A-587-86
Regional Trust Company (Appellant)
v.
Superintendent of Insurance (Respondent)
INDEXED AS: REGIONAL TRUST CO. v. CANADA (SUPERIN-
TENDENT OF INSURANCE)
Court of Appeal, Heald, Hugessen and Stone
JJ.—Ottawa, December 18, 1986 and January 19,
1987.
Insurance — Yearly determination of trust companies'
assets — Whether deferred portion of losses on interest rate
futures contracts entered into as hedging program correctly
treated as "assets not admitted" — Improper exercise of
discretionary power by Superintendent as amounting to
mechanical application of existing practices and refusal to
decide matter on merits — Trust Companies Act, R.S.C. 1970,
c. T-16, ss. 63 (as am. by R.S.C. 1970 (1st Supp.), c. 47, s. 22),
64 (as am. idem, s. 24; 1985, c. 16, s. 16), 68 (as am. by R.S.C.
1970 (1st Supp.), c. 47, s. 25; 1976-77, c. 28, s. 45; 1985, c. 16,
s. 17), 72(1),(2), 74(1),(5), 76(c), 78(1) (as am. by R.S.C. 1970
(2nd Supp.), c. 10, s. 64(2)), (2) — The Trust Companies Act,
1914, S.C. 1914, c. 55, s. 69 — An Act to amend The Trust
Companies Act, 1914, S.C. 1919-1920, c. 21 — An Act to
amend The Trust Companies Act, 1914, S.C. 1922, c. 51, s. 6.
Practice — Role of assessors appointed by Court to assist in
hearing of cases involving technical matters — Not limited to
explaining terms of art but should not give evidence or express
opinion on issues Court must decide — There to assist Court
in understanding effect and meaning of technical evidence or in
drawing proper inferences from established facts — Federal
Court Rules, C.R.C., c. 663, R. 492(1).
In 1984, the appellant trust company instituted a hedging
program involving trading in interest rate futures contracts to
hedge against interest rate risk arising from unmatched assets
(fixed rate, fixed term mortgage loans of up to five years) and
liabilities (short-term or demand deposits). In 1985, by applica
tion of generally accepted accounting principles, the appellant
deferred a resulting loss of $306,501 by amortizing it over the
term of the mortgage loans and reported it as "Other Assets" in
its 1985 Annual Statement to the Department of Insurance. By
a ruling made under paragraph 76(c) of the Act, the Superin
tendent of Insurance, considering that the hedging loss was
intended to protect interest spreads on the entire mix of assets
and liabilities, refused to treat it as "Other Assets" and treated
it, instead, as "Assets Not Admitted", thus impacting adversely
on the company's borrowing base. The Superintendent based
his ruling on the long-held practice of the Department whereby
assets of little realizable value are deducted from trust and loan
companies' assets in establishing their borrowing base, and on
the need for consistency in the treatment of realized gains and
losses on hedging contracts. This is an appeal from that ruling.
Held, the appeal should be allowed.
Although a broad discretionary power is conferred by para
graph 76(c), the ruling cannot stand because it is based upon
irrelevant considerations and upon purported practices of the
Department which were applied without regard to the merits of
the case. Action taken pursuant to broad statutory power must
be exercised reasonably. Relying on a long-held practice when
it is not specifically concerned with determining impact of
deferred losses on related asset items is not reasonable. Nor is it
any more reasonable to rely on the "need for consistency"
without any apparent regard for the merits of the appellant's
position.
While the Superintendent was not bound to decide the
matter on the basis of generally accepted accounting principles
alone, he was required to exercise his powers fairly by examin
ing the matter in all its newness in light of those principles and
in light of other pertinent considerations.
While the role of an assessor, called in to assist the Court
under Rule 492(1), was not restricted to explaining terms of
art, he should not give evidence or express any opinion on the
issues the Court must decide. His role is to assist the Court in
understanding the effect and meaning of technical evidence in
the record or in drawing proper inferences from established
facts. Assessors give advice and judges are free to take it or not.
