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With the increased sophistication of financial markets and financial instruments, the use of hybrid investments has been on the rise in recent decades. This article considers the question of how Canadian courts have drawn the border between debt and equity in the context of bankruptcy proceedings. The basic argument is that Canadian courts should allow the recent reforms to bring about their intended clarity on the border between debt and equity by not departing from the bright line test set out in the legislation. The article compares the pre and post-amendment case law and uses two case studies to illustrate the undue complexity that has been created by layering a contextual analysis on top of the new bright line tests. Simply put, in the context of investment classification decisions for the purposes of bankruptcy proceedings, Canadian courts should limit the scope of their analysis to an inquiry of whether the investment in question falls within the scope of the "equity claim" definition provided under Canadian bankruptcy legislation. Only then can bankruptcy costs be limited and can we come closer to a model assumed by the Modiglani-Miller Theorem.

Debt or Equity? A Puzzle for Canadian Bankruptcy Law