MECHANISMS OF DEBT ADJUSTMENT UNDER THE FARMERS' CREDITORS ARRANGEMENT ACT, 1934.

• Author: Torrie, Virginia
• Position: Canada

The Great Depression and the Dust Bowl of the 1930s presented unprecedented problems for Canadians in general, and farmers specifically. The severe financial hardship faced by prairie farmers ultimately led to the enactment of a novel farm insolvency statute--the most progressive statute of its kind in Canadian history--which was squarely aimed at saving farm businesses and keeping farmers on farms. With the Farmers ' Creditors Arrangement Act, 1934 (FCA A), Parliament provided an administrative apparatus through which farmers negotiated and effected debt compromises with their creditors. The Act itself represented a significant break with existing ideas about what bankruptcy and insolvency law was or should do. Extraordinarily, this empirical study reveals that the operation of the FCAA in practice was far bolder than even the Act's muscular policy of debt compromise indicated. The administrative officials--Official Receivers and Boards of Review charged with implementing the Act interpreted the text liberally in pursuit of debt compromises, downplaying or ignoring the restrictive elements. Additionally, the terms and conditions of the debt compromises evince a significant degree of adaptation to each farmer's unique circumstances. This article, therefore, argues that practices under the FCAA substantially enhanced protection for insolvent farmers in many cases. Furthermore, by bringing this empirical data to light, this paper demonstrates the value of a socio-legal perspective for assessing the efficacy ofa small business insolvency regime.

1. Introduction

   This article identifies and analyzes specific mechanisms of debt adjustment employed under the Farmers ' Creditors Arrangement Act, 1934 (FCAA). (1) The goals of this study are twofold. The first is to shed light on how this unique insolvency statute was implemented by the Official Receivers (the "ORs") and Boards of Review (the "BoRs") charged with doing so. To date, there has been little published scholarship on the FCAA and none which qualitatively analyzes the terms and conditions of debt compromises reached under the Act. (2) Thus, this empirical analysis of archival documents makes an original contribution to legal scholarship about Canada's first federal farm insolvency regime.

   The second goal of this study is to evaluate the mechanisms of debt adjustment identified in light of the Act's stated policy purpose of "keep[ing] the farmer on the farm." (3) In this connection, the analysis is concerned with the extent to which the empirical data bears out the strong policy of debt adjustment that the FCAA purportedly advanced. (4) The Act facilitated the adjustment of secured debt, for instance, which was out of keeping with bankruptcy and insolvency legislation at that time, and strengthened the protection that the Act afforded to farmers. (5) As discussed below, the individuals and institutions charged with implementing the FCAA appear to have acted boldly in this regard. Rather remarkably, the mechanisms of debt adjustment provided even more protection for insolvent farmers than the text of the FCAA suggested was possible. Most notably, although the Act provided that a fanner could only make use of the Act one time and that default on an FCAA debt compromise was considered an act of bankruptcy under section 2(3)--meaning that the debtor would be vulnerable to being petitioned into bankruptcy by a creditor (6)--BoRs routinely included terms that greatly limited the possibility of finding a farmer in default; in effect, providing farmers with more than the statutorily mandated "one chance" to avail themselves of relief under the statute. (7) Accordingly, this article contributes to a socio-legal understanding of FCAA law by showing that practices under the Act substantially enhanced protection for insolvent farmers in a number of cases. This analysis sheds light on how "law in practice" advanced the FCAA's policy objective of keep[ing] the fanner on the farm." (8)

   The files selected for this study consist of 12 debt compromises reached under the FCAA for farmers in Manitoba. (9) Although over 47,000 debt compromises were reached under the Act nationally, this research discovered that only a small proportion of case files were preserved in some provinces. (10) Due to the idiosyncratic record keeping of FCAA debt compromises, it was not possible to select files for further study based on representativeness or even to make an assessment of whether a given group of files were representative. Manitoba case files were selected because the FCAA was intended to address the prairie farm crisis in particular, and Manitoba appears to be the only prairie province which saved these case files relatively systematically. The 12 debt compromises identified for this study were chosen to gain a sense of the broadest possible range of terms and conditions that appeared in the debt compromises.

