Federal Security Interests Research Study and Report 2000


Agriculture has always been considered a vitally important sector of the Canadian economy.; Concern for the well-being of farmers is sparked by the common belief that the security of a nation is enhanced when it is able to feed itself.; Agriculture is also a sector that employs a great number of people.; Finally, the traditional role of agriculture in Canada has made the family farm an integral part of the fabric of Canadian society.

Because of these historical, psychological and economic factors, the federal government has historically taken an active role in passing legislation to help farmers.; The need for such help is influenced in part by the susceptibility of agriculture to downturns caused by steep fluctuations in world commodity prices, as well as by the threat posed to family farms by large scale "agri-business" operations.; Part of the federal government's effort to help farmers is aimed at assisting them in their dealings with creditors.; The Farm Debt Mediation Act (the "FDMA") and its predecessor, the Farm Debt Review Act (the "FDRA"), in particular is designed to give farmers experiencing financial difficulties some extra time in which to negotiate a settlement with their creditors and to put mediation procedures in place to assist in this respect.; The ultimate purpose of the FDMA is to keep farmers on the farm.; Secured creditors should be aware of this legislation, as it has a significant impact on their ability to enforce their security in situations where the FDMA applies.; The relevant; legislative and regulatory provisions are summarized in Apprendix C.

A. The Farm Debt Mediation Act

The FDMA was passed to ensure that farmers faced with insolvency would have the opportunity to resolve their financial difficulties with the cooperation of their creditors and the assistance of an unbiased panel.

1. Constitutional Authority

The Act is essentially legislation affecting property and civil rights in the province.; In order to make the FDMA constitutionally palatable, the federal government must justify it under its bankruptcy and insolvency head of power.; Thus, the provisions of the Act are only available to insolvent farmers.; The predecessor to the FDMA, the FDRA, was available to all farmers "facing financial difficulty".; In limiting the application of the FDMA to insolvent farmers, the federal government has made it less susceptible to any potential constitutional challenge.

2. Applications by Insolvent Farmers

Section 5 of the FDMA provides as follows:

5. (1);;;; Subject to section 6, a farmer may apply to an administrator for either

(a) a stay of proceedings against the farmer by all the farmer's creditors, a review of the farmer's financial affairs, and mediation between the farmer and all the farmer's creditors for the purpose of assisting them to reach a mutually acceptable arrangement;; or

(b) a review of the farmer's financial affairs, and mediation between the farmer and all the farmer's secured creditors for the purpose of assisting them to reach a mutaully acceptable arrangement.

It is noteworthy that while the stay applies to all the farmer's creditors, only secured creditors are allowed to participate in the mediation.; It is also worth noting that "farmer" is defined as "any individual, corporation, cooperative, partnership or other association of persons that is engaged in farming for commercial purposes".; Thus the FDMA applies to both large corporate agri-businesses and family farms.

3. Stay of Proceedings

As mediation under the FDMA is not compulsory, the legislation's greatest impact on secured creditors is made by the stay of proceedings.; Section 7(1) of the FDMA provides that upon receipt of an application by an insolvent farmer the administrator shall issue a thirty day stay of proceedings against the farmer by all the farmer's creditors.; The stay of proceedings prohibits creditors from enforcing "any remedy against the property of the farmer" or from commencing or continuing "any proceedings or any action, execution or other proceedings, judicial or extra-judicial, for the recovery of a debt, the realization of any security or the taking of any property of the farmer".

(a) "Proceedings"

Case law; respecting the nature of "proceedings" affected by the FDMA confirms that the net cast by the stay of proceedings is extremely broad.; In the case of Royal Bank of Canada v. Wagner, which examined an identical provision contained in the predecessor to the FDMA, the FDRA, the Saskatchewan Court of Appeal held that service of a notice of intention pursuant to s. 21 of the Limitation of Civil Rights Act is the taking of an "action" to realize on security.

A similar stay of proceedings to that provided for in the FDMA is found in section 11 of the Companies' Creditors Arrangement Act (the "CCAA").; Case law interpreting s. 11 of the CCAA has held that payment of a letter of credit drawn on account of an insolvent company comes within the meaning of proceedings.; Other "actions" that have been held to be subject to the s. 11 stay of proceedings include the realization by a bank on its s. 178 Bank Act ;security, exercising a contractual right of set-off and a landlord attempting to terminate a lease based on the insolvency of the lessee.

