Protecting your Small Business from CSBF Loan fraud and legal pitfalls

Key Insights from the Bank of Montreal v 1886758 Ontario Inc Decision.

Introduction

If your business is considering or has received a loan under the Canada Small Business Financing Loan (CSBFL) program, understanding the legal landscape is essential. The 2022 Ontario Superior Court decision in Bank of Montreal v. 1886758 Ontario Inc. (Rejuv Medical) offers crucial lessons for small businesses about the risks of misrepresentation, the serious consequences of fraud, and how courts protect both lenders and the integrity of government-backed programs1.

Background: The CSBFL Loan and the Fraud

In this case, Rejuv Medical and its director secured a $350,000 CSBFL loan, along with other credit facilities, by claiming the funds would be used to buy medical equipment for their clinic. However, the business never purchased the equipment, and the supporting invoice was fabricated. The funds were diverted to unrelated accounts, and no legitimate business activity took place.

Why This Matters for Small Businesses

1. Transparency Is Critical

When applying for a CSBFL loan, your business must use the funds for the stated, eligible purposes and provide accurate documentation. False statements or fabricated documents, even if intended to “help” the application – constitute fraud and can have severe legal and financial consequences.

2. Consequences of Fraudulent Misrepresentation

The court found that the defendants’ actions were organized fraud, exploiting a government program designed to help small businesses. 

The result: a judgment for the full amount owed, plus significant punitive damages and costs. The court awarded:

• $442,723.36 (plus interest) in compensatory damages
• $150,000 in punitive damages to punish and deter misconduct
• Over $20,000 in legal costs
• Orders for accounting, disgorgement, and tracing of funds

This sends a clear message: courts will not tolerate abuse of CSBFL loans or similar programs.

3. CSBFL Loans Are Not a Shield Against Liability

If a loan is obtained through fraud, the debt may not be discharged in bankruptcy. The court declared the debt arose from fraudulent misrepresentation, meaning it could survive bankruptcy proceedings under section 178 of the Bankruptcy and Insolvency Act.

4. Legal Remedies Go Beyond Repayment

The court granted additional remedies to help the lender recover funds, including tracing orders and constructive trusts. This means that if misappropriated funds can be identified in other accounts or assets, the lender can claim them – even if they have changed hands1.

What Small Businesses Should Do

• Be Honest and Accurate: Always provide truthful information and documentation when applying for CSBFL loans or any other financing.
• Use Funds Appropriately: Only use loan proceeds for the purposes outlined in your application and as allowed by the CSBFL program.
• Maintain Good Records: Keep detailed records of how loan funds are spent. This can protect your business if questions arise later.
• Seek Legal Advice: If you are unsure about eligibility, documentation, or use of funds, consult a legal professional experienced in CSBFL loans.

Conclusion

The Bank of Montreal v. 1886758 Ontario Inc. case is a powerful reminder that integrity and transparency are essential when dealing with government-backed small business loans. Fraudulent conduct can lead to devastating financial and legal consequences, including personal liability for directors and the loss of bankruptcy protection for the debt. Small businesses should view the CSBFL program as a valuable resource – one that must be respected and used responsibly.

If you have questions about CSBFL loans, compliance, or best practices, our law firm can assist and guide your business through the process.

Attention: This article is for informational purposes only and does not constitute legal advice

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