Case information

Financial institutions – Banks – Contracts – Commercial contracts – Loans Applicants and respondent entering into loan agreement containing clause for “bonus payment – - Whether respondent may extract a discretionary “bonus” sum on loan.

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(SEALING ORDER) (COURT FILE CONTAINS INFORMATION THAT IS NOT AVAILABLE FOR INSPECTION BY THE PUBLIC)

Alterinvest II Fund L.P. (“ALP”) established the Business Development Bank of Canada (“BDC”), to provide financing to small and medium sized businesses in Canada. The applicant, Phoenix Interactive Design Inc. (“Phoenix”), sought such financing. It was in the business of developing, distributing, and supporting automated teller machine and bank branch automation software. Ms. MacDonald was its president and chief executive officer. She was also the principal of the respondent, 1932780 Ontario Inc. (“193”), which was formed in March 2015 when number of predecessor companies were amalgamated as part of a restructuring.

In November 2010, ALP/BDC offered Phoenix and 193’s predecessors (the “Borrowers”) a loan for $2.25 million with a November 23, 2015 maturity date. The parties agreed that ALP/BDC would be paid a bonus of one per cent of the net proceeds of sale, after transaction costs, if any of the Borrowers were sold prior to the maturity date of the loan. The loan agreement also precluded a sale or reorganization of any of the Borrowers without ALP/BDC’s consent.

In the fall of 2014, Diebold Inc. (“Diebold”) approached Phoenix regarding a possible purchase of the company. Ms. MacDonald met with ALP/BDC to advise that Phoenix was not willing to pay the bonus under the loan agreement because that fee would be disproportionate to the amount outstanding on the loan. In March 2015, Phoenix prepaid the full amount that was outstanding under the loan agreement for principal, fees, and royalties. That amount did not include any sum on account of the bonus.

Prior to the closing of the stock purchase transaction with Diebold, 193’s predecessor companies amalgamated to achieve tax efficiency. A $55.125 million certified debt was created as an intellectual property sale between the Borrowers’ related companies. On March 13, 2015, Diebold bought Phoenix for $92.5 million. The $55.125 million of debt formed part of the purchase price and was repaid by Diebold.

ALP/BDC and Phoenix were unable to agree on the amount of the bonus payable to ALP. ALP/BDC commenced an application against the Phoenix parties seeking information on the sale price, and a declaration that the bonus was payable. The Phoenix parties then commenced an application for a declaration that the bonus provision contravened the criminal rate of interest in s. 347 of the Criminal Code, was unconscionable and was ultra vires the statutory objects of BDC. The application judge deducted the $55.125 million debt amount from the purchase price, and after other deductions, ordered Phoenix to pay a bonus of $242,552.79. The Court of Appeal allowed the respondents’ appeal and increased the amount of the bonus to be paid by Phoenix to $793,800.48, a calculation that included the disputed $55.125 million.