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Secret Loan Guarantee Sparks Controversy in Bridging Fund Dispute: PwC Rejects $213 Million Claim

In a dramatic turn of events, the receivership proceeding of Bridging Finance Inc. (BFI), as overseen by its court-appointed receiver PricewaterhouseCoopers Inc. (PwC), now urges the court to reject Cerieco Canada Corp.’s claim to $213 million against the BFI’s flagship fund. This claim rests on a loan guarantee that was reportedly secret and improper, according to PwC. This development could have serious implications for the investors who are looking for a proper distribution of the fund.

The Disputed Claim against Bridging Income Fund LP

Cerieco Canada Corp., a subsidiary of China Machinery Engineering Corp., is seeking $213 million from the Bridging Income Fund LP. The basis of the claim is a loan guarantee purportedly provided by the Fund for a construction loan made by Cerieco to Mizrahi Commercial (The One) LP regarding a significant real estate development in Toronto (the “Mizrahi Project”). After the Mizrahi Project failed to repay the loan, Cerieco attempted to enforce the guarantee.

However, PwC, the Court-appointed receiver for the Fund, has denied Cerieco’s claim, asserting that BFI provided a loan guarantee without the knowledge or approval of the Fund or its general partner. Therefore, in the receiver’s view, the guarantee of the loan by the Fund constituted a “fraud on the fund.” The receiver’s report suggested that the guarantee had been an underhanded arrangement organized by one of the co-founders of BFI, Natasha Sharpe, who had no authority to provide such a guarantee.

PwC’s Findings

PwC’s decision is based on several findings:

• Unauthorized Guarantee: The loan guarantee was made without proper authorization, making it invalid.
• Secret Arrangement: PwC found that Sharpe arranged the guarantee in exchange for a 5% stake in the Mizrahi project, a fact that was unknown to the fund or its investors.
• No Benefit to the Fund: The Bridging fund did not receive any consideration for the guarantee; this raised further questions of improper conduct.
• Potential Fraud: PwC argued that the guarantee was a fraud on the fund, and that Cerieco either knew, or should have known, it was not properly authorized.

Cerieco’s Response

Cerieco has disputed PwC’s decision, asserting that the guarantee is a valid, binding claim. The company maintains it acted in good faith and had no reason to suspect the guarantee was unauthorized. Cerieco is appealing PwC’s recommendation, which could delay the receivership proceedings and affect the amount of money available for distribution to other investors.

Impact on Investors

The resolution of this dispute is vital to every Bridging fund investor. PwC has estimated Bridging fund investors could receive between $669 million and $763 million on account of the more than $2 billion invested in the funds. If Cerieco is successful in its claim, the distribution to other investors could be much less.

The secret loan guarantee controversy highlights the importance of transparency and proper governance in the investment management industry. The final decision by the Ontario Superior Court of Justice will determine the distribution of funds and set a precedent for handling similar disputes in the future.

Reference: Investment Executive, “Secret loan guarantee the basis of claim against Bridging fund: PwC.”