Bank of Montreal v. Hall

Bank of Montreal v. Hall
Collection
Supreme Court Judgments
Date
1990-02-01
Report
[1990] 1 SCR 121
Case number
20373
Judges
Wilson, Bertha; La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Cory, Peter deCarteret
On appeal from
Saskatchewan
Subjects
Constitutional law
Financial institutions
Notes
SCC Case Information: 20373
Decision Content
Bank of Montreal v. Hall, [1990] 1 S.C.R. 121
Bank of Montreal Appellant
v.
Arthur Hall Respondent
and
The Attorney General of Canada,
the Attorney General for New Brunswick,
the Attorney General for Saskatchewan and
the National Farmers Union Interveners
indexed as: bank of montreal v. hall
File No.: 20373.
1989: February 28; 1990: February 1.
Present: Wilson, La Forest, L'Heureux-Dubé, Sopinka and Cory JJ.
on appeal from the court of appeal for saskatchewan
Banks and banking ‑‑ Secured loans ‑‑ Security interest created under ss. 178 and 179 of Bank Act ‑‑ Security seized ‑‑ Provincial legislation requiring judicial approval for seizure of security ‑‑ Whether or not acts constitutional ‑‑ Whether or not bank required to comply with provisions of provincial act when enforcing security interest created under federal act ‑‑ Banks and Banking Law Revision Act, 1980, S.C. 1980‑81‑82‑83, c. 40, ss. 178, 179 (formerly Bank Act, R.S.C. 1970, c. B‑1, ss. 88, 89; now Bank Act, R.S.C., 1985, c. B‑1, s. 178, 179) ‑‑ Limitation of Civil Rights Act, R.S.S. 1978, c. L‑16, ss. 19, 27.
Constitutional law ‑‑ Division of powers ‑‑ Paramountcy ‑‑ Federal power over banks and banking and provincial power over property and civil rights ‑‑ Security interest created under ss. 178 and 179 of Bank Act ‑‑ Security seized ‑‑ Provincial Limitation of Civil Rights Act requiring judicial approval for seizure of security ‑‑ Whether or not acts constitutional ‑‑ Whether or not acts conflicting so as to render provincial act inoperative.
Respondent, a Saskatchewan farmer, contracted loans from appellant bank and granted two mortgages on his real property in favour of the Bank and a security interest in a swather pursuant to s. 88 of the Bank Act (subsequently s. 178 of the Banks and Banking Law Revision Act, 1980 and now s. 178 of the Bank Act). Respondent defaulted and in August 1984, the Bank, acting pursuant to the Bank Act, seized the swather and commenced an action to enforce its real property mortgage loan agreement. By way of defence to the foreclosure proceedings, respondent alleged that the Bank had not served the Notice of Intention to Seize required under Saskatchewan's Limitation of Civil Rights Act and sought to have the foreclosure proceedings dismissed. He also brought action seeking cancellation of the security agreement and to recover all monies paid on it as provided by this Act. The Bank countered by alleging that it was not subject to the Act in respect of proceedings taken under the Bank Act.
In November 1985 the parties applied by way of Notice of Motion for a determination by the Court of Queen's Bench of the question whether a chartered bank was required to comply with The Limitation of Civil Rights Act in enforcing a security interest under the Bank Act. The Chambers Judge held that the Bank was not required to comply with the provincial legislation. The Court of Appeal, by majority, reversed that decision. The principal issue here was whether a security interest created pursuant to ss. 178 and 179 of the Bank Act may constitutionally be subjected to the procedures for enforcement of security interests prescribed by the Saskatchewan Limitation of Civil Rights Act. Also at issue was the constitutional validity of the relevant provisions of both the federal and provincial Acts. The constitutional questions before this Court queried: (1) whether ss. 19 to 36 of The Limitation of Civil Rights Act were ultra vires the province in whole or in part; (2) whether ss. 178 and 179 of the Banks and Banking Law Revision Act, 1980 were ultra vires Parliament in whole or in part; and, (3) whether ss. 178 and 179 of the Banks and Banking Law Revision Act, 1980 conflicted with ss. 19 to 36 of The Limitation of Civil Rights Act so as to render inoperative ss. 19 to 36 in respect of security taken pursuant to s. 178 by a chartered bank.
