in the Port Capital (EV) Inc. (Re), 2022 BCSC 370,1 The British Columbia Supreme Court recently declined to make a statement that the interest rate and fees charged under a debtor loan (DIP) did not violate Section 347 of the criminal code. The decision highlights that DIP lenders, particularly those involved in processing short-term loans, should exercise due diligence to ensure that interest and other fees associated with a loan do not trigger the criminal threshold because a court failed to provide a precautionary measure This respect will give comfort.
The criminal interest rate
§ 347 of criminal code makes it a criminal offense for a lender to enter into a contract with an APR greater than 60 percent or to receive an interest payment. Interest, for the purpose of criminal codecontains all charges are payable by the debtor to obtain the loan, regardless of how the parties have characterized those fees. Although this provision was originally intended to deter loan sharks, the breadth of this provision has provided a basis for borrowers to attack payments owed under commercial loan agreements. It should be noted that certain payday lenders, pursuant to Section 347.1 of the criminal code Regulations and nationally regulated.
Application for DIP loan
DIP financing describes a situation where an insolvent company (i.e. the debtor) remains in possession of its affairs in a restructuring process and obtains additional financing from a current creditor or a third party. The risk of lending to an insolvent company often allows DIP lenders to charge higher fees and interest rates. Therefore, incidental fees and other borrowing costs to be paid by borrowers could theoretically result in the final interest rate charged or paid inadvertently exceeding the criminal interest threshold.
The decision in Port Capital
Concerns about such a risk are confirmed by the application for declaratory judgment in port capital. Port Capital, the owner of a proposed real estate development, commenced CCAA bankruptcy proceedings in May 2020. It then applied for an increase in the amount of its DIP loan from its lender, Domain Mortgage Corp. The additional funding was approved by Judge Fitzpatrick, despite his “onerous” conditions. In response to that motion, Port Capital also sought a determination that the terms of the additional loan did not violate the criminal interest rate in Section 347 of the Federal Code criminal code. The loan bore an interest rate of 24 percent and required the payment of various loan fees, mortgage brokerage fees and fundraising fees. The lender provided a table showing that the “total annualized rate of return” is 52.45 percent. Both the amount paid out and the final term of the loan can affect the calculation of the effective interest rate received.
However, Judge Fitzpatrick declined to grant the declaratory judgment for two reasons:
- First, because the loan had not yet been drawn and the question of what interest rate would arise was largely speculative, the declaratory judgment sought “referred to a potentially contentious matter or speculative scenario.”
- Second, the court recognized that the parties had obtained extensive legal advice on this issue and turned its attention to the question of whether the funding exceeds the criminal interest rate. While this is an expected and prudent course of action, “it is not the role of this court to subvert the legal opinions of corporate actors who intend to act a particular way in the business community.”
Implications for commercial lenders
port capital stresses the importance of corporate lenders exercising due diligence when interest and other charges on a loan could reach the 60 percent criminal interest threshold. While CCAA proceedings are court-supervised and therefore often offer a degree of comfort to the parties involved, as the transactions will be court-approved, this decision underscores that DIP lenders do not rely on that comfort on the issue of encumbrance or encumbrance can receive a criminal interest rate. By its own calculations, the numerous fees on Port Capital’s DIP loan ultimately resulted in an annualized interest rate of 52.45 percent – an increase of 28.45 percent from the advertised rate of 24 percent. In order to prevent DIP loans from inadvertently exceeding the criminal interest threshold, it is important that the parties allow for the inclusion of costs and charges outside of the stated interest rate in the calculation of interest for the purposes of Section 347 of the criminal code.
1 Bennett Jones LLP acted as legal counsel for the petitioners, Port Capital Development (EV) Inc. and Evergreen House Development Limited Partnership.