This advice should be elicited by putting questions in writing
and receiving written answers.
CASES JUDICIALLY CONSIDERED
APPLIED:
Richardson v. Redpath, Brown & Co., [1944] A.C. 62
(H.L.); `Sun Diamond" (Owners of the Ship) v. The
Ship "Erawan" et al. (1975), 55 D.L.R. (3d) 138
(F.C.T.D.); Australia (S.S.) v. Nautilus (S.S.), [1927]
A.C. 145 (H.L.); Melanie (S.S.) v. San Onofre (No. 1)
(S.S.), [1927] A.C. 162 (H.L.); The "Miraflores" and
the "Abadesa", [1966] 1 Lloyd's Rep. 97 (Eng. C.A.);
"Kathy K" (The) v. Stein Estate, [1974] 1 F.C. 657
(C.A.); Roberts v. Hopwood, [1925] A.C. 578 (H.L.);
Performing Rights Organization of Canada Limited v.
Canadian Broadcasting Corporation (1986), 64 N.R.
330; 7 C.P.R. (3d) 433; Associated Provincial Picture
Houses, Ld. v. Wednesbury Corporation, [1948] 1 K.B.
223 (C.A.).
DISTINGUISHED:
Re Sun Life Assce Co., [1927] 4 D.L.R. 287 (Ex. Ct.);
Discount & Loan Corp. v. Superintendent of Insurance,
[1938] 4 D.L.R. 225 (Ex. Ct.); Montreal Life Insurance
Company v. Superintendent of Insurance, judgment
dated August 13, 1943, Exchequer Court, not reported.
COUNSEL:
Brian G. McLean for appellant.
Derek H. Aylen, Q. C. and Joseph C. de Pen-
cier for respondent.
SOLICITORS:
Edwards, Kenny & Bray, Vancouver, for
appellant.
Deputy Attorney General of Canada for
respondent.
EDITOR'S NOTE
The Executive Editor has elected to report the
reasons for judgment herein as abridged. The
deleted portion concerns technical matters upon
which the advice of the assessor was sought.
The following are the reasons for judgment
rendered in English by
STONE J.: By a ruling made pursuant to para
graph 76(c) of the Trust Companies Act, R.S.C.
1970, c. T-16 as amended, the Superintendent of
Insurance treated the deferred portion of certain
losses incurred by the apellant in its 1985 fiscal
year as "Assets Not Admitted" thus impacting
adversely upon its borrowing base. The losses were
incurred in closing out transactions in trading of
interest rate futures contracts. The appellant
sought to include such portion among "Other
Assets" as "Deferred Loss on Futures Contracts"
and so reported it in its 1985 Annual Statement
(Form INS-33) to the Department of Insurance.
Subsection 72(1) requires that Statement to be
deposited with the Department. It is to be a "state-
ment of the condition and affairs of the company
... showing ... assets and liabilities ... and .. .
income and expenditures during he year" and may
contain other information required by the Minister
of Finance. The statement must be in a form
determined by the Minister pursuant to subsection
72(2).
Paragraph 76(c) of the Act reads:
76. In his annual report prepared for the Minister under
section 74, the Superintendent shall
(c) be at liberty to increase or diminish the assets or liabili
ties of such companies to the true and correct amounts
thereof as ascertained by him in the examination of their
affairs at the head office thereof, or otherwise.
This appeal is brought under subsection 78(1) of
the Act [as am. by R.S.C. 1970 (2nd Supp.), c. 10,
s. 64(2)]:
78. (1) An appeal lies in a summary manner from the ruling
of the Superintendent as to the admissibility of any asset not
allowed by him, or as to any item or amount so added to
liabilities, or as to any correction or alteration made in any
statement, or as to any other matter arising in the carrying out
of this Act, to the Federal Court of Canada, which court has
power to make all necessary rules for the conduct of appeals
under this section.