Held: The appeal should be allowed. The first and second constitutional questions should be answered in the negative. As to the third, ss. 19 to 36 of The Limitation of Civil Rights Act are inapplicable to a security taken pursuant to ss. 178 and 179 of the Bank Act.
Sections 19 to 36 of The Limitation of Civil Rights Act, questions of paramountcy apart, come within property and civil rights in the province.
The federal banking power empowers Parliament to create an innovative form of financing and to define, in a comprehensive and exclusive manner, the rights and obligations of borrower and lender pursuant to that interest. Parliament, in the exercise of this power, can both create the ss. 178 and 179 security interest qua interest, and define the rights and obligations of the bank and its borrowers pursuant to that interest. The rights, duties and obligations of creditor and debtor are to be determined solely by reference to the Bank Act.
The security interest in question here was designed to allow the banks to lend money and make advances to certain classes of borrowers on the security of certain specified goods, including loans and advances to any farmer for the purchase of agricultural implements, on the security of such agricultural implements. The effect of the interest created by s. 178 was to vest title to the property in question in the bank when the security interest is taken out. Section 179 authorized the bank to sell all or any part of that property and provides that the proceeds of the sale shall be applied against the debt in question. These provisions complement the bank's right under s. 178(3) to take possession of secured property on default.
There can be no hermetic division between banking as a generic activity and the domain covered by property and civil rights. A spillover effect is inevitable. The fact that a given aspect of federal banking legislation cannot operate without having an impact on property and civil rights in the provinces cannot ground a conclusion that that legislation is ultra vires as interfering with provincial law where the matter concerned constitutes an integral element of federal legislative competence.
The security interest created by ss. 178 and 179, while at a variance with provincial law, was intra vires Parliament because of the policy reasons behind the creation of this security interest. This security interest met the pressing need to provide, on a nationwide basis, for a uniform security mechanism so as to facilitate access to capital by producers of primary resources and manufacturers. It freed borrower and lender from the obligation to defer to a variety of provincial lending regimes and facilitated the ability of banks to realize on its collateral. This in turn translated into important benefits for the borrower: lending became less complicated and more affordable.
The manner in which a bank is permitted to realize on its s. 178 security interest is not a mere appendage or gloss upon the overall scheme of the Act but rather the very linchpin of the security interest. It is integral to, and inseparable from, the legislative scheme. Severing the realization provisions would defeat the specific purpose of the Bank Act security interest for the banks would then be forced to contend with all the idiosyncracies and variables of the various provincial schemes.
There is an actual conflict in operation between ss. 178 and 179 of the Bank Act and ss. 19 to 36 of The Limitation of Civil Rights Act and accordingly ss. 19 to 36 are inoperative in respect of security taken pursuant to s. 178 by a chartered bank. The legislative purpose of Parliament would be displaced if the bank were required to defer to the provincial legislation in order to realize on its security.
The Bank Act provides that a lender may, on default of the borrower, seize the security; The Limitation of Civil Rights Act forbids a creditor from immediately repossessing the secured article on pain of determination of the security interest. The unqualified right of seizure granted to the bank by the federal legislation is restricted by the provincial legislation to situations where leave has been granted by judge, who will apply criteria formulated by the Province as to when and under what circumstances seizure can take place. It is not open to a provincial legislature to qualify in this way a right given and defined in a federal statute even though the sole effect of the provincial legislation would be to delay the bank's ability to take possession of its security.
Dual compliance is impossible when application of the provincial statute can fairly be said to frustrate Parliament's legislative purpose. The section 178 security interest would no longer be cognizable as such the moment provincial legislation might operate to superadd conditions governing realization over and above those found within the confines of the Bank Act.
