In a recent decision, the Quebec Court of Appeal upheld a judgment rendered by the Quebec Superior Court (the Honourable Martin F. Sheehan), in which the Court concluded that the obligation of the shareholders of the debtor company CanEst Transit Inc. to reinvest in the company in order to maintain certain financial ratios cannot amount to a guarantee giving rise to a claim after the cessation of the debtor company’s operations and its placement under receivership.
Factual Background
The debtor company CanEst Transit Inc. (“CanEst”) operated in the cleaning, storage, and containerization of grain products at the Port of Montréal.
Its operations were financed by the Fédération des caisses Desjardins du Québec (“Desjardins”) pursuant to a credit agreement. This credit agreement notably required CanEst to maintain certain financial ratios and required the shareholders to reinvest in CanEst in order to maintain those ratios.
The clause of the credit agreement providing for this obligation of the shareholders read as follows:
10.4.2 As long as any amount remains unpaid or the Borrower has the right to borrow hereunder, the shareholders of the Borrower undertake to:
a) Cure any default with respect to the financial ratios through capital contributions, within 30 days of the notice of default issued to the Borrower… [Unofficial translation]
Following financial difficulties, CanEst informed Desjardins that it would no longer be able to meet its obligations under the credit agreement.
In the months that followed, Desjardins, by way of notices of default and demand letters, summoned the shareholders of CanEst to perform their obligation to reinvest in the company in order to maintain the agreed financial ratios.
Following the shareholders’ refusal and the placement of CanEst under receivership by Desjardins, the court-appointed receiver brought an action against the shareholders seeking recovery of those amounts.
Decision of the Quebec Superior Court
The Quebec Superior Court dismissed the receiver’s claim.
The trial judge based the analysis on the principles governing the interpretation of contracts.
He first concluded that, when read in light of the agreement as a whole, the clause providing for the obligation of the shareholders to reinvest in the company became ambiguous and therefore required interpretation.1 The trial judge then considered the parties’ intention, the usage of financial ratios, and the interpretation given to the clause by the parties themselves.
The Court found that the shareholders had always refused to formally act as guarantors of CanEst’s obligations and that it was very important to them not to be held liable beyond their capital investment. In light of this information and the wording of other provisions of the credit agreement, the Court concluded that the parties’ intention was that the shareholders would not guarantee CanEst’s obligations.2
The Court then discussed the use lenders make of financial ratios in their industry, explaining that ratios are a dynamic tool used by lenders throughout the life of a loan to conduct an initial credit assessment, to continuously monitor the company’s financial situation, and to assist the lender’s decision-making. In doing so, the trial judge distinguished the concept of a guarantee from the obligation of shareholders to ensure compliance with financial ratios.
Finally, the Court considered that nearly three years had elapsed between the first demand for investment made to the shareholders (in the context of renewing the credit agreement) and the commencement of proceedings,3 and such conduct supported the view that the parties did not consider the shareholders’ undertaking to be equivalent to a guarantee.
Decision of the Quebec Court of Appeal
The Quebec Court of Appeal upheld the decision and, for the most part, the reasons of Justice Sheehan.
It agreed that the obligation of the shareholders to maintain certain financial ratios is intended to allow the lender to monitor the financial health of the debtor and thereby decide whether to continue providing funds or, conversely, to cease advancing funds, call the loan, and enforce its security.4 It therefore concluded that this obligation does not allow a lender to create a disguised guarantee by requiring shareholders to invest additional sums that would serve only to repay the loan and not to continue the debtor’s operations.
However, the Court of Appeal emphasized that the trial judge erred in relying on industry usage in interpreting the clause in question, as the necessary evidence demonstrating such usage had not been made. It nevertheless indicated that this error was not determinative, as the trial judge could have arrived at the same conclusion regarding the intended use of the clause by performing an analysis of the credit agreement itself.5
The CanEst decisions are consistent with the decision of Banque Royale du Canada c. Lavoie6, in which the Superior Court rejected a lender’s application for forced surrender of a single-family home. A hypothec on the home had been granted to the lender when the individual obtained a hypothecary loan and line of credit, stating that it secured all the obligations of an individual to the lender. The lender argued that the hypothec therefore secured the individual’s obligations as guarantor under a commercial credit agreement executed five years later. In rejecting the lender’s argument, the Court concluded that the parties never intended the hypothec to secure the commercial loan, and that the lender’s recent interpretation was not consistent with its previous position in the file.
Conclusion
These decisions illustrate how contractual obligations that are subject to interpretation must be interpreted in light of all of the relevant circumstances. Courts will exercise caution when assessing an alleged guarantee, particularly where the interpretation advanced by the lender has the effect of creating obligations that the parties had not intended.
1 Mise sous séquestre de Canest Transit inc., 2024 QCCS 79, para.68.
2 Id. para.76.
3 Id. para. 105.
4 Mise sous séquestre de Canest Transit inc., 2025 QCCA 1644, para.46-48.
5 Id. para. 41.
6 Banque Royale du Canada c. Lavoie, 2022 QCCS 4876.