Subsection 74(1) requires the Superintendent to
"examine carefully the statements of the condition
and affairs of each company, and report thereon to
the Minister as to all matters requiring his atten
tion and decision". By subsection 74(5) he must
prepare for the Minister from these statements "an
annual report, showing the full particulars of each
company's business".
For the purpose of an appeal, the
Superintendent is required by subsection 78(2) to
give a certificate "setting forth the ruling appealed
from and the reasons therefor". After referring to
section 72 and quoting paragraph 76(c) of the Act,
the Superintendent stated in his certificate:
4. The Annual Statement of The Regional Trust Company for
the year ended December 31, 1985, reports at line 09 on page
02 thereof under the caption "Other assets" the amount of
$414,402. Reference to EXHIBIT 11 on page 28 of the Annual
Statement, at line 03 thereof, indicates that of the latter
amount, $306,501 is recorded under the caption "Deferred Loss
on Futures Contracts". It is the ruling of the Superintendent of
Insurance that such amounts shown as "Deferred Loss on
Futures Contracts" are properly considered to be "Assets Not
Admitted" and are to be shown on page 28 of the said Annual
Statement iNs-33 at lines 19 through 24 thereof and deducted
from the company's assets at line 26 of page 02 of the said
statement.
It is the Department of Insurance's long-held practice that
assets of little realizable value are deducted from the assets of a
trust company or loan company in establishing the borrowing
base of such companies. Further, realized capital gains and
losses on debt securities are not, as a matter of practice,
amortized in respect of companies subject to the Trust Compa
nies Act or the Loan Companies Act. Consistency requires that
realized gains and losses on hedging contracts be treated in the
same manner.
Page 28 of the Annual Statement consists of
Exhibit 11 headed "Details of Other Assets and
Assets Not Admitted". At the top of the page
appear bracketed words: "For federally supervised
companies items 9 to 12 and similar assets of little
realizable value are to be classified as assets not
admitted . .." Page 2 of the Statement is for
listing "Assets" (at book value) and line 26 there
on requires a reporting company to "Deduct assets
not admitted". The appellant included the amount
of $306,501 (which it showed on line 03 of page 28
as "Deferred Loss on Futures Contracts") in the
amount of $414,402 on line 09 page 2 as "Other
Assets".
The basic situation thus appears. Some addition
al facts will serve to put the issues in better
perspective. They are taken from the record which
consists chiefly of correspondence between the
appellant and the Department of Insurance, inter
nal memoranda of both parties and the Annual
Statement. They are not disputed. Trading in in
terest rate futures contracts by a trust company
for the purpose of hedging is recognized by the
Department of Insurance as an authorized activity
that is reasonably incidental to its specified invest
ment powers. In 1984 the appellant instituted a
hedging program involving trading in interest rate
futures contracts to hedge against interest rate risk
arising from unmatched assets (fixed rate, fixed
term mortgage loans of up to five years) and
liabilities (short-term or demand deposits). The
object of the trading was to hedge or protect the
appellant against reductions in income that could
be caused by interest rate fluctuations, thereby
stabilizing its future net interest income.
Between March 6 and 8, 1985 the appellant
established a short position of 90 Canadian Trea
sury Bill futures contracts for June delivery. The
last contracts in that position were closed out in
June of that year. By the time all of the contracts
had been closed out, the trading resulted in a loss
of approximately $725,000. The appellant's
accounting treatment of hedging gains and losses
was to defer such gains and losses by amortizing
them over the term of the mortgage loans. At the
end of its 1985 fiscal year $306,501 of the hedging
losses was so deferred as required by application of
generally accepted accounting principles and was
reported in the 1985 Annual Statement in the
manner referred to above. The trading was accept
ed by the Department as hedges and not as specu
lations. There was disagreement, however, on the
purpose of the hedge. The appellant claims that
the mortgage loans were the hedged assets while
the respondent says that the hedging was intended
to protect interest spreads on the entire mix of
assets and liabilities. I shall return to this question
presently.
