Creditor Successfully Uses Oppression Remedy In Informal Loan Arrangements

Most secured lenders have the benefit of a full slate of negative covenants in their formal loan and security documents to restrict the actions of their borrower that might jeopardize the borrower's ability to repay the loan. Thus, there is seldom any need for them to resort to the oppression remedy (typically a tool available to shareholders) as a method to recover a loan. A recent decision of the Ontario Superior Court of Justice has confirmed however that the oppression remedy will be available to creditors with informal loan arrangements lacking negative covenants in certain circumstances to reverse actions taken by a borrower that would impair its ability to repay the loan.

In Hayat1, the creditor had advanced funds to a corporation controlled by the debtor, a friend and business associate, but became increasingly concerned that the corporate funds were being diverted for the personal benefit of the debtor (a suspicion that turned out to be true). The relationship between the parties worsened and the creditor commenced an...