Loan Rate EquityInterest rate Equity
This latter provides a waits and see attitude and was sometimes a cause for worry when equity was provided in the context of a loan operation (often termed an equity player or equity sweetener). It is often feared that the value of this equity capital at the end of the repayment term, if it is regarded as "interest" in accordance with 347, leads to an interest rate of over 60 per cent.
Whilst business leaders and senior management do not have to deal too much with reporting crimes, this rule has been used by the borrower to challenge a loan contract (or part of it) as not enforceable and has provided a foundation for contesting the original deal. Justice Gans of the Ontario Superior Court published his ruling in Bimman v. Neiman,6 in 2015, narrowing the scope of Section 347 to equity football.
It was a shareholder suppression request in relation to complaints by the respondents (mainly in relation to bank notes and the grant of a mortgage), which also required the reimbursement of sums under a shareholders' arrangement. Whilst this was only a side matter in the courts, Justice Gans examined in particular whether any of the securities granted to the defending shareholder as a consequence of their loan to the firm were covered by the interest rate definitions.
Recognizing the initial intent of Article 347 to suspend lending, Justice Gans noted that operations such as those in this case - shareholders' loan in return for or in connection with the issue of stock - were not the kind that Parliament sought to outlaw. It was not Justice Gans' belief that the stock was a "charge or issue" as these concepts are used in the legal interest rate definitions.
In particular, it noted that although costs may be incurred in connection with the issue of fractional value ordinary share capital, these costs are actually covered by the Company's stockholders and, moreover, the issue of ordinary share capital is not a fee "paid or payable" by the company and therefore does not come under the interest rate definitions; the ordinary share capital was not repurchasable at the discretion of the stockholders, the share capital was not obliged to repurchase it in the near term, and it did not provide a right to receive payments in the near term.
Yet, Justice Goose was wary to state that he did not determine whether proportions were categorically justified by Section 347 and that each case must be adjudicated on its own specific facts. Furthermore, it found that neither the stockholders nor the corporation attacked the stockholder loan as an infringement of Section 347, which may lend less importance to its findings than a case in which the borrowers question the legitimacy of the loan business.
Nevertheless, his statement, which removes the issuing of equities from the interest defined in 347, should still offer some convenience to those making and obtaining equity in a credit operation. Even though this particular question was not a point of debate before the appellate tribunal, the fact that the content of Justice Gans's ruling was confirmed by the tribunal on a unanimous basis should add further force to the ruling.
Although the exposure to 347 for equity players and similar deals has not disappeared entirely, it seems to have decreased.