I must deal first with a preliminary issue raised
by the respondent. Rule 492(1) [Federal Court
Rules, C.R.C., c. 663] authorizes the Court to
"call in the aid of one or more assessors, specially
qualified, and hear and determine a matter, wholly
or partially, with the assistance of such assessor or
assessors". On October 16, 1986 in the course of
giving directions, this Court observed that "the
case is one in which an assessor or assessors will be
of assistance to the Court". When the appeal came
on for hearing, Peter J. Speer a partner in Coopers
& Lybrand, a national firm of chartered account
ants, was appointed as an assessor after it became
apparent that neither of two other chartered
accountants earlier appointed as assessors could be
present at the hearing. The matter was put over to
be heard on December 18 and the assessor pro
vided with a copy of the record. He was present
throughout the hearing.
In written argument the respondent submitted
that the assessor's role should be limited "only to
explain terms of art" and also that he should not
give evidence or express any opinion on the issues
this Court must decide. I agree with this latter
submission. The appeal must be determined on the
evidence before us and the issues are for the
decision of the Court alone. I do not agree that the
assessor's role should be confined to explaining
terms of art. Indeed in his oral argument, counsel
for the respondent accepted a wider role for the
assessor relying on a decision of the House of
Lords in Richardson v. Redpath, Brown & Co.,
[1944] A.C. 62 where at pages 70-71 Viscount
Simon L.C. discussed the functions of an assessor
at a trial in the following terms:
My Lords, I am aware that if your Lordships accept the view
which I have presented in this opinion, the House will be
condemning a practice which we are told has of recent years
become almost universal in county courts when dealing with
workmen's compensation cases involving a medical question.
We are told that in such cases it is quite common for the
medical assessor to make an examination of the workman and
to report his opinion to the judge. But to treat a medical
assessor, or indeed any assessor, as though he were an unsworn
witness in the special confidence of the judge, whose testimony
cannot be challenged by cross-examination and perhaps cannot
even be fully appreciated by the parties until judgment is given,
is to misunderstand what the true functions of an assessor are.
He is an expert available for the judge to consult if the judge
requires assistance in understanding the effect and meaning of
technical evidence. He may, in proper cases, suggest to the
judge questions which the judge himself might put to an expert
witness with a view to testing the witness's view or to making
plain his meaning. The judge may consult him in case of need
as to the proper technical inferences to be drawn from proved
facts, or as to the extent of the difference between apparently
contradictory conclusions in the expert field. In Hall v. British
Oil and Cake Mills, Ld. (23 B.W.C.C. 529, 533), Scrutton
L.J., in several passages of his judgment, treats a medical
assessor's answers to the judge's inquiries as "evidence", and
even speaks without objection of a medical assessor or a
nautical assessor giving "evidence of facts". But I cannot agree
that this is within the scope of an assessor's legitimate contribu
tion. Earl Loreburn's judgment in Woods v. Thomas Wilson,
Sons & Co., Ld. (8 B.W.C.C. 288, 229) puts the medical
assessor's functions as high as they can properly be put. Lord
Parmoor (Ibid. 311) in that case aptly defines the medical
assessor's function as being "not to supply evidence but to help
the judge or arbitrator to understand the medical evidence"—a
view in which Lord Parker concurred. It would seem desirable
in cases where the assessor's advice, within its proper limits, is
likely to affect the judge's conclusion, for the latter to inform
the parties before him what is the advice which he has received.
But I propose that the House should definitely lay it down that
it is not part of the functions of a medical assessor as such to
conduct a personal examination of the workman or to report
the effect of the examination and his deductions from it to the
judge. (Emphasis added.)
These views were adopted by Collier J. in "Sun
Diamond" (Owners of the Ship) v. The Ship
"Erawan" et al. (1975), 55 D.L.R. (3d) 138
(F.C.T.D.) at pages 145-146. The Richardson case
was of a different kind than the one before us in
that it was concerned with the proper role of an
assessor at a trial. That said, I accept the principle
as applicable here as well. In my opinion the
assessor, at our request, may assist us in under
standing the effect and meaning of the technical
evidence in the record or in drawing proper infer
ences from the facts established by that evidence. I
also adopt the view expressed by Lord Sumner in
Australia (S.S.) v. Nautilus (S.S.), [1927] A.C.
