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Facts of the case
In 2018, five individuals came together to acquire a property and operate a gas station business in Nova Scotia. To do so, they incorporated 3317552 Nova Scotia Limited (331) on May 24, 2018. The original shareholders were Yao Chen (40 shares), Yichun Jin (20 shares), Xi Kang (20 shares), and Chun Liu (20 shares). Mr Chen held 20 of his 40 shares on trust for a fifth participant, Johnny Yang, with the knowledge of the others. The initial share subscription was straightforward: fully paid, non-assessable common shares were issued at $1 per share, giving the company a total stated share capital of $100. Non-assessable status meant there was no obligation on the shareholders to contribute additional capital beyond the subscription price. All shareholders acquired their shares in this same manner. The corporate records reflected this minimal equity structure from the start.
Shortly after incorporation, on May 25, 2018, Mr Yang sent a text message to the other shareholders referring to their initial investment and recommending a “loan agreement” to protect those funds. He was particularly concerned about ensuring that funds advanced by the shareholders would have priority over an anticipated debt from a fuel supplier that 331 hoped to secure in connection with opening a gas station. No one in the group responded to dispute the characterisation of the funds as loans. Despite Mr Yang’s suggestion, no formal loan agreement was ever drafted or executed.
The intended gas station never materialised. Instead, 331 used the advanced funds to purchase the property and operate a convenience store, which it continues to run. Between May 28 and September 14, 2018, the shareholders collectively advanced $500,000 to the company. Initially, each shareholder deposited $80,000 on May 28, 2018, with further contributions of $20,000 each between May 28 and September 14, 2018 as additional funds were deemed necessary for operations. These contributions did not result in any change to the number of issued shares or in the stated share value. Throughout, the share capital remained recorded at $100.
From an accounting perspective, the advances were consistently treated as debt rather than equity. In the general ledger of 331, maintained by an employee and overseen by Mr Kang, the deposits were recorded under the heading “Loans from Shareholders.” The “Common Shares” account, by contrast, carried a value of $1 (matching the subscribed total equity of $100). This treatment remained stable over time. 331 also engaged an external firm, Golden Touch Accounting Services Inc., to prepare unaudited year-end financial statements in accordance with Canadian generally accepted accounting principles. For each fiscal year from 2019 to 2024, these financial statements reported “owner’s equity” as $1 and classified the shareholder deposits as “due to shareholders,” with a note stating that the “amounts due to shareholders are non-interest bearing with no fixed terms of repayment.” During this period, the amount due to shareholders decreased from $462,000 at year-end 2019 to $358,000 at year-end 2024, indicating some repayment of shareholder advances while Mr Kang was the sole director.
In the background, there were also changes in beneficial ownership among the original participants and their associates. On February 14, 2019, Mr Chen transferred 20 shares (the block he had held on behalf of Mr Yang) to Mr Kang. Mr Chen did not receive any money for this transfer. Instead, Mr Kang paid Mr Yang directly. No valuation of 331 or its shares was done at that time; the parties simply used the amount of Mr Yang’s original cash contribution as the purchase price, reinforcing the idea that their equity position was fixed by their $1-per-share subscriptions and that the larger cash inputs were something else—either loans or informal capital, depending on one’s characterisation.
Later, on October 5, 2022, further share transfers took place. Mr Liu sold 20 shares to Ms Yujin Xin (Mr Kang’s spouse) for $80,000, and Mr Jin also sold 20 shares to Ms Xin for $80,000. Following these transfers, Ms Xin and Mr Kang together held 80 shares of 331 and Mr Chen retained 20 shares. These later share purchase agreements were expressly prepared against the backdrop of the dispute with Mr Chen and were ultimately treated by the court as evidence of the subjective views of those parties at that later time, rather than objective proof of the nature of the 2018 deposits.
The emergence of the dispute
The relationship between Mr Chen and the company began to break down over the treatment of his advances. In May 2019, Mr Chen requested repayment of what he regarded as his shareholder loan. By that point, he had advanced not only the $100,000 in initial contributions (consistent with the other shareholders), but also an additional $21,647.46 to assist 331 with various expenses. The company made a partial repayment of $8,000 on this latter sum, leaving a net additional advance of $13,647.46 outstanding.
The parties’ positions hardened over time. On June 20, 2022, 331 definitively refused to return any of the money Mr Chen had advanced. Mr Chen then commenced litigation. The proceeding was originally filed as an action on July 6, 2022, and 331 filed a defence and counterclaim on August 31, 2022. The counterclaim was subsequently dismissed by consent. By consent order filed June 25, 2025, the action was converted into an Application in Court, which then proceeded to a hearing.
