Interest, Insolvency and Prairie Farm Debt
In a new article, Dr. Virginia Torrie considers the impact of Reference as to the validity of Section 6 of the Farm Security Act, 1944 on the field of federal bankruptcy and insolvency law. The article is forthcoming in (2022) 55.2 UBC L Rev
The economic collapse of the 1930s coupled with years of drought caused unprecedented problems for farmers in Saskatchewan. In particular, low wheat prices and depressed global markets coupled with the prior ease of securing credit caused farmers to become overindebted. In addition to the burden of merely paying off the debt principal, high interest rates made it even more difficult for some farmers to make their payments. In fact, from 1930-1935 the interest alone would have taken nearly two thirds of the wheat available for sale in Saskatchewan.
As the province threatened to enact radical debt adjustment measures, Parliament responded with the Farmers’ Creditors Arrangement Act, 1934 (FCAA), which was intended as a temporary solution to create a mechanism through which farmers could negotiate debt compromises. The FCAA was intended to be more moderate than Saskatchewan’s proposed statute, and from the perspective of the prairie provinces, the FCAA was not as effective as they wanted. At the time that the FCAA was enacted, there was doubt as to whether Parliament could legislate in relation to secured debts, which had traditionally been in the purview of the provinces. However, the FCAA was upheld on reference at both the Supreme Court of Canada and the Privy Council.
The prairie provinces still sought long term debt adjustment legislation for farmers. When Tommy Douglas came to power in Saskatchewan in 1944, his government promised economic reforms to help farmers with high debt and interest payments. The Farm Security Act, 1944 (“FSA”) came after a line of provincial debt adjustment statutes had been found to be invalid by courts as encroaching on Parliament’s power over bankruptcy and insolvency. The FSA encountered a different problem. Section 6 operated to reduce outstanding principal by the rate of interest owing in years of “crop failure” but provided that the full interest would remain payable. Like other provincial debt adjustment statutes, the federal government referred the question of the section 6’s validity to the Supreme Court of Canada. However, section 6 of the FSA was not found ultra vires as encroaching on the federal jurisdiction over insolvency, and instead was struck down as legislation in relation to interest, another area of federal jurisdiction.
This new article outlines the historical context of the FSA, the basis for the invalidity of section 6, and the impact of the reference decisions. Although the FSA Reference had minimal contemporary impact, perhaps its greatest legacy is to show that the prairie provinces were correct that the economic difficulties experienced in the 1930s were not isolated, and that long-term planning was necessary to protect farmers. The case has also had a lasting legal legacy for the definition of “interest” that was provided by Justice Ivan Rand, which continues to be cited. The reference also reinforced the division between the possible provincial and federal approaches to farm debt as held in the FCAA Reference. Legislating on interest in order to alleviate financial difficulty for farmers was found to be firmly within the exclusive power of Parliament, along with
bankruptcy and insolvency. The remaining path for provinces was to legislate on judicial procedure and secured financing law.
In the modern era, there are more sophisticated policy options to address structural risk in farming than debt adjustment, such as subsidized business risk management programs like crop insurance and income stabilization. While debt relief as a policy option exists alongside other mechanisms it retains a strong position in the legacy of farmer protection.
Virginia Torrie is an Associate Professor and Associate Dean (Academic – JD Program), Faculty of Law, University of Manitoba.
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