Canada: Equity Kickers And The Criminal Rate Of Interest: Part II

Private equity and alternate lenders often take a basket of rights when investing in an entity. The basket may include equity, options, warrants and/or debt. In the case of debt financing, lenders often negotiate equity sweeteners/kickers in the form of options or warrants to increase their possible return, in addition to receiving interest on a loan. Lenders should be aware that in such cases there is a risk that the gains with respect to such equity received could be considered "interest" and trigger a criminal interest rate. Recent cases have materially reduced that risk, however, courts have been careful to characterize the decisions as fact-specific, leaving the door open for such sweeteners/kickers to fall within the criminal interest rate provisions.

Section 347 of the Criminal Code (Canada) defines a criminal rate as an effective annual rate of interest exceeding 60 percent. Interest by definition means "the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any form, paid or payable for the advancing of credit under an agreement or arrangement by or on behalf of the person to whom the credit is or is to be advanced." Put simply, a criminal interest rate can be triggered in two ways. First, by entering into an arrangement or agreement to receive interest at a criminal rate. Second, by receiving payment of interest at a criminal rate. The latter creates a "wait and see" approach. In other words, the concern is that if equity sweeteners granted by the borrower in a loan transaction are considered to be "interest", the transaction could run afoul of the 60 percent criminal interest rate at a later date, when the sweeteners become more valuable. Canadian courts have rarely addressed the question of whether shares, warrants, options or other equity issued by a borrower in support of a loan can constitute 'interest' within the meaning of section 347 of the Criminal Code (Canada).

In May 2017, Bennett Jones published a blog on the decision in Bimman v Neiman, 2015 ONSC 2313 [Bimman] where the Ontario Superior Court considered the ancillary issue of equity sweeteners granted by a company to its shareholders. In that case, a company could not secure third- party financing, therefore it issued shares to its shareholders in response to two cash calls. The plaintiff was a shareholder who had not participated in the cash calls and who argued that the issuance of shares by the company in response to cash calls engaged the section 347 criminal interest provision. The argument was rejected by the trial judge and was not pursued on appeal.

On October 26, 2018, the Supreme Court of British Columbia released its decision in Cirius Messaging Inc. v Epstein Enterprises Inc, 2018 BCSC 1859 [Cirius]. In this case, the Court found that the criminal interest rate did not extend to equity (in the form of shares or warrants) granted by borrowers in connection with an arm's length loan transaction. The trial judge in Cirius acknowledged the judgment in Bimman as helpful for his application of section 347, though not binding. As opposed to Bimman where the lenders were shareholders of the borrowing company, in Cirius, equity sweeteners were granted in the context of an arm's length loan transaction where the borrower later challenged the legality of the transaction.

The Supreme Court of British Columbia: Issuance of Shares and Warrants in Support of a Loan

In Cirius, the borrower was a start-up technology company that entered into a convertible loan agreement with the lender which provided that, under certain conditions, the principal amount of the loan may be converted into shares of the borrower. The borrower and the lender also entered into an ancillary services agreement (ASA) under which warrants to purchase shares at $0.01 per share were granted to the lender.

The borrower argued that the ASA was a sham and the warrants were issued on account of the loans made by the lender. In addition, the borrower argued that if the ASA was a sham, the warrants and/or conversion rights under the loan constituted a "charge or expense" that was "paid or payable" by or on behalf of the borrower, bringing them within the definition of interest in section 347 of the Criminal Code. The trial judge found that the ASA did not represent the parties' true intentions and as such was a "sham or fiction" and was actually an inducement for the loan. However, the trial judge concluded that the converted shares and warrants granted under the loan agreement did not constitute "interest" under section 347.

In reaching his conclusion, the judge focused on the definition of "interest" in section 347 which provides that "interest" means all charges and expenses paid or payable, by or on behalf of a borrower, for the advancing of credit.

A. Charges and Expenses

As the terms "charges" and "expenses" are not defined in the Criminal Code, the judge considered dictionary definitions and concluded that "charges and expenses" imply an obligation to repay a debt. The judge further considered the term "debt" to mean "an obligation to pay a sum certain or a sum readily reducible to a certainty" (i.e., a fixed or specific payment). This level of certainty and precision required in the calculation under section 347 was found to be inconsistent with the valuation of shares or warrants, which remains inherently uncertain. Given that the equity interests in the form of shares and warrants cannot be calculated or determined with precision, the judge determined they could not amount to "interest" in the criminal context.

B. By or on Behalf of the Borrower

The converted shares and warrants were also found not to be an expense that was paid or payable by or on behalf of the borrower, on the basis that the issuance of shares was found not to be an expense of the company; therefore, it was not paid by the borrower. Rather, it was characterized as affecting the capital investment of shareholders in the corporation. Further, the shareholders did not incur an expense on behalf of the corporation because they "are not personally liable for the ensuing financial obligations of a company."

Implications for Corporate Lenders

The decisions in Bimman and Cirius should provide comfort for arm's length lenders who are receiving equity interests related to the advance of loans. Lenders should, however, remain cautious. While the decisions in Bimman and Cirius provide useful precedents, both decisions are fact dependent. It was noted by the trial judge in that valuation was difficult due to the fact that the loan had been repaid and the warrants were still outstanding, which may not always be the case. In fact, the trial judge specifically noted that the door was still open for equity to be considered as "interest" in other circumstances: "it may be, for example, [...] that the payment of a specified number of shares in a publicly traded company, in exchange for a lender advancing credit, constitutes 'interest' under s. 347."

The full implications of section 347 remain to be determined. However, a pending legislative amendment to the Criminal Code, if passed, will change the landscape. Bill S-237, currently at third reading in the Senate, will provide an exemption to the criminal rate of interest for loans for commercial or business purposes in excess of $1,000,000. While business and commercial loans under that amount would still be captured, if the amendment is passed, it would provide comfort for lenders of larger business and commercial loans. In addition, the Bill also provides for an additional criminal interest rate for credit advanced in other cases. The Bill has been slow moving (it was first put forth in 2017) so it is unknown when, or if, this amendment will be passed by the Senate at which time it will also need to be passed by Parliament.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions