The recent decision of the Supreme Court of Canada in Saulnier (Receiver of) v. Saulnier has changed the basis for determining whether a licence is property under a provincial Personal Property Security Act (“PPSA”) and the federal Bankruptcy and Insolvency Act (“BIA”).
The decision recognizes that a licence may sometimes be a highly valued commercial asset, and discusses when it may be capable of being made subject to a security interest. The Saulnier decision deals with a fishing licence, but its implications extend to holders of all government issued licences, from taxi drivers to telecommunications companies.
Saulnier was a fisherman in Nova Scotia who signed a general security agreement to secure borrowings from his bank. Saulnier’s fishing business declined and he made an assignment in bankruptcy. The trustee in bankruptcy and bank-appointed receiver wished to sell his fishing licences to pay off his debt, but Saulnier refused on the basis that the licences were not property, and as such, were not subject to the Nova Scotia PPSA or the BIA.
On appeal, the Supreme Court of Canada recognized that the fishery was a public resource and that the federal government had unfettered discretion to issue, renew and approve transfers of Saulnier’s licence. However, the Court held that the temporary nature of the licence did not affect the fact that Saulnier’s interest in the licence could be considered property. The Court held that the licence gave Saulnier a right to fish coupled with a proprietary interest in the fish which he caught, and that the licence could be classified as property under the PPSA and the BIA.
Before the Saulnier decision, the issue of whether a licence or quota could be property was determined according to the extent to which the regulatory agency that issued the licence or quota had unfettered discretion to renew or revoke it, or approve its transfer. In 1987, the Ontario Court of Appeal in National Trust Company v. Bouckhuyt held that a valuable tobacco quota did not constitute property under the Ontario PPSA because the quota existed subject to the unfettered discretion of the issuing regulatory agency and was “transitory and ephemeral.” In later cases, courts distinguished Bouckhuyt on the basis that some regulatory authorities were bound, by policy and practice, to renew licences and to act reasonably when considering applications for transfer. If the issuing authority was subject to “fetters” such as these on its discretion to renew and transfer, then the licence holder had a proprietary interest in the licence to which a security interest under the PPSA could attach. This line of reasoning was criticized by various academics and lower courts.
The Saulnier case has now decided that the prospect of renewal, whether or not subject to an “unfettered” discretion on the part of the issuing agency, is no longer determinative of whether a licence is collateral. In Saulnier, the Court states that the preferred approach is to look at the substance of what is conferred; namely, a licence to participate in the fishery coupled with a proprietary interest in the fish caught, at all times subject to the Minister’s regulation. The licence may be for a limited period of time, and its renewal or transfer may be subject to the Minister’s discretion, but a secured creditor or trustee in bankruptcy has the same right to seek its replacement and has the same recourse (or lack thereof) if the application for renewal or transfer is rejected. The secured creditor or trustee steps into the shoes of the licence holder and takes the licence “warts and all.”
What are the implications of the Saulnier decision? In its simplest form, a licence is a right to do something which is otherwise illegal. In Canada many businesses hold licences. They are issued by governments at all levels – municipal, provincial and federal. Licences that are limited in number and control or limit access to a public resource have commercial value that varies depending on the market. At one extreme, liquor licences are numerous and fairly easily obtained. At the other extreme, licences to operate toll highways or airports are unique, and constitute exclusive franchises. The Saulnier decision states that a licence, coupled with a proprietary interest in the harvest or product derived from the licence, is property to which a security interest under the PPSA may attach. Thus, many licences in Canada’s primary industries (fish, timber, agriculture, petroleum, minerals, etc.) would fall into this category.
What about a licence to a public resource coupled with a right to charge users a toll or fee? The logic of the Saulnier decision should apply to these licences as well. They are temporary in duration and issued at the discretion of a regulatory authority, but they have commercial value. The licence constitutes a right to own or operate a facility coupled with the right to charge users a toll or fee. Licences of this sort would include transport (taxis, ferries, container terminals, airports, etc.), telecommunications, nursing homes and other secondary industries. The concept should even apply to public private partnerships and infrastructure finance – an exclusive franchise or concession granted by the government to build and maintain a public facility (toll roads, hospitals, schools, etc.) and to collect a user fee or rent from the ministry or agency operating that facility, is property to which a security interest may attach. It is not determinative whether such licences are temporary, or may only be renewed or transferred at the sole discretion of the issuing regulatory agency. Every such licence has value as collateral for secured creditors and, if there is any doubt in the statute under which the licence is issued, the Saulnier decision suggests that the licence should constitute property of the licence holder if the licence holder’s business ever fails or restructures.