[Recorded by Electronic Apparatus]
Wednesday, September 18, 1996
.1533 
[English]
The Chairman: We resume consideration of Bill C-5, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act.
[Translation]
Since two of our witnesses have to catch a five o'clock train, we will wrap up our work at 4:30 p.m. We will begin immediately with Mr. Normandin and Mr. Tremblay.
Mr. Bernard M. Tremblay (Associate lawyer, McCarthy Tétrault): I would like to introduce Yves Normandin, President of the Association des directeurs de crédit de Québec Inc. I am an expert advisor and I helped draft the brief and prepare the presentation.
As you will have noted, the ADC operates in the greater Quebec City area and brings together lending institutions and professionals in the field of insolvency.
Our association's brief contains a number of observations and comments on the proposed amendments in Bill C-5, and in particular relays our views on certain rights and attributions that the legislation confers to creditors.
We begin by making a number of comments about the information that may be imparted to creditors when a consumer proposal if filed or summary administration made. We recommend that measures be taken to ensure that more information is provided to creditors when a consumer proposal is filed or when a summary administration is made.
I would just like to point out that section 66.14 already provides for a certain amount of information to be provided to creditors when a consumer proposal is filed.
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Subsection 84(2) of Bill C-5 aims to round out subsection 102(2) of the current Bankruptcy and Insolvency Act so as to provide a certain amount of information to creditors. However, there is a rather obvious lack of uniformity between section 66.14 and the proposed new subsection 102(2).
We feel that these two provisions should call for the same information to be imparted, whether we are dealing with a consumer proposal or with a summary administration.
We therefore recommend that provision be made for an investigation by the trustee or the administrator, as the case may be, into the debtor's affairs and the causes of the insolvency or bankruptcy and that an evaluation be made of the estate and the methods of realization contemplated.
We then turn our attention to the meeting of creditors. Bill C-5 proposes to make such a meeting optional in the case of a summary administration. We feel this amendment perhaps goes a little too far, given the importance of the creditors' meeting in the bankruptcy process. With respect to consumer proposals, a meeting of creditors is already optional. We feel that if such meetings are to remain optional in either case, the requirement that the meeting be called by creditors having at in the aggregate least 25 per cent in value of the proven claims should be eliminated; a single creditor should be able to ask that a meeting be held, regardless of whether it is a case where a consumer proposal has been filed or one where a summary administration has been made .
Our brief then focuses on excess income. We welcome the proposed amendments to section 68 of the legislation. However, the process set out in this provision downplays the creditor's role. The focus is primarily on the mechanisms of the mediation process involving the trustee and the receiver. The creditor's role is rather limited in scope and we feel that it should be given more importance.
Moreover, under the proposed new subsection 102(4) of Bill C-5, certain information will be provided to creditors in the course of the process of determining excess income. We recommend that the rights or attributions of creditors be enhanced.
Lastly, we deal with the rules of immunity and the proposed amendments in section 67, specifically those which we had discussed previously but which had not been retained concerning registered retirement savings plans. There had been some discussion as to whether money invested in RRSPs should be exempt from seizure in the case of a bankruptcy. It would seem that at this stage, this option has not been retained in Bill C-5. We feel that the status quo should be maintained. These are the highlights of our brief as it relates to immunity in the case of RRSPs.
These are the main comments and observations that the ADC wished to make. We welcome your comments and questions at this time.
The Chairman: Thank you very much for your presentation.
Mr. Lebel.
Mr. Lebel (Chambly): I'm surprised that you did not stop to examine the provisions in the bill which deal with the decontamination and clean-up of property that represents a country's assets. Is it because this question does not concern you or because you felt that no changes to these provisions were warranted?
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I am referring to clause 15 of the bill which concerns subsections 14.6(2) and (3) and so on.
Mr. Tremblay: The association focused on the rights of creditors in general, the manner in which information is imparted to them, the bankrupt's estate and how assets are realized. This is not to say that this subject is of no interest to us. The association decided, by way of consensus, to consider these points in its brief. It did not express an opinion on the proposed amendments to section 14.06.
Mr. Lebel: I understand.
[English]
The Chair: Questions? Go ahead.
Mr. Mayfield (Cariboo - Chilcotin): Thank you very much, Mr. Chairman.
