The Supreme Court of British Columbia (Court) has clarified the potential application of Canada’s prohibition against charging criminal interest to arm’s-length commercial lending transactions that include mechanisms to capitalize on the borrower’s future growth through equity “sweeteners” or “kickers.”

In its October 26, 2018 decision in Cirius Messaging Inc. v. Epstein Enterprises Inc., the Court held that the criminal interest rate provision found in section 347 of the Criminal Code did not apply to a lending arrangement involving the issuance of warrants and debt-to-equity conversion rights.

Blakes represented Epstein Enterprises Inc. in its successful defence of the plaintiff’s claim.


Section 347 was enacted nearly 40 years ago and has been considered approximately 350 times in the commercial context, but despite this, little relevant judicial authority has addressed the question, “could the issuance of equity interests to a lender as consideration for a loan violate the Criminal Code?”

The uncertainty around this question has been particularly problematic for high-risk start-up companies and similarly situated borrowers who often have no choice but to obtain debt financing that includes an equity component for the lender.


The borrower (Borrower) in this case was a start-up technology company that entered into a financing arrangement that involved the granting and subsequent exercise of debt-to-equity conversion rights (Conversion Shares) and the issuance of warrants (Warrants) of C$0.01 per share in consideration for a loan.

After the debt-to-equity conversion rights had been exercised by the lender (Lender), the Borrower took the position that the granting of the Conversion Shares and issuance of Warrants constituted “interest” received by the Lender, and commenced legal proceedings to invalidate the Warrants.

The Borrower argued that the financing arrangement infringed both branches of section 347 because:

  • It constituted an agreement that provided for an effective annual interest rate in excess of 60 per cent; and
  • In obtaining and exercising the Conversion Shares and obtaining the Warrants (which had not been exercised as of the date of trial), the Lender had received a payment of “interest” at a rate exceeding 60 per cent. The Court dismissed the Borrower’s arguments about the application of section 347 to the Conversion Shares and Warrants. With respect to the terms “charges or expenses,” the Court held that the use of these terms suggests that the definition of interest in section 347 refers to either a fixed amount or an amount that can be calculated with precision. The Court based its conclusion on an interpretation of the structure of section 347 as a whole and, in particular, the requirement that a party invoking section 347 must be able to calculate the effective rate of interest. According to the Court, an interpretation of section 347 that requires a court to determine the “value” of an equity interest before any “calculation” can be undertaken is inconsistent with the structure of section 347 and, more importantly, would be impossible in the criminal context.
  • The Court’s decision turned on the elements of the definition of “interest” set out in section 347: a charge or expense that is paid or payable by, or on behalf of, a borrower for the advancement of credit.


The Court further held that an independent difficulty with applying section 347 to equity interests follows from straightforward principles of corporate law.

  • First, the Court held that the issuance of shares by a company from treasury is not an expense paid or payable by that company. Rather, such transactions, if they take place for inadequate consideration, affect the shareholders whose shares are diluted, and not the borrower whose interests section 347 is intended to protect. In this transaction, the Borrower did not pay any funds to the Lender from its revenues, or otherwise, in connection with the equity interests.

Second, the Court held that there was “no principled basis upon which to say that shareholders incur an ‘expense’ ‘on behalf of’ a company when that company issues shares or warrants in connection with its borrowings.”

Finally, with respect to the Warrants, the Court emphasized that these equity interests could not be interest within the meaning of section 347, because they had not been exercised, might never be exercised and, after the conversion of the loan into shares, were held by an entity that was no longer a creditor of the Borrower.


This is the first Canadian decision that directly addresses the application of section 347 to arm’s-length lending transactions involving the issuance of equity interests. The decision provides significant comfort to investors and lenders providing credit to high-risk borrowers who may not have the ability to offer any security or inducement for the advancement of credit beyond equity sweeteners.

The Court was careful to state that it was only addressing the application of section 347 to equity interests in the context of the specific parties and the specific agreements before it. The Court specifically cautioned that it was not clear that equity can never constitute interest under section 347. In particular, the Court noted, without deciding, that the payment of a specified number of shares in a publicly traded company, in exchange for a lender advancing credit, may constitute interest under section 347. While this hypothetical remains to be addressed another day, this decision provides a framework that can be applied when assessing the risks associated with receiving equity-related consideration in commercial lending transactions.