Epiq Systems, Inc.
Corporate

Decision on personal guarantee a warning to credit bidders

Credit bidders will have to pay close attention to the wording of purchase agreements and guarantees after Ontario’s top court reduced the amount a company president owed from US$3 million to just US$250,000, says Toronto corporate and commercial lawyer Marlin Horst.

The defendant in the case provided a personal guarantee for corporate indebtedness, limited at $3 million, as part of a financing agreement with a bank. When the company’s debt was purchased by the plaintiff — a distressed debt lender — the guarantee was part of the deal.  

After the company defaulted on its loans, the lender ultimately purchased its assets with a credit bid worth $34 million, $3 million less than the $37 million the defendant was owed by the company.

A motion judge ordered the former president to pay the full difference plus interest due to the guarantee, but a unanimous panel of Ontario’s Court of Appeal overturned the decision and reduced his liability to $250,000.  

The court ruled that there was no evidence that $2.75-million worth of facility and forbearance fees, which were specifically excluded from the guarantee, had been included in the extinguished portion of the debt.

“The debt was treated as a whole; there was no issue of allocation,” the judges noted in their decision. As a result, they reduced the defendant’s liability under the guarantee to $250,000.

“Going forward, any creditor in this type of situation will want to make it very clear what their bid is paying off,” says Horst, a partner with the Toronto office of Shibley Righton LLP, who was not involved in the matter and comments generally.

“If it was clear that the offer was meant to go first towards fees, it would have made it more difficult for a court to rule in favour of the defendant,” he adds.  

Horst says the open nature of the credit bid and the particular wording of the guarantee left the appeal court with room to find that the motion judge had erred in his original decision.  

According to the appeal court ruling, the defendant saw the company’s interest rates hiked after the plaintiff bought its debt and blamed it for the difficulty he faced in servicing debts.

The former president also suspected the defendant “was engaging in a ‘loan to own’ strategy by which it consumed the equity value of the Company’s business through debt and fees with a view to ultimately owning the company,” the decision states.

“It’s one of those cases where the court seems more focused on finding a fair result, as opposed to a very technically correct legal result,” Horst says.

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