I have just one general question to ask at this time. I'd ask if you would perhaps offer your rationale for the need for this bill at this time. You've mentioned some things you feel need to be looked at and perhaps changed in the bill, and you said you see other things as being pretty well okay. I was wondering if you'd offer a general rationale for the need for the bill at this time, please.
Mr. Tremblay: First of all, in November 1992, when an amendment was brought to the Bankruptcy Act, it was already fixed that there should be a process review within a three-year period. So it was already agreed by members of Parliament that within a three-year period there should be a review. It would be hard for me to re-examine the opportunity for that review when it was already decided to conduct such a review within three years.
We were interested in those amendments brought to the act in 1992 that were substantial in nature. We didn't address some other changes in the act, substantial in nature, such as the bankruptcy of brokers and the international aspects, but I think it was so long before the act was amended in 1992, the last time, that we have to welcome any new updating process of the Bankruptcy Act, and the three-year period was not alterable in that respect. So if this was the question, whether it's opportune to review the act, I would say yes, of course.
Mr. Mayfield: Do you feel the issue raised by my colleague about soils and contaminations is satisfactorily dealt with in the act?
Mr. Tremblay: No, I didn't say that. I said we didn't address that issue in our review of the proposed amendments, for various reasons of resources and people to work on this exercise, and we have chosen not to address that issue in our presentation. It doesn't mean it's not an interesting or important issue. It's just a decision we have made to concentrate on those issues we are addressing.
I'm not here to express my personal views or feelings on this proposed amendment. I'm representing the association.
The Chairman: Mr. Bodnar.
Mr. Bodnar (Saskatoon - Dundurn): Thank you, Mr. Chairman.
I have just a short question. I don't want to catch you off guard, but yesterday there was a matter that was of interest to me. If you can't answer it, that's fine too.
Yesterday we were advised that the Superintendent of Bankruptcy will not license as a trustee in bankruptcy anyone who is a practising lawyer. We do not as yet know why, but there must be some reason.
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I'm wondering whether your association believes - and we have a lawyer on the panel here today - that this provision should remain or that it should be changed so that the legal profession will be treated in the same way as the accounting profession in setting up insolvency branches so its members can be licensed for the purpose of administering estates under bankruptcy legislation.
Mr. Tremblay: I was not prepared for such a question.
Mr. Bodnar: That's why I'm saying that I don't want to put you on the spot on this.
Mr. Tremblay: I shall need more reflection in order to address that very delicate issue.
Mr. Bodnar: Okay.
The last area I wanted to touch on is dealing with pensions. You said that for RRSPs you preferred at this time to have the status quo remain. Do you think it's a fair provision to leave it as is when certain pension schemes are really protected under bankruptcy legislation but RRSPs would not be protected?
Mr. Tremblay: I think the reason was that there were some concerns about rendering RRSPs unseizable. The purpose was to make uniform all the provincial wealth to have the same standing for everybody in Canada regarding RRSPs, because there are some inconsistencies from one province to another. That is true. People might have different treatment in Quebec, Ontario, Alberta, or wherever.
We have to think also that each province has basically economic or social purposes in deciding whether or not some financial vehicle or some asset will be seizable. Those purposes could be defeated by a general and uniform enactment in the bankruptcy act.
I think the process should come more from the provinces to try to make uniform the legislation in that respect, in view of the bankruptcy provision as it is, section 67, instead of Parliament putting that like this. Then it will be uniform all across the country.
Also, in some provinces, as we can see in other areas, bankruptcy could become more attractive for debtors than facing their obligations outside of the bankruptcy framework. Therefore, if the debtor knows that an RRSP is unseizable, bankruptcy will become attractive.
We have to think twice of inducing debtors to go through the bankruptcy channel too quickly.
Did I answer the question?
This is why we suggest that at this stage the status quo should be maintained. It might not be the perfect solution, but -
Mr. Bodnar: I think that what you've told me is that it's a difficult area and therefore we should leave the status quo rather than change it at this time. Is that a good summary of what you're saying?
Mr. Tremblay: Well, should the changes normally come from the provinces instead of in the bankruptcy act?
Mr. Bodnar: I have no further questions. I believe Mr. Lastewka would like the remainder of my time.
