In a new article, Dr. Virginia Torrie explores the debt adjustment mechanisms from the Farmers’ Creditors Arrangement Act (FCAA) that were utilized to protect insolvent farmers during the Great Depression. This article is published in (2021) 72 UNBLJ 132-172.
As the COVID-19 pandemic has presented unprecedented challenges for small and medium businesses across Canada, history provides examples of legal methodologies and solutions which ensured businesses’ survival and the prevention of their insolvency during difficult times. In some cases, history provides unique insights into how we can ensure small and medium-sized businesses across Canada can make it through the pandemic and its potential after-effects.
The specific debt adjustment models under the FCAA allowed for small and medium-sized farms to prevent their insolvency and liquidation. Seven subsections of the FCCA were particularly effective in achieving the goal of “keeping farmers on their farms”, which addressed issues concerning farm maintenance, taxes, loan principals, loan interest, secured debt, payment plans and creditor interests.
Farm maintenance considerations included clauses that intended to “keep farmers on their farms”, by allowing farmers to retain supplies and equipment to sustain farming operations. Crop farming is incredibly capital intensive in terms of up-front and ongoing costs, and revenue is usually only generated after a harvest is completed. Due to these unique industry characteristics, under the FCAA,debt adjustment models allowed some farmers to retain their equipment and the necessary seed to sow crops for the subsequent year.
The principle of farm maintenance is also the overarching purpose of other debt adjustment models and compromises under the FCAA, which factored in additional considerations like outstanding taxes and secured debt. Tax sales presented a particular difficulty for farmers, as the government’s priority as a creditor could deem land for sale based on unpaid property taxes. When farmers were completely behind on their tax payments, they could pay one-third of the crop share for the following year, which ensured they had an opportunity to maintain their operations while worrying about revenue when earned. Similarly, a default protection clause was frequently used and allowed farmers to forfeit one-third crop share or its cash equivalent to prevent a default on any outstanding debt. Preventing the sale of land or other significant assets applied to all creditors, and debt adjustment models ensured farmers were safe from some secured creditors’ ability to repossess and sell their land or machinery which were considered collateral. In some cases, farmers secured debt obligations became unsecured debt obligations, providing greater asset protection for debtors and modifying creditor rankings.
Another consideration factoring into these debt adjustment models was the eventual repayment of some or all of the farmer’s debts. Payment plans were drafted while some debtors otherwise received reductions in loans and principals that were owing. When payment plans were drafted, they greatly mitigated the chances of default by providing farmers with a schedule to pay off their debts incrementally. Payment plans offered different benefits that can be contrasted with normal reductions in the principal or interest, which were additional considerations used in debt adjustment models. However, instead of reducing debts or interest, additional time was given to farmers for repayment.
Although all of the aspects mentioned seem to benefit those in debt, the proposals and compromises mentioned would not always apply, and creditors’ interests were also always balanced among those of the debtors. Further, there are examples of initiatives taken to benefit creditors instead of debtors, including the return of some equipment to creditors, and additional interest being paid to creditors.
This article, which accompanies other articles I have written on the effectiveness of the FCAA, examines debt adjustment mechanisms for farmers’ and the flexible use of the FCAA, which was used to maintain farmers’ livelihood during the Great Depression. In the future, the FCAA may be used as an example of the progression of insolvency legislation for small and medium-sized businesses outside of the agriculture sector. Specifically, the FCAA allowed for a significant adaptation of debt adjustment models to each debtor’s unique circumstances, which factored in their families, weather conditions, production capabilities, rights of creditors’, and more. This statute’s effectiveness shows the importance of socio-legal perspectives and provides an example that could be applied elsewhere. However, for the present, it showcases the most progressive statute in Canadian history and its profound effect on farmers in the prairies during the Great Depression, a sentiment that Dr. Thomas Telfer and I expressed in a recent book.