The Importance Of Documenting Shareholder Loans (Ontario)

Shareholders often overlook the need to properly document loan advances in their haste to provide funds to the company, without being aware of the significant consequences that can result. One such consequence arises from the provisions of the BIA¹ which operate to allow the trustee in bankruptcy to reject proofs of claim where advances have not been properly documented or are structured in a manner that makes the advances appear like an equity injection. A recent Québec Court of Appeal decision addressed the potential pitfall arising from Section 139 of the BIA in the circumstances of undocumented shareholder loans.

In Doorcorp Installations², the court examined the decision of a trustee to disallow a proof of claim tendered by Ballylickey Investments Inc. (Ballylickey), the sole shareholder of the bankrupt Doorcorp Installations Inc. (Doorcorp). Ballylickey had made advances to Doorcorp between 2006 and 2007 in a total amount of $1,762,500 and had submitted a proof