For most lenders, taking security from their borrowers is pretty straightforward: take a general security agreement covering inventory, receivables and all other collateral, add some guarantees, and then look to see if there are any other loose ends that need tying up. But for businesses in regulated industries where some sort of government-issued licence is a threshold requirement, it's not that easy.
"A commercial fisher with a ramshackle boat and a licence to fish is much better off financially than a fisher with a great boat tied up at the wharf with no licence." Indeed, within these regulated businesses, the licence or quota is recognized as having the most value. It is, therefore, the logical single type of collateral for a borrower in such a business to offer as security.
Unfortunately, a series of trial and appeal cases have held, at least since 1987, that different types of licences or quotas did not constitute "property" and hence could not be given as security to the lender. This has made financing within such industries particularly challenging. The issue has, finally, made its way to the Supreme Court of Canada, which has handed down a decision, in Saulnier v. Royal Bank of Canada, that will be particularly welcome to both lenders and businesses within these regulated industries.
The Supreme Court held that one of the most readily marketable and valuable loan collateral, namely a fishing licence issued under the Fisheries Act, constitutes property within the scope of the federal Bankruptcy and Insolvency Act (the "BIA") and the Nova Scotia Personal Property Security Act (the "PPSA"). Secured creditors can now take comfort that their security interest will extend to something of significant value – fishing licences (subject to any necessary third party consents to the eventual assignment to the secured party).
The decision is significant and represents a positive development that will facilitate commercial practice and reaffirms the court's purposeful approach to the law. The case may also be helpful in other areas where a licence forms part of the collateral.
Mr. Saulnier had a commercial fishing business, including four fishing licences that conferred upon him the right to fish and a proprietary right in the fish harvested and the earnings from their sale. The business was financed by Royal Bank of Canada, which had a security interest in all of Saulnier's present and after-acquired personal property. Subsequently, Saulnier declared bankruptcy. The receiver and trustee in bankruptcy sought to sell the licences (valued at in excess of $600,000). Saulnier argued that the licences did not constitute property of the debtor under the BIA and PPSA and hence were not subject to his creditors' claims.
In confirming the decisions of the trial judge and appeal court (which both held in favour of RBC), the Supreme Court reviewed various jurisprudential approaches to the issue. The following are the principal bases upon which the court arrived at its ruling.
- The law has evolved; courts now adopt a more purposeful approach to the definitions in the BIA and personal property security legislation. Traditional common law notions of property are less of a stumbling block to the recognition of licences as "property" for statutory purposes. Where something does not qualify as property under the common law, it does not follow that it cannot qualify as such under legislation.
- Whereas a fishing licence may not strictly speaking constitute property under common law, it is similar to a profit à prendre (a right to enter onto land to extract a natural part of the land), which is property at common law and which constitutes property under the BIA and provincial and territorial personal property security regimes.
- The BIA and the PPSA are largely commercial instruments that should be interpreted in a way best suited to enable them to accomplish their respective commercial purposes.
- A fishing licence is not merely permission to do that which would otherwise be unlawful. Rather, the holder of a fishing licence has a right to engage in an exclusive activity as well as a proprietary right to both the fish harvested under the licence and the earnings from their sale. It is extremely doubtful, therefore, that a simple licence could itself be considered property at common law. The court did not elaborate on what a "simple" licence was.
- The holder's rights under a fishing licence are limited in time, place and the manner of their exercise by the Fisheries Act.
- Although the Fisheries Act regulations provide that a fishing licence is the property of the Crown and not transferable, that merely means that the documentation of the licence, as opposed to the rights conferred by the licence, is the property of the Crown. It does not restrict a fishing licence from falling under the application of the BIA or provincial and territorial personal property security legislation. Similarly, concerns that such application to a fishing licence would restrict the Minister's discretion under the Fisheries Act are unfounded – the Minister can take away a fishing licence. The degree of renewal discretion vested in the issuing authority is also not useful in determining whether something is property.
It is interesting to note that the court distinguished between a mere licence and a licence coupled with a property interest. The court was clear that the latter case constituted something more than just a right to do something that would otherwise be illegal.
The question then arises: what else constitutes "a licence coupled with a property interest"? Take, for example, a licence to use software that allows the licensee to earn money through its use (or save money through obtaining greater efficiency). Could this not be seen as a property interest? Since the Supreme Court is using a purposeful and a limited commercial reality approach in analyzing property rights, it is arguable that this form of licence will be provided with a higher value than may otherwise have been the case. The court did not address this in this case; however, the underpinning of this argument could be developed by the logic used by the court in this decision.