Jason Bryk 

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Application of the Criminal Rate of Interest Rule to "Royalty" Payments

August 2003


Section 347 of The Criminal Code of Canada, which prohibits contracting for or collecting interest on a debt in excess of sixty percent per annum, defines “interest” so broadly that it includes payment by the debtor to its creditor of amounts which are not normally considered to be interest.  The recent British Columbia Court of Appeal case Boyd v International Utility Structures Inc. (the “Boyd Case”) judgment, August 1, 2002, is a case in which “interest” under the legislation was held to include payments made by the debtor based on the debtor’s level of production and sales utilizing technology where the technology was acquired using the proceeds of the creditor’s loan.

            In 1991, the creditor loaned about $50,000.00 to the debtor which the debtor used to acquire the technology it needed to manufacture utility poles.  The debtor agreed to pay its creditor interest at a rate of thirty percent per annum, repay the loan in four months, and also pay the creditor a royalty of $2.00 for every pole manufactured and sold using the technology.  The loan was repaid with interest at thirty percent per annum in approximately six months, the stipulated royalties were paid for the years 1994, 1995 and 1996, but thereafter, the debtor refused to pay any further royalties and resisted the creditor’s claim on the basis that the arrangement provided for interest in excess of the sixty percent per annum criminal rate.

            It is interesting to note that each party had separate knowledgeable counsel and it would appear that each party, in particular the debtor, fully understood the price it was going to have to pay to obtain the loan.  The debtor company was in desperate need of the loan and it appears that only the creditor was prepared to advance it.  The creditor had originally asked to obtain shares in the debtor as well as being able to make the loan at thirty percent per annum but was told that no shares were available.  The loan was documented by a loan agreement and the royalty arrangement was documented by a separate royalty agreement.

            These facts would argue for the creditor being able to legally get its loan interest plus the royalty payments, but the Court held that the arrangement contravened Section 347.  Notwithstanding that the debtor’s obligation to pay the royalty payments was dependent upon future and thus unknown production levels, the Court held that such payments were to be made as part of the consideration for the making of the loan, and thus had to be included in “interest” in determining whether or not Section 347 was applicable.

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