may make written submissions as to costs and disbursements payable by the defendants by May 31, 2026, failing which the amount payable by the defendants to the plaintiff for both costs and disbursements shall be $2,500.00 (representing approximately 15% of the amount awarded. This amount accounts for both costs and disbursements, taking into account the circumstances of this case and s. 29 of the Courts of Justice Act.)
DJ F. Jamal Karmali
Deputy Judge F. Jamal Karmali
Released: April 16, 2026
COURT FILE NO.: SC-25-778
ONTARIO
SUPERIOR COURT OF JUSTICE
SMALL CLAIMS COURT
MERCHANT OPPORTUNITIES FUND LIMITED PARTNERSHIP by its general partner merchant opportunities fund ltd.
Plaintiff(s)
– and –
1000489131 oNTARIO INC., sHIMA JAVAHERI & raul mauricio gomez Villarroel
Defendant(s)
REASONS FOR JUDGMENT
Deputy Judge F. Jamal Karmali
Released: April 16, 2026