For a lender in the agricultural space, some of the most valuable assets a lender may be relying on for recovery purposes are the production quotas held by their borrower. Legislation in Ontario provides for various types of production quotas, including for example for the production of tobacco, milk, eggs and poultry, which control each and every aspect of the production, sale and marketing of the subject matter of the quota in Ontario.
Lenders should be aware that the Ontario Court of Appeal has consistently held that production quotas are not property within the meaning of the Personal Property Security Act1 (Ontario) (the “Act”). As a consequence a security interest cannot be taken in a production quota and the production quota cannot validly be included as the subject matter of a general security agreement.
This issue was examined in Re National Trust Co. and Bouckhuyt2 (1987), where the Ontario Court of Appeal was asked to determine if a tobacco quota allotted pursuant to the regulations under the Ontario Farm Products Marketing Act3 constituted intangible personal property for the purposes of the Act for which a valid security interest could be taken in. The Court found that the essence of the authorizing legislation and regulations thereunder was to control every aspect of the industry, and control of the industry was based upon control of the quotas themselves. In this regard, the Court found that as the “basic production quota” was by its nature subject to such discretionary control and so “transitory and ephemeral” that it could not be considered property within the scope of the Act.4 The position in Bouckhuyt was followed again by the Ontario Court of Appeal inBank of Montreal v. Bale.5
Lenders may be able to get comfortable with their rights of realization on a production quota, subject to the wording of the governing legislation, through other means such as an assignment of the production quota, but should be aware that the Courts in Ontario will likely find a security interest in a production quota to be unenforceable.6 It should be noted that most entities which control the production quotas, such as the Turkey Farmers of Ontario or the Chicken Farmers of Ontario, will agree to make a notation on the particular quota that it cannot be assigned without the consent of the lender.