Cases Cited
Applied: Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161; Tennant v. Union Bank of Canada, [1894] A.C. 31; considered: Landry Pulpwood Co. v. Banque Canadienne Nationale, [1927] S.C.R. 605; Royal Bank of Canada v. Workmen's Compensation Board of Nova Scotia, [1936] S.C.R. 560; Flintoft v. Royal Bank of Canada, [1964] S.C.R. 631; distinguished: Canadian Pioneer Management Ltd. v. Labour Relations Board of Saskatchewan, [1980] 1 S.C.R. 433; referred to: Abitibi Power & Paper Co. v. Montreal Trust Co., [1943] A.C. 536; Canada Trust Co. v. Hanson (1949), [1950] 1 D.L.R. 375, aff'd [1951] S.C.R. 366; Merchants' Bank of Canada v. Smith (1884), 8 S.C.R. 512; Bank of Montreal v. Guaranty Silk Dyeing & Finishing Co. (1935), 4 D.L.R. 483; Canadian Imperial Bank of Commerce v. R. (1984), 52 C.B.R. 145; Attorney‑General for Canada v. Attorney‑General for Quebec, [1947] A.C. 33; Attorney‑General for Alberta v. Attorney‑General for Canada, [1947] A.C. 503; Reference re Alberta Statutes, [1938] S.C.R. 100; Construction Montcalm Inc. v. Minimum Wage Commission, [1979] 1 S.C.R. 754; Attorney‑General for Alberta and Winstanley v. Atlas Lumber Co., [1941] S.C.R. 87.
Statutes and Regulations Cited
Act Respecting Incorporated Banks, C.S.C. 1859, c. 54.
Bank Act, R.S.C. 1970, c. B‑1, ss. 86(2), 88.
Bank Act, R.S.C., 1985, c. B‑1, ss. 178, 179.
Banks and Banking Law Revision Act, 1980, S.C. 1980‑81‑82‑83, c. 40, ss. 178, 179.
Constitution Act, 1867, ss. 91(15), 92(2).
Limitation of Civil Rights Act, R.S.S. 1978, c. L‑16, ss. 19 to 36.
Mercantile Amendment Act, R.S.O. 1887, c. 122.
Personal Property Security Act, S.S. 1979‑80, c. P-6.1.
Authors Cited
Anstie, R. H. "The Historical Development of Pledge Lending in Canada", Part I, The Canadian Banker 74, 2 (Summer 1967): 81-89; Part II, The Canadian Banker 74, 3 (Autumn 1967): 35-44.
Falconbridge, John Delatre. Banking and Bills of Exchange, 4th ed. Toronto: Canada Law Book, 1929.
Falconbridge, John Delatre. Crawford and Falconbridge Banking and Bills of Exchange, vol. 1, 8th ed. By Bradley Crawford. Toronto: Canada Law Book, 1986.
Galbraith, John Alexander. Canadian Banking. Toronto: Ryerson Press, 1970.
Lederman, W. R. "The Concurrent Operation of Federal and Provincial Laws in Canada" (1963), 9 McGill L.J. 185.
Moodie, William. "Accounts Receivable, Section 88 Of the Bank Act, And Inventory Financing ‑‑ A Banker's View", Meredith Memorial Lectures, 1967 Series, McGill University Faculty of Law. Security in Moveable Property. Montreal: Wilson & LaFleur Ltd., 1967.
Moull, William D. "Security Under Sections 177 and 178 of the Bank Act" (1986), 65 Can. Bar Rev. 242.
APPEAL from a judgment of the Saskatchewan Court of Appeal (1987), 54 Sask. R. 30, 36 D.L.R. (4th) 523, [1987] 3 W.W.R. 525, allowing an appeal from Matheson J. in Chambers (1985), 46 Sask. R. 182. Appeal allowed. The first and second constitutional questions should be answered in the negative. As to the third, ss. 19 to 36 of The Limitation of Civil Rights Act are inapplicable to a security taken pursuant to ss. 178 and 179 of the Bank Act.
William Softley and Dale Doan, for the appellant.
Gary Semenchuck, Q.C., for the respondent.
T. B. Smith, Q.C., and James Mabbutt, Q.C., for the intervener the Attorney General of Canada.
Robert G. Richards, for the intervener the Attorney General for Saskatchewan.
Bruce Judah, for the intervener the Attorney General for New Brunswick.
Audrey Brent, for the intervener the National Farmers Union.
//La Forest//
The judgment of the Court was delivered by
LA FOREST J. -- The principal issue in this appeal is whether a security interest created pursuant to ss. 178 and 179 of the Bank Act may constitutionally be subjected to the procedures for enforcement of security interests prescribed by the Saskatchewan Limitation of Civil Rights Act. It also raises the constitutional validity of the relevant provisions of both the federal and provincial Acts.