145 (H.L.), at page 152 that "assessors only give
advice and that judges need not take it".
It is also my view that such advice should be
elicited by putting written questions to the assessor
and receiving written answers. That way of pro
ceeding in an appeal was approved in 1919 by the
House of Lords in Melanie (S.S.) v. San Onofre
(No. 1) (S.S.), [ 1927] A.C. 162, at page 164 where
Lord Birkenhead L.C. said:
In a Court of first instance consultation between the Court and
its assessors will naturally and usefully be informal and fre
quent, and I should be unwilling to suggest artificial restrictions
upon its course. But in the Court of Appeal the issues are or
ought to be clearly defined, and it would, I think, be convenient
that the advice of the assessors should be elicited by written
questions.
The practice of putting the questions and taking
the answers in writing has become well established
in the English Court of Appeal (See e.g. The
"Miraflores" and the ' Abadesa ", [ 1966] 1
Lloyd's Rep. 97, at page 101). We appear to have
adopted the same practice (see e.g. `Kathy K"
(The) v. Stein Estate, [1974] 1 F.C. 657 (C.A.), at
pages 677, 680-681). In the present case, after
hearing both sides on the merits, four questions
were formulated in draft and their text reviewed
with the parties before being cast in final written
form and presented to the assessor for his opinion.
Judgment was thereupon reserved. The Registry
transmitted a copy of the answers to each party
promptly after their filing, thus appraising them of
the assessor's advice at an early opportunity.
No doubt a broad discretionary power is con
ferred by paragraph 76(c), the precise limits of
which are to be determined upon its proper con
struction. The appellant claims that the ruling
under appeal cannot stand because it is based upon
irrelevant considerations and also upon purported
practices of the Department of Insurance which
were applied without regard to the merits of this
particular case. It is also argued that the Superin
tendent ought to have carefully considered wheth
er gains and losses on hedging contracts should,
generally and in this particular case, as a matter of
sound and generally accepted accounting princi
ples be deferred and amortized and that he ought
to have given considered reasons therefor. Finally,
it is said that the Superintendent acted arbitrarily
and capriciously and without regard to the evi
dence or to the submissions made to him and that
his ruling is wrong being contrary to the evidence
and is unreasonable. I shall take these arguments
in the above order.
The "irrelevancies" relied on appear in para
graph 4 of the Superintendent's certificate. It is
said that the Department's "long-held practice
that assets of little realizable value are deducted
from the assets of a trust company or a loan
company in establishing the borrowing base of
such companies" is not relevant because it com
pletely ignores the fact that here gains and losses
are part of a hedging program to stabilize future
net interest income. The "true and correct
amounts" of assets can only be properly ascer
tained in the context of the purpose and function
of that program. The decline in interest rates
resulted in the losses and also in corresponding
gains in the value of the mortgage loans. It is
contended that the Superintendent should have
looked at the entire situation flowing from the
hedging and made his determination accordingly,
but that he failed to do so.
Another alleged "irrelevancy" is based upon the
Superintendent's statements that "realized capital
gains and losses on debt securities are not, as a
matter of practice, amortized in respect of compa
nies subject to the Trust Companies Act or the
Loan Companies Act" and also that "consistency
requires that realized gains and losses on hedging
contracts be treated in the same manner". This
too, it is said, ignores the nature of a hedging
program and the impact of falling interest rates on
the value of the mortgage loans. The position
taken by the Superintendent, it is argued, amounts
to the application of existing practices and a refus
al to decide the matter on its merits.
