Canada: Rights Of Trustees In Bankruptcy And Secured Creditors To Licenses Held By A Debtor

The Supreme Court of Canada recently released its decision in Saulnier v. Royal Bank of Canada1 ("Saulnier"), an important case involving fishing licences in the context of a secured lending transaction and an assignment in bankruptcy. This case contains what we believe is significant commentary on classifying certain governmental licences as "property" under the Bankruptcy and Insolvency Act (Canada) (the "BIA") and "personal property" under the Personal Property Security Act (Nova Scotia) (the "Nova Scotia PPSA").

Mr. Saulnier operated a fishing business and held four fishing licences. He and his wholly-owned fishing company separately obtained financing by Royal Bank of Canada (the "Bank"). Mr. Saulnier provided a personal guarantee to the Bank in respect of obligations of the fishing company and granted a general security agreement in favour of the Bank. His fishing company also provided a general security agreement in favour of the Bank. The general security agreements were in the Bank's standard form and created a security interest in all "present and after acquired personal property", including, inter alia, all "intangibles" (with reference to the definition of such term in the Nova Scotia PPSA) of the debtors.

Ultimately, the business failed and Mr. Saulnier made an assignment in bankruptcy. Shortly thereafter, he sought to lease one of the fishing licenses to a company owned by his spouse. Meanwhile, the receiver and the trustee in bankruptcy entered into an agreement to sell the licenses to a third-party purchaser. This sale, however, was conditional upon the trustee in bankruptcy being able to transfer the licenses to the new purchaser.

The question before the court was whether the commercial fishing licences were: (1) "property" of a bankrupt available to a trustee in bankruptcy under the BIA, and/or (2) "personal property" of a debtor available to a secured creditor under the Nova Scotia PPSA. Mr. Saulnier argued that the fishing licences were merely a "privilege" for him to fish and did not give rise to an interest in property. Mr. Saulnier followed that he should be entitled to continue to fish and enjoy the profits related thereto, or enter into new leases in respect of the licences, notwithstanding his assignment in bankruptcy and the rights of the Bank under the general security agreements.

In its decision, the Court stated that terms in the BIA and Nova Scotia PPSA should not be interpreted based on a strict common law understanding, but rather in a purposive manner that enables the BIA and Nova Scotia PPSA to accomplish their respective commercial purposes. When evaluating whether a fishing licence was included under the terms "property" or "personal property", the Court looked to the substantive nature of the rights conferred by a fishing licence.

Significantly, the Court noted that a fishing licence conferred rights that were broader than the traditional rights granted by a licence, namely, to permit the holder to do something which would otherwise be unlawful. A fishing licence also contains a proprietary right to tangible property in the form of the fish that are caught by its terms and the earnings from their sale.

The term "property" is defined under section 2 of the BIA as follows:

"property" means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.

The Court concluded that the "bundle of rights" possessed by Mr. Saulnier under terms of the fishing licence were sufficient to meet the purposefully broad and extended definition of "property" under the BIA.

With respect to the Nova Scotia PPSA, the Court found that the granting of the fishing licenses, coupled with the proprietary interest of the license holder in the fish caught thereby, was broad enough to be an "intangible" and within the definition of "personal property" under section 2 of the Nova Scotia PPSA.

Applying the Court's findings, the trustee in bankruptcy was entitled to sell the fishing licenses to the third-party purchaser with the power to transfer the licenses to the new purchaser. In addition, the Bank was entitled to proceed with its remedies as a secured creditor under the Nova Scotia PPSA in respect of the fishing licenses.

Saulnier is a significant case for secured creditors and trustees involved in transactions with debtors that operate in a regulated industry. The case provides clarification and, to a lesser extent, some certainty regarding the classification of certain governmental licenses under the BIA and personal property security legislation. One must be careful not to extend the judgement too far, however, since the Court is clear that its decision is not meant to apply to all types of governmental licenses or similar instruments, such as quotas. The Court was clear that the proprietary right to the fish caught under the licences was instrumental in it reaching its decision. Special consideration must be made in the circumstances to determine the rights of a secured creditors under personal property security legislation and trustees under the BIA with respect to governmental licenses.

Footnote

1. [2008] S.C.J. No. 60

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