Facts
The respondent, Arthur Hall, a farmer in Saskatchewan, contracted loans from the appellant Bank of Montreal in the early 1980s. As collateral, Mr. Hall granted two mortgages on his real property in favour of the Bank. The loans were also secured by a security interest in a piece of farm machinery, a 1980 Versatile swather, pursuant to s. 88 of the Bank Act, R.S.C. 1970, c. B-1, subsequently s. 178 of the Banks and Banking Law Revision Act, 1980, S.C. 1980-81-82-83, c. 40, now s. 178 of the Bank Act, R.S.C., 1985, c. B-1.
Mr. Hall defaulted on his loan, and in August 1984, the Bank, pursuant to the provisions of the Bank Act, seized the swather and commenced an action to enforce its real property mortgage loan agreement. By way of defence to the foreclosure proceedings, Mr. Hall alleged that the Bank had not served the Notice of Intention to Seize required under the provisions of The Limitation of Civil Rights Act, R.S.S. 1978, c. L-16, and accordingly sought to have the foreclosure proceedings dismissed. He also brought action for cancellation of the security agreement and to recover all monies paid thereon as provided by this Act. The Bank of Montreal countered by alleging that it was not subject to the Act in respect of proceedings taken under the Bank Act.
In November 1985, the parties, by Notice of Motion filed before the Court of Queen's Bench for Saskatchewan, applied for a determination of the question whether the plaintiff, as a chartered bank, was required to comply with The Limitation of Civil Rights Act in enforcing a security interest under the Bank Act.
Judicial History
Court of Queen's Bench
The Chambers Judge, Matheson J., held that the Bank was not required to comply with The Limitation of Civil Rights Act. He expressed the opinion that the amended definition of "security interest" in s. 19(f) of The Limitation of Civil Rights Act was not meant to extend to a security interest under s. 178 of the Bank Act, but was solely intended to bring The Limitation of Civil Rights Act into line with the personal property security interests provided for in Saskatchewan's Personal Property Security Act, S.S. 1979-80, c. P-6.1.
Matheson J. nonetheless went on to deal with the case on the assumption that the Act did apply to chartered banks. He opined that it was "entirely possible", in view of the development of financial and commercial institutions that are subject to provincial consumer protection, that s. 178(3) of the Bank Act, though purporting to be enacted under the federal power to regulate banking, might be ultra vires as trenching on provincial jurisdiction over property and civil rights. He noted, however, that this question had not been properly put in issue before him and proceeded on the assumption that the provision had been validly enacted. He went on to draw attention to the fact that the Bank, if required to comply with the provincial legislation, would be subject to the penalty provision of s. 27 whereby failure to give the requisite Notice of Intention to Seize results in the termination of the security agreement and the release of the debtor from all further obligations. In Matheson J.'s view, the provincial legislature did not have authority to enact legislation which had the effect of negating a federally created security agreement, even if the provincial legislation were held competent to limit the manner in which it could be enforced.
The Court of Appeal
The Court of Appeal, by majority, reversed the decision of the Chambers judge; (1987), 54 Sask. R. 30. Writing for the majority, Sherstobitoff J.A., rejected the notion that the definition of "security interest" in The Limitation of Civil Rights Act would not extend to a s. 178 security interest taken by a chartered bank. Noting that the Legislature had expressly excluded other security interests created pursuant to federal legislation from the definition in s. 19, but had not done so in the case of s. 178 interests, he declined to accord any special significance to the fact that The Limitation of Civil Rights Act was only amended following the enactment of The Personal Property Security Act.
Sherstobitoff J.A. then turned to the question whether the doctrine of paramountcy applied so as to suspend the provincial legislation or render it inoperative. There was no question that s. 178 fell within the federal power respecting banks and banking. However, in his opinion, by application of the test for paramountcy laid down by this Court in Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161, this was not a case where there was an express contradiction between the two enactments. The Limitation of Civil Rights Act could not be said to operate so as to affect the amount of a debtor's indebtedness or his liability for payment. It merely imposed an obligation on the bank to give notice prior to seizure so as to permit a debtor to make an application to the court for an order specifying the procedures to be followed for realizing on the security. This obligation might delay a bank's ability to realize on its security but this, in itself, did not imply an inconsistency or incompatibility between the federal and provincial enactments. He thus put it, at p. 40:
Paramountcy applies only where there is actual conflict in operation as where one enactment says "yes", the other "no", or compliance with one is defiance of the other. I can find no such conflict in this case. A bank may be delayed in realizing upon its s. 178 security, but it will not be denied its remedy so long as it follows the required procedure.