This alleged refusal lies at the base of the third
major attack. The Superintendent, it is argued,
ought to have dealt with the question of whether
gains and losses incurred on hedging contracts
should, generally and in this particular case, as a
matter of sound and generally accepted accounting
principles be deferred and amortized. It is asserted
that he ignored evidence supporting such treat
ment. Two pieces of evidence in particular were
relied upon. The first is a document issued in
August, 1984 by the Financial Accounting Stand
ards Board of the Financial Accounting Founda
tion in the United States. It is entitled "Statement
of Financial Accounting Standards No. 80,
Accounting for Futures Contracts" and is known
simply as "FASB No. 80". The second is a
Reporting Guide subsequently prepared for The
Toronto Futures Exchange by Clarkson Gordon, a
national firm of chartered accountants. It is en
titled "Interest Rate Futures in Canada, a Report
ing Guide".
The appellant's contentions of alleged arbitrary
and capricious action and of the ruling being
wrong, contrary to the evidence and unreasonable
appear to flow from acceptance of the major
attacks outlined above. In the circumstances, it
will be sufficient to deal with those specific
attacks. The validity of the Superintendent's ruling
must, of course, depend upon whether he acted
within the discretionary power conferred by para-
graph 76(c) and whether he properly exercised
that discretion. That is the ultimate legal issue
raised by this appeal. At the same time it is
important to appreciate the true significance of the
reasons upon which the ruling is based.
EDITOR'S NOTE
The Court accepted the assessor's opinion,
that the interest rate futures contracts were taken
out to protect interest spreads with respect to
specific pools of assets and liabilities and that the
deferred losses had a tangible realizable value on
liquidation when considered in conjunction with
the book value of the related hedged assets and
liabilities. Also accepted was the opinion that it
would not be appropriate to add the amount of
any unamortized deferred gain to the borrowing
base. Lastly, the assessor advised that realized
capital gains and losses, in the case of a trust
company, should not be deferred but rather rec
ognized immediately in the results of operations.
The assessor's answers to the questions put by
the Court were based upon generally accepted
accounting principles. The Court understood the
assessor's advice to be that Regional Trust had
been correct in deferring the portion of the
deferred losses and in amortizing it over the
lifetime of the mortgage loans.
Finally, I come to the legal issues facing the
Court on this appeal. Primarily, the question is
whether the Superintendent acted within his
powers under paragraph 76(c) in ruling as he did.
A related question is whether he went wrong in
treating the losses according to a practice that
assets having little realizable value must be
deducted and also in applying to them a practice
of refusing to amortize realized gains or losses on
debt securities of trust and loan companies. A
further related question is whether the Superin
tendent should have dealt with the matter on its
merits.
The requirement that trust companies report
their assets and liabilities annually to the govern
ment began in 1914 under section 69 of the statute
as it then stood (The Trust Companies Act, 1914,
S.C. 1914, c. 55). In 1920 Parliament placed on
the Superintendent the duties of inspection and
submission of an annual report on the affairs of
trust companies to the Minister of Finance (An
Act to amend The Trust Companies Act, 1914,
S.C. 1919-1920, c. 21). The powers now found in
paragraph 76(c) were first conferred on the Super
intendent in 1922 (An Act to amend The Trust
Companies Act, 1914, S.C. 1922, c. 51,s. 6).
Trust companies deal with members of the
public in a variety of ways. They manage estates
and trust funds (section 63 [as am. by R.S.C. 1970
(1st Supp.), c. 47, s. 22]); they accept deposits
(paragraph 63(k)); they issue guaranteed invest
ment certificates and invest the proceeds in loans
and other prescribed investments (sections 63, 64
[as am. by R.S.C. 1970 (1st Supp.), c. 47, s. 24;
1985, c. 16, s. 16] and 68 [as am. by R.S.C. 1970
(1st Supp.), c. 47, s. 25; 1976-77, c. 28, s. 45;
1985, c. 16, s. 17]). Their continuing solvency is a
matter of vital public concern. I accept the
respondent's contention that the Superintendent
has a "watchdog" function under the legislation.
