The Officer's Certificate and the Directors Resolution are often viewed as formalities in corporate loan transactions that attract very little time or attention. However, a recent Ontario case confirms the importance for lenders to routinely obtain these corporate authority fundamentals.
In Wallerstein1, Business Development Bank of Canada ("BDC") was able to rely upon these documents when the validity of a loan transaction was contested by a minority shareholder for non-compliance with a unanimous shareholders agreement (the "USA").
The plaintiff in Wallerstein was a minority shareholder of 2161375 Ontario Inc. ("216"), to which BDC had extended loans and taken a general security agreement to secure the repayment of those loans. She sought a declaration setting aside any loan liability of 216 to BDC on the basis that she had not authorized the transaction, and a further declaration that the other shareholders were wholly responsible for any liability to BDC on the loan.2 BDC then moved for a order dismissing the action against it, and the Ontario Court of Justice granted that order.
216 had been incorporated to own a commercial building, and the USA had been entered into between its four shareholders.3 The specific terms of the USA were not disclosed in the judgment, but it appears that there was some form of non-compliance with its express terms. However, the evidence showed that the existence of the USA had not been disclosed to BDC.4 Moreover, BDC had actually received both an executed directors resolution and an officer's certificate from the president of 216 confirming that 216 had all necessary corporate power to obtain the loan and to grant the security, and that there was no provision in any USA which had the effect of restricting the powers of the directors with respect to borrowing and granting security.
Applying the indoor management rule, the Court held that BDC was justified in relying upon the officer's certificate and directors resolution in believing that the president was authorized to sign the loan agreement and the general security agreement on behalf of 216.5 In reviewing the evidence, the Court concluded that BDC had no indication of any improper conduct on the part of the president, and thus no basis existed for setting aside 216's liability for the BDC loans.6
This litigation might have been avoided if a legal opinion as to the borrower's corporate authority had been obtained from borrower's counsel at the time the loan was established. The law firm providing the opinion would have undertaken some due diligence enquiries, which would in all likelihood have uncovered the existence of the USA, and then that firm would have ensured that the terms of the USA were complied with. However, in those cases where a legal opinion has not been obtained for any reason, it is good to see a recent confirmation of a lender's ability to rely upon the indoor management rule in appropriate circumstances where the lender has no indication of any improper conduct on the part of the borrower.
Footnotes
1 Wallerstein v. 2161375 Ontario Inc., 2013 ONSC 976 ["Wallerstein"].
2 The plaintiff made her application approximately three years after the loan was made. The Court did not comment on the reason for the delay in challenging its validity, nor did it draw any inference from the delay.
3 Wallerstein at paragraph 7.
4 The Court indicated that the plaintiff filed no evidence to contest BDC's evidence on this point. [Wallerstein at paragraph 13].
5 Wallerstein at paragraph 19.
6 The Court also held that the plaintiff technically had no standing to assert a claim against BDC as she had not sought or obtained leave to commence a derivative action on behalf of 216. [Wallerstein at paragraph 16].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
