INTEREST, INSOLVENCY AND PRAIRIE FARM DEBT: AN HISTORICAL ANALYSIS OF REFERENCE AS TO THE VALIDITY OF SECTION 6 OF THE FARM SECURITY ACT, 1944 (SASKATCHEWAN).

• Author: Torrie, Virginia

1. INTRODUCTION

   The Great Depression of the 1930s had a profound effect on the livelihood of farmers, particularly in Canada's prairie provinces. In response to falling prices and increasing debt, the federal government passed the Farmers' Creditors Arrangement Act (FCAA) to provide relief for farmers facing insolvency. (1) In order to address local farm debt issues and political pressure, Saskatchewan passed the Farm Security Act, 1944 (FSA). (2) However, Saskatchewan's FSA came at a time when prairie provinces were overreaching their constitutional jurisdiction to deal with rising debt, and the FSA was no exception. In the year prior to the enactment of the FSA, Alberta's Debt Adjustment Act, 1937 was declared ultra vires by the Privy Council. (3) Saskatchewan had a similar Debt Adjustment Act, which was rendered unconstitutional by implication of the Alberta reference decision. (4) Therefore, the Saskatchewan Liberal government moved quickly to replace the province's Debt Adjustment Act with new, constitutionally valid statutes. The FSA, while enacted by the new Co-operative Commonwealth Federation government, continued the line of providing support for farmers and other debtors and similarly ended up having its validity challenged. In particular, the validity of section 6 of the FSA was referred to the Supreme Court of Canada (SCC) in 1946. Unlike other provincial debt adjustment legislation of the time, many of which were found invalid as encroaching on the federal government's jurisdiction over bankruptcy and insolvency, section 6 of the FSA was found ultra vires as legislation in relation to interest, another area of federal jurisdiction.

   This article takes a critical look at the Reference as to the validity of Section 6 of the Farm Security Act, 1944 of Saskatchewan ["FSA Reference"). (5) It will trace the historical context of the FSA and the reference, as well as the attempts at provincial legislative reform that preceded them. Next, it will outline the arguments made at the Supreme Court and at the subsequent appeal to the Judicial Committee of the Privy Council. Tracing the evolution of these arguments is important for understanding the contemporary significance and conception of these legal issues, and helps clarify what was at stake, both practically and legally. Finally, this article will consider the aftermath of the reference and its historical legacy. The issues and themes raised in this case relate closely with aspects of farm business as well as issues around restructuring modern small and medium-sized enterprises (SMEs). (6) While the FSA had little contemporary economic impact, its legacy can be found in the contribution of the FSA Reference to the body of jurisprudence on the scope of the federal power over interest and in its influence on Saskatchewan's future attempts to address farm security in the 1980s. In particular, the FSA Reference further demarcated the division between provincial and federal jurisdiction relating to farm debt that was set out in the Reference re legislative jurisdiction of Parliament of Canada to enact the Farmers' Creditors Arrangement Act, 1934, as amended by the Farmers' Creditors Arrangement Act Amendment Act, 1935 ["FCAA Reference"), (7) with federal authority being over bankruptcy and interest, and the provinces being able to legislate on judicial procedure and secured lending.

2. FARM INSECURITY, AND THE FEDERAL AND PROVINCIAL RESPONSES

   1. THE FARM DEBT CRISIS

      The Great Depression caused severe economic hardship in Canada. Dependent on exports, Canada's economy was especially vulnerable to the fluctuations of the global market. (8) The collapse of prices and demand for staple products had left many Canadians unemployed and desperate. (9) The problem was acute for farmers on the prairies as crop values had been decreasing throughout the early 1930s. As noted by William Allen, while he was the head of the University of Saskatchewan's Department of Farm Management:

      [t]he Saskatchewan wheat crop of 1928 was valued at 247 million dollars which was about equal to the average value of the five crops from 1924 to 1928. Since 1928 the total values of [Saskatchewan's] wheat crops have declined tremendously. The 1929 wheat crop had about two thirds of the value of that of 1928; the 1930 crop, two fifths; the small crop of 1931, one fifth; the 1932 crop one quarter; the crop of 1933, the lowest average yield per acre on record for Saskatchewan, one fifth; and that of 1934, the smallest total yield since 1920, one quarter. (10) Figure 1 depicts the decrease in the total cash income from Saskatchewan's wheat crop from 1928 to 1934. This decrease in value was compounded with the fact that in the late 1920s good yields and high prices allowed farmers to take on additional debt and expand, due to the ease of securing credit. Until 1900, land prices in the prairies had been low, but the arrival of the railroads led to land speculation by non-farmers, which drove up prices. Thus, to expand farmers needed to purchase increasingly overvalued land and did so with credit. (12) The increased debt load meant that when prices collapsed many farmers were unable to make their payments. In fact, from 1930-1935, the interest alone would have taken nearly two thirds of the wheat available for sale, and most of the rest would have been consumed by taxes. (13)

