Dust Bowl

Farm Businesses, Debt Adjustment & Federalism

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In a new article, Virginia Torrie and Thomas G.W. Telfer consider the impact of Reference Re Debt Adjustment Act, 1937 (Alta.) on the field of federal bankruptcy and insolvency law. The article is forthcoming in (2022) 59.4 Alta L Rev and currently available on SSRN.

The drought of the early 1920s and the economic collapse of the 1930s caused unprecedented problems for farmers in Alberta. Low prices and poor markets caused farmers to become overindebted. Parliament’s response to the situation was the Farmers’ Creditors Arrangement Act, 1934 (“FCAA”), which was intended to create an alternative mechanism to bankruptcy through which farmers could negotiate debt compromises with their creditors. Parliament viewed the situation as a temporary issue, and the FCAA reflected this assumption. In contrast, the prairie provinces sought long-term debt adjustment legislation for farmers and other debtors affected by the Great Depression. At the time the FCAA was enacted, a policy of debtor rehabilitation was unprecedented in a federal insolvency statute and there was doubt as to whether Parliament had the jurisdiction to bind secured creditors, an area typically reserved for the provinces. However, the FCAA was upheld in a reference case at both the Supreme Court of Canada and the Privy Council.

In Alberta, two reformist social movements created new legislation to alleviate the debt burden in the province. The United Farmers of Alberta created the first Debt Adjustment Act (“DAA”) in 1923 to address the issue, which was then modified and expanded in the later 1930s by the new Social Credit government. However, in its attempt to create a robust debt adjustment scheme, the Social Credit government created a regime which overstepped the bounds of provincial jurisdiction. The key thrust of the DAA was to create a Debt Adjustment Board which had the responsibility to attempt to negotiate settlements between debtors and creditors and a wide range of actions to enforce debts could not be commenced without permission of the Board. In 1941, Alberta’s DAA was referred to the Supreme Court of Canada where it was decided that the DAA was ultra vires the province as legislation on bankruptcy and insolvency, an area reserved exclusively for the federal government. The decision was upheld by the Privy Council in 1943.

This new article outlines the historical context of the DAA, the basis for its invalidity, and argues that the impact of the reference decision was the affirmation of a broad construction of the federal bankruptcy and insolvency power. Chief Justice Lyman Duff’s decision in the Supreme Court of Canada was the complement of his analysis in the FCAA reference case where he uncharacteristically upheld a federal statute on a broad construction of bankruptcy and insolvency. If the FCAA reference case represented a shift from provincial to federal power over the resolution of debt, this case represented distilled and reinforced the idea that federal power included compulsory arrangements made related to the payment of debt when the debtor is in a “state of insolvency.”

This case did not end provincial attempts to address over-indebtedness. Shortly after the Privy Council’s decision, Alberta enacted the Debtors’ Assistance Act, which repealed the DAA and created a board to assist debtors in working out arrangements with debts and preparing debt plans but did not include a power of compulsion that was a key issue in the DAA reference case.

Likewise, Saskatchewan, which had a similar DAA, repealed it and replaced it with the Provincial Mediation Board Act, which created a board with similar purposes as the Alberta act. Both of these boards continue to exist to this day. However, Saskatchewan’s further attempts to protect debtors failed as the Moratorium Act, 1943 and section 6 of the Farm Security Act, 1944 and were both found to be ultra vires by the Supreme Court of Canada.

Virginia Torrie is an Associate Professor and Associate Dean (Academic – JD Program), University of Manitoba, Faculty of Law.

Thomas G.W. Telfer is a Professor and Teaching Fellow at Western University, Faculty of Law, and an Affiliated Researcher with the Desautels Centre for Private Enterprise and the Law.