Mr Chen’s core claim was that the initial $100,000 he advanced was a shareholder loan repayable within a reasonable time, which he said would have been 18 months. Given that he first requested payment in May 2019, he contended that interest at 5% per annum should run from December 1, 2020 (18 months after his demand) to the date of payment. He also claimed that the remaining $13,647.81 (rounded form of the net balance) from his later advances was a shareholder loan due and payable. The respondent company, 331, admitted that the $13,647.81 was indeed a shareholder loan and that it was payable. However, it disputed the character of the $100,000. On the company’s argument, this amount was an equity investment—capital put at risk in the business and therefore not repayable as a debt.
Evidentiary concerns and remote affidavits
A significant procedural and evidentiary dimension to the case involved two affidavits filed by the respondent, purportedly sworn by Chun Liu and Yichun Jin. These affidavits were, on their face, sworn remotely by respondent’s counsel over Microsoft Teams. Counsel was in Dartmouth, Nova Scotia, while the affiants were said to be in Shanghai, China. The affidavits did not state the residence of the affiants and it was unclear from the face of the documents whether the affiants had personally signed them. No prior permission was obtained from the court for this mode of attestation.
During the hearing, the judge raised concerns about the legality and propriety of this remote commissioning. The court reminded counsel that, apart from special pandemic-era measures, there is no Civil Procedure Rule or provision in the Nova Scotia Evidence Act authorising remote attestation of affidavits as a matter of course. The temporary procedures adopted during the COVID-19 pandemic had been discontinued. Counsel candidly acknowledged adopting the earlier pandemic practice based on perceived necessity, given the witnesses’ presence in China, and admitted they had not considered whether they needed consent from the other side or permission from the court for this procedure.
It also emerged that Mr Liu’s affidavit had been prepared with translation assistance from the major shareholder and director of 331—effectively a highly interested party—during the Teams conference. The affidavit did not disclose that a translator had been used, and counsel admitted they had not spoken directly with Mr Liu before drafting the affidavit, instead relying on notes in the file. These factors raised serious questions about both the reliability and independence of the evidence.
Although the judge ultimately allowed the affidavits into evidence, this was done reluctantly and largely because the applicant consented. The court made clear that this practice is not permitted under the Evidence Act or the Rules, is disfavoured, and in future should be allowed only in exceptional circumstances, upon reasonable notice and with advance permission from the hearing judge. Likewise, the court stressed that having witnesses testify by video is not a matter of counsel’s unilateral choice; it is an exceptional measure requiring prior judicial authorisation on notice to opposing parties. During cross-examination, the problems with Mr Liu’s affidavit became so apparent that the respondent withdrew it. The judge concluded that the overall approach taken by the respondent in obtaining and attempting to present these affidavits fell below the standard of practice expected of counsel.
Legal framework and key issues
Substantively, the dispute turned on a single central issue: whether the $100,000 advanced by Mr Chen in 2018 was a shareholder loan or an equity contribution. The parties agreed on the governing legal principles. In the absence of a formal written agreement specifying the terms of the advance, the court had to determine the parties’ intentions as a question of fact, guided by well-established principles of contractual interpretation.
The decision draws on authorities such as Sattva Capital Corp. v. Creston Moly Corp. and Jorna & Craig Inc. v. Chiasson. These cases emphasise that contractual interpretation involves examining the factual matrix or objective surrounding circumstances, rather than the subjective intentions of the parties. The goal is to interpret the arrangement in a manner consistent with sound commercial principles and to avoid commercial absurdity. Extrinsic evidence may be used where ambiguity exists. In the specific context of shareholder advances, the court also relied on Broer v. Multiguide GmbH, a British Columbia Court of Appeal decision confirming that where no formal agreement exists, it is appropriate to look at the surrounding circumstances and subsequent conduct—including corporate and accounting records—to determine whether advances are loans or capital contributions.
The court noted that the absence of a written loan agreement, interest rate, or fixed maturity date does not compel the conclusion that monies advanced are equity rather than debt. 331 itself had admitted that the additional $13,647.81 advanced by Mr Chen was a shareholder loan, even though it was equally undocumented and lacked explicit interest or maturity terms. That admission undercut any suggestion that formal loan documentation was a necessary condition to treat shareholder advances as loans.
The Articles of Association and the Nova Scotia Companies Act also played an important role. The Articles of 331 permitted capital increases only through the issuance of additional shares, subject to shareholder ratification. Articles 50 to 54A governed such increases. Article 70 authorised the directors to borrow money on the company’s behalf but did not empower them to increase share capital by other means. The respondent argued for a broad reading of Article 70 that would allow the directors to “raise money” other than by borrowing and without issuing new shares. The court rejected this interpretation as effectively rendering Articles 50 to 54A meaningless and inconsistent with the Companies Act, which grants directors specific, limited powers. On the court’s view, any genuine capital increase had to occur through issuing further shares pursuant to the Articles, which never happened.