      Due to the high number of farmers in the prairie provinces, farm debt became an important political issue. (14) With each passing year of drought and low prices, the issue of farm debt became more pressing, and the prairie legislatures came under pressure to provide legislative relief to farmers by protecting farms from debt enforcement efforts. (15)

   2. FARMERS' CREDITORS ARRANGEMENT ACT

      Under threat of Saskatchewan enacting robust debt moratorium legislation to address the farm debt crisis, Prime Minister Bennett announced that his government would enact federal debt adjustment legislation. (16) The FCAA, which was intended to be more moderate than Saskatchewan's proposed bill, came into force in 1934. (17) Bennett announced that the FCAA was one of his New Deal statutes, which were a series of statutes that purported to usher in a new social and economic order, but ultimately only effected fairly modest changes. (18) The Act created a process for farmers to make compromises with their creditors in order to avoid bankruptcy. Under the FCAA, a farmer could apply to a local Official Receiver, who would work with the farmer to develop a compromise proposal. If the farmer's creditors consented to the proposal, it would be submitted to the court for approval. If the creditors did not consent, the farmer could apply to the Board of Review, which could create a compulsory proposal. Most of these proposals involved some reduction of the farmer's debt and an extended period of repayment. (19)

      From the perspective of the prairie provinces, the FCAA was not as effective as they wanted and needed. In 1936, total agricultural debt in Saskatchewan amounted to $450 million, but debt reductions through federal and provincial schemes had only amounted to $6.2 million. (20)

      In 1935 the FCAA was amended such that the Act did not apply to any debt created after May 1, 1935 without the consent of the creditors. (21) In 1938 the Act was amended again to provide that by December 1939, no new proposals could be received in any province other than Alberta and Saskatchewan. (22)

   3. PROVINCIAL ATTEMPTS AT INTERVENTION

      In response to the prairie farm debt crisis, the provinces had enacted their own legislation to deal with the situation. However, the provinces had mixed success with these approaches, as the most robust statutes were found to overreach provincial jurisdiction. One of these approaches was a direct attempt at debt adjustment. Alberta had enacted its first debt adjustment act in 1923, the last consolidated version of which was the Debt Adjustment Act, 1937 (DAA). (23) This Act created the Debt Adjustment Board, which had two main purposes. First, on application by a debtor or creditor, the Board was to attempt to bring about an arrangement for the payment of the debt. (24) Second, the DAA prohibited certain kinds of actions from being commenced or continued without permission from the Board. (25) For example, proceedings for foreclosure of a mortgage and proceedings of those claiming a share of a farmer's crop were prohibited. At the beginning on the 1940s, the province began to face serious challenges to the constitutionality of the DAA. In May 1941, the Governor General in Council referred the question of the validity of the DAA to the SCC. In December of that same year, the Court decided that the DAA was invalid in whole as legislation in relation to bankruptcy and insolvency. (26) The Supreme Court's decision was later affirmed by the Judicial Committee of the Privy Council in February 1943. (27)

      Saskatchewan had its own debt adjustment act at this time, which had virtually the same purpose and effect as the Alberta Act. (28) Therefore, its own policy of debtor protection and farm security was severely damaged by the Privy Council's decision, prompting swift legislative reform. (29) In response, the Saskatchewan Legislature passed several debt related statutes in April 1943. One of these was the Provincial Mediation Board Act (PMBA), (30) which was clearly an attempt to revise the Debt Adjustment Board to only have powers within the province's jurisdiction. The PMBA repealed Saskatchewan's Debt Adjustment Act and created the Provincial Mediation Board. Like the Debt Adjustment Board, this new board was charged with the duty to attempt to bring about arrangements between debtors and creditors for the payment of the debt, on application by either the debtor or the creditor. (31) These agreements would be binding even without consideration. (32) The new Act only barred certain actions granted by some provincial tax statutes.

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