Executive Summary: Key Legal and Evidentiary Issues

• Whether the elements of civil fraud/fraudulent misrepresentation were made out against Makhija, particularly in relation to the allegedly false Personal Financial Statement and the loan application.
• Central factual dispute over authorship and authenticity of the Personal Financial Statement, including whether Makhija prepared or signed it and whether it accurately reflected his net worth and property ownership.
• Assessment of Makhija’s state of mind: did he knowingly make false representations, act recklessly, or instead reasonably believe in the legitimacy of the printing business and the loan transaction.
• Evidentiary weight of the Bank’s own affidavit evidence that it relied solely on the Personal Financial Statement—and not on other alleged misrepresentations—in deciding to advance credit and accept the guarantees.
• Appellate review of factual findings: whether the application judge ignored or misapprehended critical evidence or committed palpable and overriding error in crediting Makhija’s account.
• Adequacy of reasons: whether the application judge’s reasons sufficiently explained why fraud, including reckless misrepresentation, was not established and allowed meaningful appellate scrutiny.

Facts of the case

In 2019, Master Manoj Makhija applied for and obtained a loan and credit facilities from the Bank of Montreal (BMO) for his company, Seven Colors Entertainment Ltd. He also signed two limited personal guarantees in connection with that corporate borrowing. Seven Colors subsequently stopped repaying the loan in 2020, prompting the Bank to sue both Seven Colors and Makhija for the amounts owing. The action was undefended and the Bank obtained default judgment against Seven Colors for $356,711.24 (plus interest and costs) representing the indebtedness under the loan and credit facilities, and against Makhija personally under his guarantees for $142,500 (plus interest and costs).

After obtaining the default judgment, the Bank discovered that Makhija was not the registered owner of real property as had been represented in the Personal Financial Statement submitted in support of Seven Colors’ loan application. The Personal Financial Statement had portrayed a net worth position that included ownership of a personal residence. On the strength of this discovery, the Bank brought an application seeking a declaration that Makhija was personally liable for the full corporate indebtedness under the default judgment against Seven Colors, not merely the amount of his limited guarantees. The Bank’s theory was that Makhija had fraudulently misrepresented his net worth in the Personal Financial Statement and that these misrepresentations induced the Bank to extend credit to Seven Colors and to accept him as guarantor. The Bank also alleged that he falsely represented that the loan proceeds would be used to finance the start-up of a printing business that in reality did not exist.

In his responding affidavit, Makhija presented a markedly different narrative. He asserted that he had been duped by two fraudsters, individuals introduced to him by a coworker at the mattress store where he worked. According to Makhija, these individuals proposed that he lend his name and assistance in applying for financing to establish a printing business, which they represented they would set up and manage. In exchange, he would receive a share of the profits. Makhija denied drafting or signing the Personal Financial Statement and stated that he was pressured to submit the loan application documentation without carefully reviewing that document. He maintained that he believed the printing business would be real and legitimate, based on multiple interactions with the fraudsters, including meetings at their home where the business plans were described.

After the Bank agreed to provide the loan and credit facilities to Seven Colors, the fraudsters obtained access to the corporate bank accounts. Makhija said that they then absconded with the borrowed funds, leaving him with nothing and the company without any genuine operations. He nevertheless insisted that he had believed the business was bona fide at the time, and that he did not intend to deceive the Bank.

Proceedings before the application judge

The Bank’s application sought to enlarge Makhija’s personal exposure beyond his existing limited guarantees, essentially re-characterising him as personally responsible for the corporation’s entire indebtedness on the basis of civil fraud. The Bank pleaded civil fraud and fraudulent misrepresentation, relying particularly on the allegedly false Personal Financial Statement concerning his net worth and property ownership. It also advanced claims under s. 241 of the Canada Business Corporations Act and s. 178(1)(e) of the Bankruptcy and Insolvency Act, but those additional statutory claims were dismissed, and the Bank did not pursue them on appeal.

The application judge correctly set out the elements of the tort of civil fraud (fraudulent misrepresentation), adopting the four-part test from Bruno Appliance and Furniture, Inc. v. Hryniak. Those elements required: (1) a false representation by the defendant; (2) knowledge of the falsehood or recklessness as to truth; (3) causation—i.e., that the false representation induced the plaintiff to act; and (4) resulting loss. He also specifically recognized that fraudulent misrepresentation encompasses “reckless misrepresentation” where a representation is made without caring whether it is true or false, drawing on authorities such as Precision Drilling and CIBC v. Deloitte & Touche.

On the central factual controversy surrounding the Personal Financial Statement, the application judge found that the signature on that document did not belong to Makhija and that he had not prepared it. This meant that the Bank’s key alleged misrepresentation—the inflated net worth and misdescribed real estate ownership—could not straightforwardly be traced to Makhija as author or signatory. The judge then examined whether, even so, Makhija might be liable on a recklessness theory in relation to the overall loan application.

The judge accepted Makhija’s evidence that he believed the information in the loan application was truthful and that he thought the loan was being used to finance a genuine printing business. He emphasized that Makhija had met the fraudsters multiple times, understood that Seven Colors had been incorporated, and understood that a lease had been entered into for business premises. After the loan advanced, Makhija received a tour of a facility where he saw printing equipment and supplies, even though there were no workers present at the time. On this record, the judge concluded that there was a reasonable basis for Makhija’s belief that the loan and business were bona fide and that he was not reckless in proceeding.

