In Dhaliwal v. Gulati, [2012] O.J. No. 641, Gurbakht wanted to buy the Quality in in Orillia, a resort town one hundred miles noth of Toronto. Gurbakht asks Sundeep for $200,000 so Gurbakht can but the shares of the numbered company which owns the Quality Inn.
Sundeep said yes and lends Gurbakht $200,000.
Sundeep wanted a promissory note from Gurbakht. The promissory note said that there would be a $3500 fee for each 10-day delay after the expiry of the one-year lending period.
The judge determined (para.31) that the $3500 per ten day period translated into a 63.87 annual rate of interest which exceeded the maximum 60 percent rate permitted under the Criminal Code of Canada
The lender’s lawyer said it was a typo. The amount should have been $3000 per ten day period of non-payment meaning a permissible 56% interest per year.
Here’s the shocker: Gurbakht said (para 37): because the interest rate is 63% the entire promissory note is void and cannot be enforced!
Not surprisingly Sundeep said (para 36): No! Just reduce the rate to 5% (or even better, just reduce it to the permissible 60%).
The judge upheld the promissory note and applied a three percent interest rate (para 67).
Takeaway for creditors: when you are writing up promissory notes, the real value for the lender is not the interest but the fees, and extras which increase the effective interest rate. This raising of the effective interest rate attracts the Interest Act provisions. A lender who does not carefully write in the extension fees, and other extras will find that they are restricted to 5% under the Interest Act or less as in this case.