The dissenting judge, Wakeling J.A., agreed that the definition of "security interest" embraced security interests granted pursuant to s. 178 of the Bank Act. While conceding that there was logic behind the assumption that the amendment to the definition of "security interest" had been merely in the nature of a "housekeeping measure" designed to ensure that related legislation conformed to Saskatchewan's Personal Property Security Act, Wakeling J.A. nevertheless concluded that the language was so clear and unambiguous as to support the view that the Legislature had intended to include s. 178 security interests within the meaning of the definition.
On the question of paramountcy, however, Wakeling J.A. parted company with the majority. As he saw it, the crux of the matter lay in the fact that the provincial legislation purported to subject to the operation of provincial law a security interest created by federal legislation that gave a bank an unqualified right of seizure on the default of a loan. This restriction on an unqualified right to seize, concluded Wakeling J.A., satisfied the test for paramountcy set out by this Court in Multiple Access Ltd. v. McCutcheon. Compliance with the legislation of the one jurisdiction would necessarily entail defiance of the other. He stated, at p. 35:
This test must be applied within a specific time frame, and in this case that time is when a bank has made a decision to seize as a result of default. When that decision is made, the clear fact is the Bank Act provides that the bank can do so while the Limitation of Civil Rights Act indicates it can not. I perceive this to be a conflict sufficient to meet the test previously described as the right of seizure given under federal legislation cannot be exercised without being in defiance of provincial legislation.
The Appeal to this Court
Leave to appeal to this Court was then sought and granted, and the following constitutional questions were stated:
1.Are ss. 19 to 36 of The Limitation of Civil Rights Act, R.S.S. 1978, c. L-16, ultra vires the Legislature of Saskatchewan in whole or in part?
2.Are ss. 178 and 179 of the Banks and Banking Law Revision Act, 1980, S.C. 1980-81-82-83, c. 40, ultra vires the Parliament of Canada in whole or in part?
3.Do ss. 178 and 179 of the Banks and Banking Law Revision Act, 1980, S.C. 1980-81-82-83, c. 40, conflict with ss. 19 to 36 of The Limitation of Civil Rights Act, R.S.S. 1978, c. L-16, so as to render inoperative ss. 19 to 36 in respect of security taken pursuant to s. 178 by a chartered bank?
The Attorneys General of Canada, New Brunswick and Saskatchewan intervened. Those of Ontario, Quebec, Manitoba and British Columbia also intervened but later withdrew. As well, the National Farmers Union applied for and was granted leave to intervene.
Sections 19 to 36 of The Limitation of Civil Rights Act
Apart from the possible conflict with federal legislation (a matter I shall deal with later), no argument was made in the courts below or in this Court challenging the constitutionality of ss. 19 to 36 of The Limitation of Civil Rights Act and, in my view, no such challenge could be seriously mounted. It is not necessary to reproduce these provisions here. Suffice it to say that they confer on a debtor the right to seek court supervision of the realization of a secured debt, and thus may have the effect of suspending the right of a secured creditor to realize on its security. They allow a debtor an opportunity to redeem or reinstate a security agreement. In particular, s. 21 requires a secured creditor to give notice to the debtor of its intention to take possession of secured property, and if it fails to do so, the security agreement (by s. 27) is terminated and the debtor is released from all liability under the agreement and is entitled to recover any monies already paid. I have no difficulty holding, questions of paramountcy apart, that such legislation may fairly be said to come within property and civil rights in the province, and thus intra vires the provincial legislature; see Abitibi Power & Paper Co. v. Montreal Trust Co., [1943] A.C. 536 (P.C.), and Canada Trust Co. v. Hanson (1949), [1950] 1 D.L.R. 375, aff'd [1951] S.C.R. 366.
Sections 178 and 179 of the Banks and Banking Law Revision Act, 1980
The analysis of the question whether ss. 178 and 179 of the Bank Act are in any way ultra vires the Parliament of Canada begins with an examination of the federal banking power itself, s. 91(15) of the Constitution Act, 1867, which reads as follows:
91. . . . the exclusive Legislative Authority of the Parliament of Canada extends to all Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say, ‑-
. . .
