Closely connected guarantor fails in bid to imply terms into a guarantee

In a recent decision of the Ontario Superior Court of Justice, the Court rejected the efforts of a guarantor closely connected to the principal borrower to: (1) import or imply additional obligations on a creditor, which contradicted the clear and unambiguous language of a guarantee, and (2) suggest that the conduct of a creditor was not in good faith and caused a principal debtor to default under its credit facilities.

In Konga¹ , Toronto-Dominion Bank (the “Creditor”) brought a motion for summary judgment pursuant to Rule 20 of the Rules of Civil Procedure against Raymond Kuate Konga (the “Guarantor”). The Guarantor had guaranteed all present and future obligations owed by Vertamin Inc. (the “Principal Debtor”) to the Creditor (the “Credit Facilities”) under an unlimited and continuing guarantee. The Creditor claimed that the Principal Debtor had breached the terms of the Credit Facilities, and simultaneously demanded repayment from the Principal Debtor and the Guarantor.

Although the Guarantor opposed the motion, he admitted to providing the guarantee as security for the Credit Facilities established for the Principal Debtor.  The Guarantor also admitted to receiving a demand for payment under the guarantee from the Creditor, that payment had not been made, and that, at the time of the demand, the Principal Debtor owed the Creditor $1,098,646.22.²

The Court granted the motion for summary judgment in favour of the Creditor and dismissed the various defences raised by the Guarantor. The Court’s determination that there was no genuine issue for trial in this case turned on two findings of fact: (1) the right to payment from the Guarantor had crystallized, and (2) the Creditor’s conduct did not entitle the Guarantor to a discharge of its obligations under the guarantee.

Regarding the crystallization of the guarantee, the Court noted that a creditor is not required to provide notice of a principal debtor’s default to the guarantor, absent a contractual provision to the contrary.  To require notice in this case made little sense: as the 91% shareholder, chief executive officer and controlling mind of the Principal Debtor, the Guarantor was well aware of the Principal Debtor’s breach under the Credit Facilities.³

Further strengthening the Creditor’s position on the crystallization issue were express provisions in the guarantee, which stated that the Guarantor was bound not only to pay all debts and liabilities, present and future, of the Principal Debtor, but also to repay the Creditor on demand. The Court found that section 11 of the guarantee explicitly enabled the Creditor to make a demand under the guarantee even if the Creditor had not yet exhausted its recourse either against the Principal Borrower or under any other security held by the Creditor in respect of the Principal Debtor’s indebtedness. The Court, therefore, held that the Guarantor’s argument—that the Creditor was required to provide notice of default to the Guarantor and a reasonable (yet undefined) time for repayment—contradicted the clear and unambiguous language of the guarantee.⁴

The evidentiary record also assisted the Creditor’s case. It showed that the Creditor notified the Principal Debtor, through the Guarantor, of its defaults on numerous occasions. The record additionally confirmed that the Creditor repeatedly warned the Guarantor that it would be demanding repayment should the Principal Debtor continue to be in default under the Credit Facilities. Despite these good faith attempts by the Creditor to resolve the Principal Debtor’s default, the Principal Debtor continued to be overdrawn on the line of credit, was in breach of the tangible net worth requirement, and refused to provide its accounts receivable listings.⁵ The Court held that all of these defaults crystallized the Creditor’s right to demand payment.⁶

As set out above, the Creditor’s good faith conduct in its dealings with both the Principal Debtor and the Guarantor improved its position when seeking to enforce the guarantee. The Court rejected the assertion that the Guarantor should be discharged of its obligations under the guarantee due to the Creditor’s conduct.⁷   Although the Creditor may be required under common law principles to provide a reasonable period of time for the Principal Debtor to arrange for alternative funding to repay the indebtedness, it was not required to do so prior to making a demand for payment from the Guarantor as well.  The principle of good faith implied in contractual dealings could not overcome the express wording of the guarantee.⁸ The Court also held that the principle of implied good faith could not impose a duty of loyalty or of disclosure on the Creditor, oblige the Creditor to give up its advantages under the guarantee, or require the Creditor to subordinate any of its interests.⁹

Konga is an important decision because it essentially reconfirms the common practice of creditors of making demand simultaneously upon both a principal debtor and a guarantor is acceptable, absent a contractual provision to the contrary, and does not offend the common law notion of reasonable demand. The case also illustrates that well-documented actions of a creditor done in good faith will always serve a creditor well in defending allegations and challenges by a guarantor under a guarantee.