Assessment of the evidence
In determining the true nature of the $100,000, the court placed primary emphasis on objective documentary and accounting evidence rather than after-the-fact assertions. Several factors were considered particularly persuasive.
First, the share structure at incorporation remained simple and nominal: total capital of $100 divided into 100 common shares at $1 each, with each of the five participants allocated 20 shares (Mr Chen holding 20 on behalf of Mr Yang). No additional shares were ever issued, and in cross-examination Mr Kang, as sole director, agreed that the company’s records were accurate. This supported the conclusion that the larger sums advanced in 2018 were not additional equity subscriptions.
Second, the May 25, 2018 text from Mr Yang recommending a “loan agreement” to protect the initial investments and ensure priority over a potential fuel company loan was treated as an important contemporaneous indicator of the parties’ understanding. There was no contemporaneous dissent from that characterisation. While Mr Jin claimed not to have seen the text, Mr Chen, Mr Kang, and Mr Yang all indicated that it was a group message among all shareholders. On this and other disputed points, the judge preferred Mr Chen’s evidence over that of Mr Jin where uncorroborated.
Third, the consistent classification of the advances in 331’s own general ledger and annual financial statements strongly supported the loan characterisation. The ledger, from the outset, recorded the deposits under “Loan from Shareholders.” The externally prepared financial statements from 2019 through 2024 described the amounts as “due to shareholders,” with an explicit note that they were non-interest bearing with no fixed repayment terms, and kept “owner’s equity” at $1. Mr Kang, who oversaw the bookkeeping and received the annual accounts, never instructed the accountants to reclassify the deposits. He also allowed the reported amount “due to shareholders” to decrease over time as repayments were made. Given his duties as a director under the Companies Act—including a duty to report any significant error in the financial statements—the absence of any correction or reclassification was telling.
Fourth, the court found parallels between this case and Broer v. Multiguide GmbH, where corporate financial statements labelling contributions as “Loan from shareholders” were held to reflect the clear agreement of the shareholders at a time before any dispute surfaced. Here too, the accounting treatment began well before any litigation and remained consistent over several years.
By contrast, the share purchase agreements executed in October 2022—where Ms Xin bought shares from Mr Liu and Mr Jin—were prepared in the shadow of the dispute and were viewed as having limited probative force. They were treated as evidence only of the subjective intentions of those particular parties at that time, not as reliable indicators of the purpose of the 2018 deposits. The court stressed that the absence of a shareholders’ agreement or other formal document defining the deposits was not, in itself, probative of whether the funds were loans or equity; rather, the pattern of treatment in corporate and accounting records and the Articles governed.
Outcome and relief granted
In light of the documentary and contextual evidence, the court held on a balance of probabilities that the $100,000 advanced by Mr Chen in 2018 was a shareholder loan, not an equity contribution. This finding aligned with the minimal recorded share capital, the text message describing the funds as loans to be protected by a loan agreement, the long-standing treatment of the advances as “Loans from Shareholders” and “amounts due to shareholders,” and the structure of the Articles and Companies Act permitting capital increases only through the issuance of additional shares. The court reaffirmed that the absence of formal loan documentation, interest, or maturity date did not defeat the loan characterisation when all objective indicators pointed the other way.
The admitted loan of $13,647.81 was treated together with the $100,000. The court concluded that the total of $113,647.81 represented shareholder loans made by Mr Chen that were due and payable by 331. The judge ordered that this full amount be repaid to Mr Chen and held that simple interest at 5% per annum would accrue on the total sum from December 1, 2020 (18 months after his repayment demand) until the date of payment. The decision did not specify the precise dollar amount of interest because it depends on when payment is actually made.
On the question of costs, the court did not set a fixed figure in the judgment. Instead, it directed that if the parties could not agree on costs, they might file written submissions (limited to 10 double-spaced pages) within three weeks, after which the court would decide. As of the decision itself, therefore, no specific monetary amount for costs had been determined.
In the result, the court found in favour of the applicant, Yao Chen, and ordered 3317552 Nova Scotia Limited to pay him a total principal sum of $113,647.81, together with simple interest at 5% from December 1, 2020 until payment, while the exact amount of any costs award remained undetermined at the time of judgment.
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Applicant
Respondent
Court
Supreme Court of Nova ScotiaCase Number
Hfx No. 516202Practice Area
Corporate & commercial lawAmount
$ 113,647Winner
ApplicantTrial Start Date