Some of his powers as such are found in paragraph
76(c). In my view the issues before us come down
to a proper construction of that paragraph, a
question with which the courts have yet to deal. I
agree with the respondent that the existing juris
prudence is distinguishable and that it establishes
no principle for our guidance in this case (see Re
Sun Life Assce Co., [1927] 4 D.L.R. 287 (Ex.
Ct.); Discount & Loan Corp. v. Superintendent of
Insurance, [1938] 4 D.L.R. 225 (Ex. Ct.); Mon-
treal Life Insurance Company v. Superintendent
of Insurance, unreported (Ex. Ct.), August 13,
1943).
The extent of the discretionary power conferred
by paragraph 76(c) depends upon its proper inter
pretation. It may be read as the conferring of a
discretion which is so broad as to be virtually
open-ended or of one which is more limited. Thus
if, by the words "to increase or diminish the assets
or liabilities ... to the true and correct amounts
thereof as ascertained by him", Parliament intend
ed that amounts can only be true and correct if
subjectively ascertained to be so by the Superin
tendent, the paragraph would be seen as conferring
a very sweeping power. There would, indeed, be
difficulty in seeing any limitation on its scope. On
surface, it would allow the Superintendent to act
according to his own view of the value of assets
and liabilities reported by a company. Alternative
ly, if by that language Parliament empowered the
Superintendent to ascertain amounts of reported
assets and liabilities to be "true and correct"
according to an objective method, then his powers
would be more limited. In making a decision he
would be bound to consider all relevant factors and
to disregard all that is irrelevant. The element of
subjectivity would be reduced accordingly.
The choice between these two possible interpre
tations is not easy. I have concluded, however, that
the words "as ascertained by him" do not bestow a
power to act in a wholly subjective manner. If
Parliament had intended to confer so broad a
power, suitable language might have been
employed. No reported case dealing with the pre
cise point in a comparable context has been drawn
to our attention. Nevertheless, the principle that
action taken pursuant to a broad statutory power
must be exercised reasonably is well-established on
high authority. In Roberts v. Hopwood, [1925]
A.C. 578, the House of Lords was faced with
interpreting the words "as (they) may think fit" by
which Parliament had vested a discretionary power
in a statutory authority. At page 613 of the report,
Lord Wrenbury discussed the extent of that discre
tion. He said:
I pass ... to the words "as [they] may think fit". We have
heard argument upon the question whether these words are or
are not to be understood as if the word "reasonable" or
"reasonably" were inserted, so that the sentence would run "as
they reasonably think fit" or "such reasonable wages as they
may think fit". Is the verb "think" equivalent to "reasonably
think"? My Lords, to my mind there is no difference in the
meaning, whether the word "reasonably" or "reasonable" is in
or out .... A person in whom is vested a discretion must
exercise his discretion upon reasonable grounds. A discretion
does not empower a man to do what he likes merely because he
is minded to do so—he must in the exercise of his discretion do
not what he likes but what he ought. In other words, he must,
by use of his reason, ascertain and follow the course which
reason directs. He must act reasonably.
Thirdly and lastly, I point to the word "fit". That word
means, I think, "fitting" or "suitable". The words "as they
think fit" do not mean "as they choose". The measure is not the
volition of the person vested with the discretion, it is the
suitability or adequacy or fitness of the amount in the reason
able judgment of the person vested with the discretion.
That principle was recently applied by a majority
of this Court in Performing Rights Organization
of Canada Limited v. Canadian Broadcasting
Corporation (1986), 64 N.R. 330; 7 C.P.R. (3d)
433, per Heald J. at pages 339 N.R; 446 C.P.R.