(b) Extension of the Stay of Proceedings

Section 13 of the FDMA gives the administrator the authority to extend the stay of proceedings for a maximum of three further periods of thirty days each where the administrator considers an extension "essential to the formulation of an arrangement between a farmer and the farmer's creditors".; The Regulations to the FDMA offer more guidance in this regard, providing that an extension will be given only if (a) the value of the farmer's assets will not significantly diminish during the period of the extension, (b) the majority of the farmer's creditors will not be unduly prejudiced by the extension and (c) there is no indication of bad faith by the farmer.; A decision by the administrator not to extend the stay is subject to appeal.; The stay is extended until the outcome of the appeal is determined.

(c) Preservation of Collateral

The prospect of a 120-day stay of proceedings will cause concern among creditors with respect to preservation of the collateral.; This concern is addressed in s. 16(1) of the FDMA, which provides that where a stay of proceedings is issued a guardian is to be appointed to watch over the farmer's assets.; Often the farmers themselves are appointed guardians of their assets.; If a nominee of a creditor is appoined guardian, the nominee's expenses must be borne by the creditor.; Only secured creditors are allowed to put forward nominations for guardians.

Additional relief for creditors concerned that assets may be dissipated is contained in s. 14(2) of the FDMA, which gives the administrator discretion to end the stay where the administrator is of the opinion that the farmer has, by any act or omission, jeopardized his or her assets or obstructed the guardian in the performance of the guardian's duties.; The combined effect of the Regulation noted above and ss. 14 and 16 of the FDMA is to provide secured creditors with some degree of certainty that the value of the collateral will not diminish even if the maximum 120-day stay of proceedings is granted.

4. Financial Review and Mediation

Another major part of the FDMA is the review of the farmer's financial situation and the mediation between farmers and their creditors.; Section 9 of the FDMA directs the administrator to undertake a detailed review of the farmer's financial affairs.; For this purpose, the FDMA allows the administrator to appoint an expert.; The results of the review are put into a report, at which point the administrator appoints a mediator.

The FDMA provides that only secured creditors are entitled to participate in the mediation.; Participation in the mediation is entirely voluntary and the administrator has the discretion to terminate the mediation where the farmer or the majority of secured creditors refuse to participate or refuse to participate in good faith.; Otherwise, the mediation ends either when an agreement is reached or upon the termination of the stay of proceedings.

5. Notice Requirement

Section 21 of the FDMA requires secured creditors who intend to enforce their security to provide the farmer written notice of their intent to do so.; In the notice the secured creditor must inform the farmer of the right to make an application under s. 5 of the FDMA.; It is notable that the notice requirement applies only to secured creditors.; In a case dealing with the old FDRA, it was held that the notice provision does not apply to execution creditors.; The result is that the FDMA does not prevent an unsecured creditor from taking action against a farmer subsequent to the issuance of a notice by a secured creditor but prior to the filing of an application.; This apparent oversight exposes secured creditors to a risk that the asset pool will be reduced before they can realize on their security.

Section 22 of the FDMA underlines the importance for secured creditors of adhering to the notice requirement.; Pursuant to s. 22, "any act done by a creditor in contravention of s. 21 is null and void, and a farmer affected by such an act may seek appropriate remedies against the creditor in a court of competent jurisdiction".

The FDMA is something that all lenders lending money to agricultural enterprises should be aware of.; Failure to abide by its provisions can lead to sanctions against lenders.; The primary result of the FDMA for secured creditors is that they may be forestalled from enforcing their security for up to 120 days.; However, this result should not be exaggerated.; Provisions are in place to ensure that the stay of proceedings will not be a lengthy one if the farmer is hopelessly insolvent or if a majority of the secured creditors do not wish to mediate.; On the other hand, the FDMA represents an opportunity for secured creditors to sit down with the insolvent farmer, armed with a report prepared at government expense detailing the farmer's financial situation, and assisted by a mediator also paid for by the government.; Looked at in this light, the FDMA represents not just a burden on secured creditors, but also an opportunity for secured creditors and farmers alike to reach a mutually beneficial solution.

B. Other Federal Legislaton

In its efforts to strengthen the agricultural sector, the federal government has passed a number of laws designed to facilitate the lending process between banks and farmers.; These include the Agricultural Marketing Programs Act, the Farm Credit Corporation Act, and the Farm Improvement Loans Act.; These laws place the federal government in the role of either guarantor or lender with respect to loans to farmers.; In some cases, the legislation gives the federal government the authority to impact on the taking and enforcement of security by non-government lenders.