15. Banking, Incorporation of Banks, and the Issue of Paper Money.
The locus classicus as to the meaning of this provision is, of course, the pronouncement of Lord Watson in Tennant v. Union Bank of Canada, [1894] A.C. 31, where the Privy Council was called upon to consider "whether warehouse receipts, taken in security by a bank in the course of the business of banking" are matters falling within the provision. In the course of his judgment, Lord Watson, at p. 46, gave a broad interpretation of the federal banking power in the following passage:
The legislative authority conferred by these words is not confined to the mere constitution of corporate bodies with the privilege of carrying on the business of bankers. It extends to the issue of paper currency, which necessarily means the creation of a species of personal property carrying with it rights and privileges which the law of the province does not, and cannot, attach to it. It also comprehends "banking," an expression which is wide enough to embrace every transaction coming within the legitimate business of a banker.
Lord Watson's pronouncement echoes the view taken by this Court in Merchants' Bank of Canada v. Smith (1884), 8 S.C.R. 512, where, at p. 541, Henry J. held that everything necessarily connected with banking fell within the powers of Parliament even though they might interfere, in some respects, with property and civil rights.
Given the broad sweep of his definition of banking, it was hardly necessary for Lord Watson to venture an exhaustive enumeration of the actual practices that fell within the ambit of the "legitimate business of a banker". But in remarks with immediate relevance to this case, he, again at p. 46, did make it clear that he took for granted that the business of banking would necessarily embrace the "lending of money on the security of goods, or of documents representing the property of goods".
The respondent did not directly challenge this proposition, but sought to qualify it somewhat. He conceded, rightly in my view, that the federal banking power extends to allowing Parliament to define a security interest and to permit borrowing on the strength of that interest. He submitted, however, that Parliament could not, pursuant to this power, legislate with respect to the requirements relating to the realization and enforcement of that interest. Such provisions, he argued, would trench on the exclusive jurisdiction of the provinces respecting property and civil rights.
Consideration of this proposition logically begins with a general outline of the nature of the ss. 178 and 179 security interest itself. In essence, as is apparent from s. 178(1)(a) to (j), the security interest in question here is designed to allow the banks to "lend money and make advances" to certain classes of borrowers on the security of certain specified goods, comprehensively defined in paras. (a) to (j), and including loans and advances "to any farmer for the purchase of agricultural implements, on the security of such agricultural implements".
By section 178(2), a bank may take security in property owned by the borrower at the time of the loan transaction, and any property acquired during the pendency of the security agreement. The rights and powers of the bank with respect to the secured property are set out in s. 178(2)(c). By the terms of s. 178(2)(c), these rights and powers are stated to be "the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which such property was described". These powers are defined, in turn, in s. 186 of the Act where it is specified that any warehouse receipt or bill acquired by a bank as security for the payment of a debt, vests in the bank all the right and title to goods, wares and merchandise covered by the holder or owner thereof.
The nature of the rights and powers vested in the bank by the delivery of the document giving the security interest has been the object of some debate. Argument has centred on whether the security interest should be likened to a pledge or bailment, or whether it is more in the nature of a chattel mortgage. I find the most precise description of this interest to be that given by Professor Moull in his article "Security Under Sections 177 and 178 of the Bank Act" (1986), 65 Can. Bar Rev. 242, at p. 251. Professor Moull, correctly in my view, stresses that the effect of the interest is to vest title to the property in question in the bank when the security interest is taken out. He states, at p. 251:
The result, then, is that a bank taking security under section 178 effectively acquires legal title to the borrower's interest in the present and after-acquired property assigned to it by the borrower. The bank's interest attaches to the assigned property when the security is given or the property is acquired by the borrower and remains attached until released by the bank, despite changes in the attributes or composition of the assigned property. The borrower retains an equitable right of redemption, of course, but the bank effectively acquires legal title to whatever rights the borrower holds in the assigned property from time to time.
Section 179(4) sets out the general powers of the bank in the event of non-payment of the loan or advance secured by the property assigned to it by s. 178. In a word, this section authorizes the bank to sell all or any part of that property and provides that the proceeds of the sale shall be applied against the debt in question. These provisions complement the bank's right under s. 178(3) to take possession of secured property on default.
