Striking Interest From a Criminal-Rate Promissory Note

The Dispute

Two acquaintances in British Columbia carried on two informal money arrangements together in 2018. In one, a lender advanced a series of loans to a business associate, each backed by a promissory note carrying a steep rate of interest. In the other, the same lender deposited funds into bank accounts the associate controlled, who withdrew the money in cash and returned it in person for a small fee. When the relationship broke down, each side disputed how much of that money had actually come back, and the matter went to trial in the Supreme Court of British Columbia.

The Parties’ Positions

The plaintiff sought repayment of the amounts he said remained outstanding under both arrangements, at the rates the promissory notes stated. He also sought recovery from the defendant’s spouse personally, on the strength of an alleged verbal guarantee.

The defendant disputed how much he still owed under each arrangement, pointing to repayments he said the plaintiff had understated. He argued the notes could not be enforced at their stated rate. That rate, he said, exceeded the maximum a lender may charge before an agreement to receive interest becomes an offence under section 347 of the Criminal Code. His spouse denied ever agreeing to guarantee anything personally. The only conversation on the subject, she said, had been with her husband, never with the plaintiff.

Both arrangements carried a further complication that was not seriously disputed by the end of trial. The cash-handling arrangement existed, at least in part, to move money in a way that concealed income from tax authorities and currency-reporting requirements. The court had to weigh that purpose before it could decide whether either agreement was enforceable at all.

The Court’s Decision

The court found that concealing income from tax and currency-reporting rules did taint the cash-handling arrangement. It declined, though, to let the defendant keep money that was never his because of it, calling that result disproportionate. It ordered him to repay an outstanding balance in the low six figures, with statutory interest running from 2018.

On the loans, the court confirmed the notes’ true annual rate, in the range of 240 percent, breached the Criminal Code’s 60 percent ceiling. Applying the Supreme Court of Canada’s four-factor test for choosing a remedy, it found no coercion between parties of equal bargaining strength. That factor would ordinarily favour reading the rate down to the legal maximum. But the lender’s own purpose in structuring the arrangement was to evade income tax. Because of that, the court declined even the reduced rate and struck the interest terms out altogether. The defendant was left liable for a remaining principal in the ninety-thousand-dollar range, plus statutory interest, and nothing more. The spouse’s alleged guarantee rested on her word against the plaintiff’s, and the claim against her was dismissed.

Key Lessons for Lenders and Borrowers

• A high interest rate does not automatically make a debt uncollectible. BC courts usually sever only the offending interest term, so a lender who did not exploit a vulnerable borrower can still recover the principal even where the stated rate breached the Criminal Code.
• A lender who structures the arrangement itself to serve an illegal purpose, such as concealing income from tax authorities, can lose the reduced legal rate as well. The remedy for a criminal rate of interest tracks why the rate was illegal, not merely that it was.
• An agreement is not automatically unenforceable just because it also served an illegal purpose. Courts ask whether refusing to enforce it would leave one wrongdoer holding money that was never theirs, a result the illegality doctrine does not require.
• An alleged personal guarantee needs more than one side’s account of a private conversation. Where the only evidence supporting a guarantee is the plaintiff’s own contested testimony, a claim against the guarantor can fail even where the principal debtor’s own liability is proven.

The outcome of this matter turned on the interest rate the notes actually carried and on the purpose the court found behind the cash arrangement. A similar dispute may resolve differently.

ATAC LAW acts for lenders and borrowers in civil and commercial litigation over informal loans, promissory notes and the interest rates they carry.

This matter was conducted by Dan H. Griffith, a partner at ATAC LAW, who acted for the defendant and his spouse at trial.