Supreme Court Of Canada Rules On Criminal Interest Rates

In our January 2003 Corporate Finance Bulletin ("January 2003 Bulletin"), based on the Ontario Court of Appeal ("OCA") decision in Transport North America Express Inc. v. New Solutions Financial Corp. ("Transport 1"), we reported that Ontario Courts would no longer read down interest provisions of credit agreements to comply with interest rate limitations in the Criminal Code of Canada (the "Code"). On February 12, 2004, the Supreme Court of Canada ("SCC") overturned the Transport 1 decision.

Under Section 347 of the Code, the maximum legal interest rate, defined to include a broad range of fees and expenses charged under a loan, is 60%. The main issue in Transport 1 was the appropriate judicial treatment of credit agreements in which the agreed upon rate of interest exceeds the criminal limit, but which are otherwise unobjectionable. In Transport 1, the OCA favoured the "Blue Pencil" technique over that of "notional severance" applied