1. The Agricultural Marketing Programs Act

The Agricultural Marketing Programs Act (the "AMPA") is designed to improve marketing opportunities for producers of crops by guaranteeing the repayment of advances made to them as a means of improving cash-flow at or after harvest.; The AMPA creates a system whereby under certain conditions the Minister guarantees the repayment of loans advanced by lenders and "administrators" to producers of crops.; "Administrator" is defined to mean either the Canadian Wheat Board or (a) an organization of producers that is involved in marketing a crop or (b) any other organization that the Minister considers is supported by producers and designates as an administrator.

Of particular interest to secured creditors is s. 12 of the AMPA, which provides that "an administrator that makes a guaranteed advance to a producer has a security interest in the crop for which the advance was made, and in any crop subsequently grown by the producer, for the amount of the producer's liability…"; The predecessor to the AMPA, the Advance Payment for Crops Act gave the producer organization advancing the money a lien on the crop.; The position of the administrator under the AMPA is better, as the lien given by the Advance Payment for Crops Act would rank as an unsecured claim in a bankruptcy.; Section 12 does not apply to lenders advancing money.; Presumably it is expected that these will enter into their own security agreement with the borrower.

The most significant aspect of s. 12 of the AMPA is its application to crops "subsequently grown" by the producer.; The fact that the administrator's security interest applies to "subsequently grown" crops represents a real advantage over other lenders, particularly those who take security in crops in the ordinary manner i.e. not pursuant to the AMPA.; Section 12(2)(a) of the Ontario PPSA restricts the ability of a security interest to attach to crops under an after-acquired property clause.; It prevents the security agreement from attaching to crops which become growing crops more than one year after the security agreement is entered into.; A security interest in subsequently grown crops will attach only if the security interest comes within s. 32(1) of the Ontario PPSA, which provides:

32.(1);;; A perfected security interest in crops or their proceeds, given not more than six months before the crops become growing crops by planting or otherwise, to enable the debtor to produce the crops during the production season, has priority over an earlier perfected security interest in the same collateral to the extent that the earlier interest secures obligations that were due more than six months before the crops become growing crops by planitng or otherwise even thought the person giving the value has notice of the earlier security interest.

Advances made pursuant to the AMPA are likely to come within s. 32, as they are generally made to enable the debtor to produce crops during a specific production season.; Ordinary secured creditors taking security in crops should be aware of s. 12 of the AMPA and ss. 12 and 32 of the Ontario PPSA, as they ensure that secured creditors taking security in crops in respect of loans advanced to enable the debtor to produce crops during the production season will have priority.

2. The Farm Credit Corporation Act

The Farm Credit Corporation Act (the "FCCA") is designed to improve the availability of credit for farming operations and other rural businesses related to farming.; The Corporation established by the FCCA is empowered to, among other things, provide loans to farmers and acquire and hold security interests in respect of loans made or guarantees given.; The FCCA does not in any way effect the system of priorities and registration that normally defines relations between secured creditors and debtors.; It simply introduces another lender into the field.

3. The Farm Improvement and Marketing Cooperatives Loans Act

The Farm Improvement and Marketing Cooperatives Loans Act (the "FIMCLA") is described in its preamble as "An Act to increase the availability of loans for the purpose of the improvement and development of farms and the processing, distribution or marketing of farm products by cooperative associations".; Section 4 of the FIMCLA provides that the Minister is liable to pay to a lender ninety-five per cent of any loss it sustains as a result of a loan made to a farmer for, among other things, the purchase of tools, livestock and additional land.; Section 4(3)(c) provides that in order to be subject to the FIMCLA the principal amount of the loan must not exceed $250,000.; The FIMCLA reduces considerably the risks normally associated with lending to farmers.; It does not alter the normal system of registration and priorities associated with secured lending.

C. Conclusion

The federal government intervenes in a number of ways to ensure that agricultural lending is not subject to the ordinary rules of commercial lending.; For the most part this intervention is of benefit to lenders and other secured creditors, and thereby to farmers as it facilitates access to credit.; The government establishes a mechanism for negotiating with farmers faced with insolvency, advances money to farmers where an ordinary lender might be reluctant to do so and guarantees loans made by lenders to farmers.; Lenders should be aware of these benefits provided by the federal agricultural statutes.; They should also be aware of the potential of these statutes to create delay in the enforcement of security, and even to effect priorities where the collateral consists of crops.

Next Annual Meeting

2020 Annual Meeting

Place to be Announced

August 9 – 13, 2020