Crucially, the judge also addressed the reliance element of fraud. The Bank’s own affiant, Jeffrey Kilpatrick, swore that it was the information in the Personal Financial Statement—particularly with respect to Makhija’s net worth and ownership and value of his residence—that the Bank relied upon when deciding to extend credit to Seven Colors and to accept Makhija as guarantor. The judge noted that Mr. Kilpatrick did not say the Bank relied on any other representations by Makhija in the loan application. In other words, reliance was confined to the Personal Financial Statement, not to broader oral or documentary representations. Given his findings that Makhija did not prepare or sign that Statement and that he believed the loan transaction was legitimate, the judge held that the Bank had not proven civil fraud.

On that basis, the application judge dismissed the Bank’s civil fraud claim against Makhija and refused the requested declaration that he was personally liable for the full amount of the corporate default judgment. The underlying default judgments (against Seven Colors and for the guaranteed amount against Makhija) remained, but the Bank did not obtain the expanded fraud-based remedy it had sought.

The appeal to the Court of Appeal for Ontario

BMO appealed to the Court of Appeal for Ontario, arguing that the application judge had misapplied the legal test for civil fraud, ignored or misapprehended material evidence, and provided reasons inadequate to permit meaningful appellate review. Specifically, the Bank contended that the judge had failed to properly address the theory that Makhija acted recklessly and that he could still be responsible for inaccurate information in the Personal Financial Statement even if he did not personally sign it. The Bank also invoked case law such as Turbo Logistics and Buccilli to suggest that reliance and responsibility could be inferred from the overall circumstances, including the broader loan documentation and dealings.

The Court of Appeal rejected these arguments. It held that the application judge had correctly identified and applied the governing test for civil fraud, including the reckless misrepresentation pathway. The appellate court noted that the judge expressly considered whether Makhija had been reckless in the context of the loan transaction, not only in relation to the Personal Financial Statement, and concluded that Makhija had a reasonable, good-faith belief in the legitimacy of the business and the financing.

On the Bank’s evidentiary challenge, the Court of Appeal emphasized that the Bank’s own witness, Mr. Kilpatrick, testified that he relied solely on the Personal Financial Statement in making the loan decision, rather than on the other loan documents or alleged oral representations. All of the financial misstatements were contained in that document, which, on the factual findings, had been materially fabricated but not by Makhija. The other loan documents that Makhija did sign did not directly reference the Personal Financial Statement. In these circumstances, the court agreed with the application judge that the Bank’s evidence was “seriously wanting” and that Makhija’s carelessness in trusting the fraudsters and failing to scrutinize documents did not amount to fraud or actionable recklessness.

Regarding the alleged misapprehension of evidence, the Court of Appeal underscored that it was not its role to re-try the case or to reweigh the evidence. Factual determinations about whether Makhija had fraudulent intent or acted recklessly are subject to the palpable and overriding error standard. On the record, the application judge’s acceptance of Makhija’s account—that he believed the reassurances of the fraudsters, that he thought the proposed printing business was real, and that he did not understand the information presented to the Bank to be untruthful at the time—was fully open to him. The appellate court found no palpable and overriding error.

On the adequacy of reasons ground, the Court of Appeal summarized the framework from its recent decision in National Steel Car and found it satisfied here. The application judge had reviewed the evidence in detail, summarized the parties’ arguments, and explained how he reached his conclusion that Makhija neither prepared nor signed the Personal Financial Statement and reasonably believed the financing related to a legitimate business purpose. The reasons were found to be functionally adequate: they allowed the parties and the appellate court to understand why the Bank’s fraud claim failed and permitted meaningful appellate review.

Discussion of policy terms or contractual clauses

This case arose out of a commercial loan and related personal guarantees, not an insurance policy. The appellate reasons focus on civil fraud, misrepresentation, reliance, and the loan application process, rather than on specific insurance policy terms or detailed contractual clauses. The decision does not set out or analyze particular policy wording or clause-by-clause provisions in the loan or guarantee documents; instead, it treats those instruments primarily as the background to the Bank’s tort claim for fraudulent misrepresentation. Accordingly, while the existence of loan documents and personal guarantees is central, there is no substantive discussion of discrete “policy terms” or specific contractual clauses at issue in the way one might see in an insurance coverage or policy-interpretation dispute.

Ruling and overall outcome

The Court of Appeal concluded that the application judge correctly applied the law of civil fraud, made factual findings that were open to him on the evidence, and provided reasons that met the standard of adequacy. It held that Makhija did not make the false misrepresentations in the Personal Financial Statement, that he reasonably believed the information provided to the Bank in the context of the loan application was truthful, and that these were the only misrepresentations on which the Bank relied when extending credit to Seven Colors. Given those findings, the Bank’s civil fraud claim and its attempt to expand Makhija’s personal liability beyond his limited guarantees could not succeed.

As a result, the appeal was dismissed. The successful party on the appeal was the respondent, Master Manoj Makhija. The Court of Appeal ordered that he receive all-inclusive costs of $22,000, and there was no additional damages or monetary award beyond this costs order in his favour. The precise quantum of any other costs or amounts at the application level is not specified in this appellate decision, but at the appellate level the total monetary amount ordered in favour of the successful party was $22,000 in all-inclusive costs, with no further recoveries identified.