While the appellant regards application of existing
practices in the exercise of the discretion as
"irrelevancies" it is really the same thing as saying
that the Superintendent failed to act reasonably in
deciding the matter, for as was pointed out by
Lord Greene M.R. in Associated Provincial Pic
ture Houses, Ld. v. Wednesbury Corporation,
[1948] 1 K.B. 223 (C.A.), at page 229:
It is true the discretion must be exercised reasonably. Now
what does that mean? Lawyers familiar with the phraseology
commonly used in relation to exercise of statutory discretions
often use the word "unreasonable" in a rather comprehensive
sense. It has frequently been used and is frequently used as a
general description of the things that must not be done. For
instance, a person entrusted with a discretion must, so to speak,
direct himself properly in law. He must call his own attention
to the matters which he is bound to consider. He must exclude
from his consideration matters which are irrelevant to what he
has to consider. If he does not obey those rules, he may truly be
said, and often is said, to be acting "unreasonably".
Did the Superintendent exercise his discretion
reasonably? In my view he did not. I am led to this
conclusion by the following considerations. First,
application of the Department's "long-held prac
tice" whereby assets of little realizable value are
deducted from trust and loan companies' assets in
establishing their borrowing base rather implies
that the Superintendent viewed the deferred losses
in isolation rather than in their total hedging
context, leading him to conclude that they, also,
had little realizable value. I do not think he acted
reasonably in relying on that practice when it is
not specifically concerned with determining impact
of deferred losses on related asset items. The same
may be said of his decision equating hedging losses
with certain realized losses on debt securities and
applying a practice developed around such losses
whereby he does not permit their amortization. In
fact, as he says in his certificate, it was the need
for "consistency" that led him to apply that prac
tice. By so deciding the matter without any appar
ent regard for the merits of the appellant's posi
tion, the Superintendent failed to pay proper
attention to a relevant consideration. In sum, he
acted unreasonably.
In Canada, the concept of a trust company
protecting its future net interest income by trading
in interest rate futures contracts is a recent de
velopment. Indeed, it was only in 1983 that the
Department of Insurance approved that sort of
trading as falling within a trust company's invest
ment powers. The extent to which the Superin
tendent may have considered the accounting treat
ment proposed by the appellant is not made
apparent in his certificate where he was obliged to
set forth both the ruling "and the reasons there-
for" (section 78(2)). The appellant's position was
not based on mere fancy; it is supported by gener
ally accepted accounting principles. I think the
Superintendent was under a duty to consider that
position and to give reasons for not accepting it.
Mere reference to practices and to the need for
"consistency" without any explanation of that
need did not, to my mind, satisfy that duty. The
unreasonableness of so proceeding is made even
more apparent when viewed in light of the asses
sor's advice. In answering the second question he
noted that a pro rata share of the hedging losses
together with book value of the related mortgage
loans were "realized" on the subsequent sale of
mortgage loans. It is also argued that the Superin
tendent may have had legitimate concerns with the
financial stability of the appellant. If such con
cerns existed and figured in his decision they are
not reflected in the reasons which he gave. I find it
impossible to say that the ruling was in any way
related to an anxiety for the overall financial
health of the appellant.
I do not suggest the Superintendent was bound
to decide the matter on the basis of generally
accepted accounting principles alone. That, clear
ly, is not a requirement of paragraph 76(c). But he
was required, in my view, to exercise his powers
fairly by examining the matter in all of its newness
in light of those principles and in light of other
pertinent considerations. Only then could he rea
sonably ascertain the true and correct amount of
"Deferred Loss on Futures Contracts" reported to
him as "assets" in the 1985 Annual Statement.
The appellant asks that we set aside the Super
intendent's ruling and that we order acceptance of
its 1985 Annual Statement as submitted with the
amount for "Deferred Loss on Futures Contracts"
remaining as reported. I resile from adopting this
latter course. To do so would be to remove this
important financial decision from the hands of the
person selected by Parliament to deal with it in
serving the public interest. In my view the decision
properly resides with the Superintendent and not
with the Court which is ill-equipped to make it.
Instead, it would be better that the ruling be set
aside and that the Superintendent be directed to
reconsider the matter and to decide it afresh on its
merits. I would so order. The appellant should
have its costs.
HEALD J.: I agree.
HUGESSEN J.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.