The Historical Record
I turn next to a consideration of the historical circumstances behind the creation of this security interest. For if the above remarks suffice to give a basic understanding of the operation of the s. 178 security interest, it is only in light of the historical record that one can appreciate the rationale for the creation of this particular security interest which, as noted in Crawford and Falconbridge Banking and Bills of Exchange (8th ed. 1986), vol. 1, is unique to Canadian banking legislation.
In "The Historical Development of Pledge Lending in Canada", Part I, The Canadian Banker 74, 2 (Summer 1967): 81-89, and Part II, The Canadian Banker 74, 3 (Autumn 1967): 35-44, Anstie traces the predecessors to the s. 178 security interest to pre-Confederation banking legislation of the Province of Canada. This legislation, enacted against a backdrop of severe economic depression, aimed at fostering commerce by doing away with prohibitions in the charters of banks which had effectively prevented them from making loans on the security of real or personal property. As put by Anstie, at p. 82:
The original authority for pledge lending goes back more than one hundred years and while the early legislation was not passed as banking legislation per se it was directed at and supported by the banks. Its principal aim was to encourage banks and other lenders to facilitate commercial transactions, a need felt by the business community. Parliamentary records show too that the same motive, public need, was behind subsequent developments of this feature of the banking system.
Anstie, at p. 83, quotes from a parliamentary report of the day dealing with a bill entitled "An Act Granting Additional Facilities in Commercial Transactions":
March 1, 1859
"Hon. Mr. Rose introduced a bill to grant additional facilities to commercial transactions. He said the object of the bill was to enable parties holding bills of lading to render these bills available as collateral security, in order to enable the holder to obtain advances of money. As the law now stands, a person having a cargo of flour, and holding bills of lading of such cargo, and wishing to obtain a discount to facilitate his progress, is obliged to place these bills in the hands of a consignee, because it is doubtful whether the banks can hold bills of lading as collateral security. He wished, therefore, by his bill to make such securities available for the means of obtaining advances without the aid of a third party".
Incorporated in the Consolidated Statutes of Canada under the title An Act Respecting Incorporated Banks, C.S.C. 1859, c. 54, this Act introduced a security interest that is immediately recognizable as the predecessor of its modern day counterpart in the Bank Act. By the terms of the 1859 statute, the holder of a bill of lading could endorse it to the bank as collateral security for the due payment of any bill of exchange or note discounted by the bank. The endorsement vested in the bank, from that date, all right and title of the endorser to the goods, subject to the endorser's right to redeem his bill.
The 1859 Act was the object of an important amendment in 1861. Any person engaged in the calling of a warehouseman, miller, wharfinger, master of vessel or carrier and authorized to issue receipts in that capacity, was empowered to give a bill of lading under the statute in respect of goods that he owned. In other words the amendment did away with the requirement that bills of lading could only be given by a person acting as bailee. As put by Anstie, at p. 84:
The effect of this amendment was to establish for the first time, the principle that the owner of the goods might practically give the bank a mortgage upon his goods in the form of a warehouse receipt or bill of lading. [Emphasis in original.]
The Bank Act of 1890 brought with it a significant broadening of the list of eligible borrowers and of acceptable collateral. In effect, the Act was recast in the form it bears to the present day. The nature of this transformation is thus summarized in the 4th edition of Falconbridge's Banking and Bills of Exchange (1929), at p. 222:
Instead of the former provision by which in effect certain specified classes of persons of a custodier character might give security upon their own goods in their own possession, it was enacted that any wholesale manufacturer of goods, and any whole purchaser or shipper of products of agriculture, the forest and mine, or the sea, lakes and rivers, or live stock or dead stock, might give security upon such goods, products or stock.
The rationale underlying these changes may be found in the remarks of Sir Edmund Walker who in the Bank Act Revision Proceedings (1933), at p. 236, made the following comment noted by Moull, op. cit., at p. 243, n. 3:
[T]he late Mr. Lash and myself framed [section 178] in the early days in this country . . . in order that the manufacturer [etc.] . . . could borrow from the bank without endorsers or anything of that kind, by pledging the material to the bank.
