Case information

Commercial law — Royalty purchase agreement — Buyout — Criminal rate of interest — Whether the definition of interest in s. 347 of the Criminal Code captures contractual payment terms agreed by commercial parties that do not provide for a fixed amount, but instead requires a valuation or appraisal — Whether a contractual provision limiting a payment to the maximum allowed by law displaces the common law rule that s. 347 does not apply to voluntary payment — Whether a contract for royalty payments with a repurchase right determined by the future net equity value of a business is a debt transaction subject to s. 347 of the Criminal Code — Criminal Code, R.S.C. 1985, c. C-46, s. 347.

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The respondent Hybrid Financial Ltd. carries on business as a sales and distribution company involved in the provision of capital market services, investor relations, asset management and shareholder services. The applicant Flow Capital Corp. provides growth capital for companies in North America and the United Kingdom. In 2017, Hybrid was indebted to a bank and the debt was secured by the personal guarantee of Hybrid’s CEO. In search for alternative financing to pay off the bank loan and not require a personal guarantee, Hybrid’s CEO approached Flow. Flow agreed to provide $750,000 to Hybrid and in exchange, Flow acquired rights to receive payments in return, subject to a buyout option exercisable by Hybrid. Hybrid was obliged to make a minimum monthly payment described as a royalty. Flow did not acquire any shares in Hybrid, nor did it receive a right to play a role in the governance of Hybrid. The buyout option gave Hybrid the right to end the obligation to make monthly payments once Hybrid had made payments totalling at least $750,000. The option required Hybrid to pay the greater of $1,500,000 or 5 per cent of Hybrid’s net equity value. Unless it exercised the buyout option, Hybrid was required to make the stipulated monthly payments in perpetuity. The agreement included a maximum permitted rate clause stipulating that Flow could not receive a payment at a rate prohibited by law.

In June 2020, Hybrid gave notice of its intention to exercise the buyout option. At the time, Hybrid had paid $828,205.34 in monthly payments, thus satisfying the condition precedent of the option. The parties jointly retained an independent evaluator to conduct a valuation of Hybrid’s net equity. The evaluator estimated Hybrid’s net equity value to be approximately $75,500,000. Using the 5 per cent net equity valuation stipulated in the agreement, the cost of exercising the option to terminate the monthly payments would be $3,775,000. Hybrid disputed this valuation and claimed the net value of the company was under $30,000,000. In November 2020, for the first time, Hybrid asserted its claim that the agreement resulted in a criminal rate of interest and was in violation of s. 347 of the Criminal Code, R.S.C. 1985, c. C-46. Flow brought its own application for an order declaring Hybrid in default under the agreement and requiring Hybrid to pay the buyout amount.

The application judge dismissed Hybrid’s application and granted the relief sought by Flow. The Court of Appeal set aside the application judge’s dismissal of Hybrid’s application and remitted the matter to the Superior Court to determine the buyout amount which was to be determined by application of the maximum rate clause in the agreement.