   The rest of this paper is arranged as follows. Subsection (a) briefly describes the FCAA and debt adjustments carried out by ORs and BoRs under the Act. Section II outlines the protections afforded to insolvent fanners by virtue of making an application for relief under the FCAA. Section III reviews the specific mechanisms of debt adjustment contained in the debt compromises reached under the Act, categorizing these as follows: (a) Farm Maintenance, (b) Taxes, (c) Principal, (d) Interest, (e) Security, (f) Payment Plan, and (g) Protections for Creditors. Section IV concludes.

   (a) The Farmers' Creditors Arrangement Act

   In 1934, Parliament introduced the FCAA in response to the severe economic privation suffered by Canadian farmers and political pressure from Saskatchewan farmers in particular. (11) In the 1930s, prairie farmers experienced severe drought conditions, and all farmers experienced a drop in commodity prices, creating a widespread depression in the agricultural sector. (12) The FCAA was intended to prevent insolvent farmers from entering bankruptcy proceedings and keep them on their farms in the long-term. (13) The FCAA defined a "farmer" as "a person whose principal occupation consists of farming or the tillage of soil". (14) Remedies under the FCAA were varied and responded to farmers' and creditors' specific circumstances. Although the FCAA was a federal statute, its administration was decentralized, with ORs and BoRs established in each province. (15) Using insolvency law as a remedy for addressing over-indebtedness was limited to Canada' farming population. Non-farming debtors did not receive similar relief in the Bankruptcy Act. (16) In several provinces, however, debt adjustment legislation was used in an effort to postpone debt collection efforts during the 1930s. (17)

   The FCAA was based on a recognition that two crises--one economic, the other environmental--left farmers temporarily unable to repay their debts and that it was in the national interest to keep farmers on their land. To that end, the focus of the Act was on facilitating arrangements and compromises between farmers and their creditors to make debt service affordable until conditions improved. (18) The documents consulted in the course of this study routinely acknowledged the purpose of the Act as well as fanners' capacity to pay their debts before launching into the formulae and machinery by which these debts would be paid down. (19)

   A farmer's failure to comply with a formulated proposal constituted an act of bankruptcy, unless the court took the view that the failure was for reasons beyond the farmer's control. (20) The BoR compromise frequently included additional protections for the farmer that would lessen the likelihood that the farmer would default; most notably, by including a clause that prevented a farmer from being found in default in a variety of circumstances. Close examination of specific farm debt compromises under the FCAA shows how the terms and conditions themselves furthered these objectives.

   Most of the anangements examined in this study were formulated by BoRs, but for one compromise overseen by an OR and another overseen by the court. (21) The following is a list of the farmers and the type of arrangement each received, along with the year:

   Arrangements could be reached at two different points in the administrative process under the FCAA. OR compromises occurred at the earliest step in the process at which a compromise could be reached after the farmer filed an application for relief with the FCAA's OR. (22) At this stage, creditors would be called to a meeting by the OR to negotiate a compromise for debt relief. (23) Accepted compromises would be confirmed, while compromises that failed at this stage could be moved to the BoR to formulate a proposal. (24) The BoR would hear submissions from the parties involved and could formulate a compromise that was binding on all parties. When the stream of FCAA applications diminished in the 1940s, the BoRs were dissolved, and courts of competent jurisdiction in each province took over the duties of the Board. (25)

2. Protections that flowed from an FCAA application

   A fanner initiated the FCAA process by making an application to the OR. (26) Upon making an application, several protections flowed to farmers either automatically or as a fairly standard practice under the Act. Section 11 of the Act protected farmers who had filed under the FCAA with an automatic stay of proceedings which prevented both secured and unsecured creditors from pursuing "any remedy against the property or person of the debtor" without leave of the court. (27) Pursuant to section 11, creditors were precluded from commencing or continuing "any proceedings under the Bankruptcy Act, or any action, execution of other proceeding for the recovery of a debt provable in bankruptcy, or the realization of any security." (28) The applicability of this stay of proceedings to secured creditors and the debtor's property subject to security interests made the FCAA...