The remarks of Anstie, op. cit., at p. 81, round out the above comments. He points out that these changes, tailored to allow producers of primary products and manufacturers of finished goods to borrow on the strength of their seasonal inventories, were predicated on the recognition that problems of cash flow could cripple the ability of these sectors to "carry or cure their product until absorbed by the market". The legislation, therefore, was aimed at enabling producers to borrow, at reasonable rates of interest, more money than would otherwise have been possible. The following excerpt from Anstie, op. cit., at p. 88, which bears on the efforts of farming interests to be covered by the provisions of the 1890 Bank Act, speaks volumes about the deficiencies in the money market of the day addressed by the legislation:
The exclusion of farmers was upheld despite active representations by some of the champions of the farming interests, who felt strongly that a farmer should be able to borrow against the security of threshed grain and livestock. It was pointed out in debate that a farmer may be solvent but still find it difficult to borrow $300/$400 from a bank at harvest time. This resulted in private local bankers becoming the middlemen between the farmers and the chartered banks. It was stated that these lenders would charge 12, 15 to 24 per cent and at the same time borrow from the chartered banks at 7 per cent.
Almost a century has passed since the predecessor of the present day security interest was first incorporated into the Bank Act, and that period has seen a steady expansion in the categories of eligible borrowers. But the governing principle of the security interest, for all subsequent refinements to successive Bank Acts, remains to the present day essentially the same as that first defined by the 1859 statute. Today, as in 1859, an owner of goods assigns an interest in those goods as security for a loan or advance so as to permit the bank to sell the goods on default of payment.
In Crawford and Falconbridge Banking and Bills of Exchange, (8th ed. 1986), vol. 1, at pp. 403-7, the point is made that the need to introduce a uniform security interest, applicable nationwide, did not rest solely on the desire to abolish the restrictions that prevented banks from lending on the security of real and personal property. The introduction of a national security interest was also perceived as a means of obviating barriers to the lending of money attributable to the complexity and diversity of lending regimes in the nascent Canadian economy. In Crawford and Falconbridge, op. cit., it is stated, at p. 407:
The confused and complicated state of personal property security law at the time the provisions were introduced, and even when they were substantially revised in 1890 and 1923, was such that one obvious object must have been to encourage bank lending by making security more readily available. The complexity of the documentation required under provincial chattel security statutes, and the multiplicity of registrations and renewals required under their county registration schemes were considerable obstacles, where goods might be moved out of the county, or where the debtor carried on business in more than one county. The advantages of a single security document in the form of the schedule and a single place of registration, even for debtors having national operations, were inestimable advantages of the new regime evolved under the Bank Act.
Moodie in an article entitled "Accounts Receivable, Section 88 Of The Bank Act, And Inventory Financing -- A Banker's View", in Security in Moveable Property, Meredith Memorial Lectures, 1967 Series, notes, at p. 50, that the new lending regime had the advantage of enabling a borrower to "give security more easily, more quickly, and far more cheaply than by any other means".
It is generally agreed that this provision of Canadian banking legislation has, in large part, met its objective of providing natural resource and manufacturing industries nationwide with a readily available stimulus of capital that would otherwise not have been available, or available only at a much higher cost. Masten J.A. in Bank of Montreal v. Guaranty Silk Dyeing & Finishing Co. (1935), 4 D.L.R. 483 (Ont. C.A.), at pp. 489-90, commented:
It is to be borne in mind that the Parliament of Canada has enacted these sections not so much for the benefit of banks as for the benefit of manufacturers; but principally to provide a convenient and suitable means for the provision and application of capital to industry with the object that thus manufacturing and commercial enterprise in Canada may be encouraged. It is also to be noted that, originally enacted in 1890, they have with amendments from time to time been re-enacted during more than 40 years.
Masten J.A.'s view of the Bank Act security as intended to be for the benefit of the borrower is reflected in academic literature as well. Professor Moull, op. cit., at p. 243, cites Galbraith in that author's treatise Canadian Banking, published in 1970, to the effect that s. 178 often provides "the most effective, inexpensive, and convenient way of obtaining security for the eligible classes of borrowers", and goes on himself to add, at p. 244:
This concern for the borrower is perhaps why section 178 was broadened during the last decennial revisions to the Bank Act, at a time when other changes seemed to reflect a trend towards curtailing bank powers and privileges.
In a word, the creation of the Bank Act security interest has been a key factor in the evolution of banking in this country. As noted by Professor Moull, op. cit., at p. 243, the availability of the s. 178 security interest has been a prime factor in the evolution of the chartered banks into predominant national lending institutions. To q