Going into business with friends can seem like an attractive, comfortable and relatively easy way to start a new business or receive funding for a business idea without pursuing traditional means of financing. However, regardless of the strength and length of the relationship between the entrepreneurial parties, it is always a best practice to ensure that a comprehensive contract is in place outlining terms of expectations and obligations between parties, particularly when it comes to the transfer of funds and loans. A contract can be particularly important in the event that a business does not work out or the recipient of the loan becomes unwilling or unable to pay it back.

In a recent decision from the Court of King’s Bench of Alberta, the plaintiff provided the defendant, who he knew personally, with a loan. However, the plaintiff later alleged that the loan was made to the corporation and he was, therefore, not personally liable for its repayment. This made it difficult for the lender to collect payment, which resulted in litigation between the parties.

Private loan is made from lender’s personal funds

There were a number of issues not in dispute leading up to the hearing in the matter of Rayner v Mizier. On January 21, 2013, the plaintiff personally provided a bank draft to the defendant in the amount of $200,000. The loan funds came from the plaintiff’s late husband’s life insurance policy.

After receiving the loan, the defendant deposited the funds into his personal bank account. The parties agreed that the money was being provided as a loan and not a gift. There was interest attached to the loan at a rate of 12% annually, with interest to be paid on the 21st of each month so long as there was still a principal balance, which could be paid off entirely at any time.

Plaintiff demands repayment from defendant

The parties proceeded without issue for 27 months, up until June 21, 2017, during which time the defendant was making monthly payments of $1,000 to the plaintiff. The payments did not come from his personal bank account, but were instead paid for from a proprietorship account he owned. In November 2016, the defendant told the plaintiff he was planning to sell his matrimonial home and intended to start paying back the loan’s principal. However, only three payments were subsequently made following to the plaintiff, at which point she demanded repayment.

When the loan was not repaid, the plaintiff sued the defendant personally. However, the defendant claimed that the parties’ promissory note for the loan listed his corporation as the borrower, and not himself personally. The defendant claimed that he did not have sufficient funds to pay back the balance of the loan because it was made to a corporation of which he was the shareholder, director, and controller of. However, the company had gone defunct and the defendant claimed to have no bank records from it.

Court examines ‘personal’ and ‘corporate’ promissory notes

There were two promissory notes provided to the Court, dated December 21, 2013 and January 21, 2013, respectively. The January 2013 note was made on the day which the loan was issued. The defendant asserted that while the bank draft with the loan funds was delivered to him personally, this was a mistake. The ‘personal note’ was apparently signed by both parties, however, the plaintiff stated that the date was wrong, and denied that it was his signature on the note.

The ‘corporate note’ which listed the company as the borrower was signed only by the defendant. Each party provided an expert report, however, the Court preferred the plaintiff’s expert report which suggested that both notes were made on the same computer using the same software. However, there was no evidence to suggest when the notes were prepared.

Court finds signature on ‘personal’ note belonged to the defendant

Both expert witnesses also provided opinions in regard to the signature that the defendant claimed was not his. The plaintiff’s expert report suggested that the signature belonged to the defendant, while the defendant’s expert report opined it did not. The Court preferred the opinion of the plaintiff’s expert, who compared the signature on the note to those on the cheques that were used for the interest payments. The Court indicated that it preferred this conclusion because it relied on more comparisons, and matched with the conclusion that the notes were both made on the same computer. The Court also stated that it would have been very difficult for the plaintiff to forge the defendant’s signature, like the defendant had suggested.

The Court then asked whether the corporate note was sufficient evidence, which led to a question of credibility as only the defendant had signed it. The Court found that the weight of evidence heavily favoured the plaintiff, and acknowledged that even if the corporation was the intended borrower of the loan, the ‘personal’ note and the repayments suggested the defendant was the borrower even if he did not intend to be.

Defendant ordered to repay loan

The Court stated that even if the corporation was found to be the borrower, the defendant would then benefit from unjust enrichment, writing that:

“The plaintiff has made out a strong prima facie restitutionary claim for unjust enrichment. There is plainly a benefit to the defendant, either directly or indirectly. There is a detriment to the plaintiff as she is out the funds. The question is whether there is a juristic reason for the defendant’s retention of the benefit.”

As such, the Court found in favour of the plaintiff and ordered the defendant to repay the remaining principal of the loan as well as interest of 12% per annum, less the interest paid to the date of judgment.

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