Clarity please! Licences and quota as intangible personal property in Ontario

The current provincial government appears committed to reforming and updating Ontario’s commercial laws including Ontario’s Personal Property Security Act[1] (“PPSA”). In February 2015, the Ministry of Government and Consumer Services convened a panel to create a report advising the Ministry on how to modernize business laws in Ontario to foster a better business climate in the province. The panel, which consisted of a number of legal scholars and lawyers, released their Report[2] in June 2015 and the panel accepted comments on the Report until December 2016.

Although recommendations were made in a variety of areas, one that may be of particular interest to lenders is the Report’s recommendation that licences and quota be included in the definition of “intangible” in the PPSA. This has long been an area of uncertainty for lenders, particularly those with borrowers operating in the agricultural sector. For the purposes of the PPSA, an “intangible” is something that otherwise constitutes “personal property” but is not one of the listed types of “tangible” property such as goods, instruments, money or investment property.[3]

The current law in Ontario is unclear whether licences and quota are “personal property” and, therefore, whether they can be used as collateral. Although the Supreme Court at one time ruled that certain licences can be used as collateral (discussed in more detail below), the case law on this point since the Supreme Court’s ruling has been inconsistent at best. As such, lenders in Ontario face uncertainty as to the lending value to be attributed to licences and quota when taking a security interest in licences or quota as collateral from borrowers. In many industries, a licence or quota may be a borrower’s most valuable asset—it literally provides the borrower with the ability to operate its business. Yet it remains unclear whether a lender that has accepted a licence or quota as collateral has an enforceable security interest, at least for the purposes of the PPSA.

Inconsistency in the Case Law

Prior to 2008, the Ontario Court of Appeal’s decision in National Trust Co. v Bouckuyt[4] was viewed as the leading case on the issue of licences as a form of intangible personal property. In that case, National Trust argued that a valuable tobacco quota listed in the chattel mortgage it obtained from the borrower could be the subject of a valid security interest for the purposes of a PPSA registration. Justice Cory came up with what became known as the “regulatory approach” to this issue and held that, because the yearly renewal of the tobacco quota was subject to the “unfettered discretion of the Tobacco Board”, the quota itself was too “transitory and ephemeral” to constitute intangible property for the purposes of the PPSA.[5] In other words, licences (and, presumably, quota) could not be considered intangible personal property if the regulatory body had a certain degree of discretion to renew, suspend or revoke the licence. As such, the decision in Bouckuyt resulted in a line of cases in which licences and quotas were held to be intangible property (or not) according to the degree of discretion vested in the issuing authority.

The decision in Bouckuyt was criticized by some legal scholars for a number of reasons, not least of which was because the Court failed to clarify the degree of discretion required before a licence would cease to be considered intangible personal property. In the lending context, this only increased uncertainty and adversely affected the cost and availability of credit. In a more general sense, it was also argued that a broader concept of intangible personal property is required if the business purposes of the PPSA are to be achieved.[6] Over time, courts tended to restrict Bouckuyt to its particular facts and it became clear that a new approach was needed that was more in keeping with commercial realities.

When the Supreme Court released its decision in Saulnier v Royal Bank of Canada[7] in 2008, the hope was that the Court would provide a new approach. While the Court noted that focusing on the discretion vested in the issuing authority was of “limited value”, the Court’s decision essentially boiled down to a determination that some licences are property, but only if coupled with a proprietary interest—i.e. only licences that allow the holder to acquire physical property (like a fishing licence allows the holder to fish) can be used as collateral.[8]

The concern of course is that not all licences result in the acquisition of physical property. For instance, both a fishing licence and a taxi cab licence allow the holder to generate economic value, yet only the fishing licence can be offered as collateral according to a strict interpretation of the Court’s reasoning in Saulnier. Some legal scholars have suggested that this distinction cannot be supported in light of the objectives of the PPSA and it permits arbitrarily different treatment between licence holders.[9]

Moreover, inconsistency in the way Saulnier has been applied in subsequent decisions has only added to the uncertainty and has created a legal grey area for lenders and their counsel. The panel’s recommendation in the Report that the PPSA be amended to specifically include licences and quota as intangible personal property would therefore provide some much needed clarity to this issue.

Future Legislative Clarity

Each common law province has personal property security legislation substantially similar to Ontario’s PPSA, meaning lenders and borrowers in each province have faced the same uncertainty with respect to licences and quota as intangible property. However, to date, only a few provinces have made specific provision in their personal property security legislation for licences or quota. For example, Saskatchewan’s PPSA defines “intangible” to include a licence and defines a “licence” to mean a right to essentially do anything with personal property or to provide services. However, this definition is limited to transferable licences and, as such, statutory licences which cannot be transferred (because the governing statute prohibits or restricts transfers), and contractual licences subject to an anti-assignment provision, fall outside the purview of the PPSA and cannot be definitively characterized as “intangibles”. This, of course, is merely an example of how one jurisdiction legislated this issue in order to provide greater clarity.[10] It remains to be seen if and how Ontario’s legislature will amend the PPSA to include licences and quota as intangible property.

Fortunately, some form of clarification is likely not far off as it appears that the government hopes to implement the panel’s recommendations by the end of 2017.[11] Again, it is not clear how the legislature will implement the recommendation on this point, but any clarification will benefit both lenders and borrowers and will facilitate financings involving security in the borrower’s licence or quota.