Mr. Lastewka (St. Catharines): I would like to congratulate you on your fiftieth anniversary as an organization. It's nice to see that.
There was an area on which I wasn't quite clear when you were speaking, and I know that I misunderstood you. I'd like to go back to the section you were talking about on the meeting with creditors and the reason you made your recommendation. Could you go over that for me one more time?
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Mr. Tremblay: The reasons why.
Mr. Lastewka: Yes, the reasons why.
Mr. Tremblay: Since 1992 the creditors' meeting has been optional in the consumer proposal. It's not automatic. It could be a demand from the superintendent or a demand from creditors forming at least 25% of the value of the debts.
This was not the case for the summary administration. The creditors' meeting...and you know about summary administration being for low realizable assets. There was still an automatic creditors' meeting to be held in summary administration.
The bill proposes to have an optional creditors' meeting at the demand of creditors in the summary administration. The justification of that amendment is probably that it's a costly process and there was a very low level of attendance at the creditors' meeting. But I think it's not exactly a question of the relevancy of the meeting. It's more a question of statistics. We have creditors who will attend at all meetings, whether ordinary summary administration or not. Very often they won't represent the 25% value of the debts. Then they lose the opportunity to have this creditors' meeting held.
The creditors' meeting is an important forum for creditors to see the debtor in front of them, to ask the debtor questions, to give instructions to the trustees: you should conduct such an investigation and do that and do this. Then they cannot do this. They are put in a situation where they will lose the benefit of that creditors' meeting, and often it's the only time a creditor could intervene in the process in an efficient manner.
This is why we're making that recommendation.
The Chairman: Mr. Lebel.
[Translation]
Do you have any further questions?
Mr. Lebel: No, not for this witness. Thank you.
[English]
The Chairman: Mrs. Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.
I thank you for your presentation.
I would come back to the privilege, as you refer to it, of the creditors' forum, and maybe just a general question about bankruptcy and solvency. There is a perception amongst the public that it's far too easy to declare bankruptcy. I wish you would express your views on this, whether this is real or perceived, that it's easy to go through the process and declare that while at the same time protecting many assets. I think as a society we have an obligation to ensure there is a sense of fairness here. I'd just like to hear your views on that.
Mr. Tremblay: Your assumption is that there is a perception that it's easy to go bankrupt. I would say this might be debated by the fact that Parliament tried over the past few years, and many years before, to mention that the bankruptcy act should be viewed as a process of rehabilitation of a bankrupt and not as a penal process. Bankruptcy should be viewed as a process to rehabilitate someone in economic life as soon as possible and at the lowest cost possible, and this could be a fair motivation.
But I would share your view, if I understand it, that it should not be a simple route. It should not be easy for a debtor to bankrupt. It should be an ultimate step for a debtor in financial difficulties. In the bankruptcy act we should not allow a debtor to go through the process without facing creditors at least to explain why he went bankrupt, just to go through a process very quickly, automatically getting a discharge nine months after, without meeting the creditors at all.
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I think it's not proper to make it so easy for the debtor. We have to help the debtor rehabilitate, but we have people who go bankrupt two or three times in their lives, and they should not be allowed to do it in so easy a manner. This is why I think the creditors' meeting is important. It should be optional, but creditors should maintain the right to have this meeting held, and other rights, to information or whatever.
It also seems to me trustees in bankruptcy will have a problem fulfilling all their obligations and duties because of the cost involved. This is a big problem, because when you have a summary administration or a consumer proposal sometimes the costs involved are so high the trustee won't do all the jobs they should have done, such as investigating or conducting an examination of the debtors and other persons. This is a sorry state of affairs, because trustees in bankruptcy should not have a cost problem in performing the minimal duties they have to fulfil according to the bankruptcy act. They might be tempted to do that if all the time we are making the life of the debtor easier in summary administration and consumer proposals.
That's my point of view.
The Chairman: Mr. Murray.
Mr. Murray (Lanark - Carleton): Thank you very much.
I would like to know your thoughts on financial counselling. The act requires that individuals who go bankrupt take financial counselling. You mentioned just now that some people go bankrupt two or three times in a lifetime. I was wondering if you have any experience with the success of counselling and whether that can help prevent repeated bankruptcies.
Mr. Tremblay: The idea to provide a consulting process was very good, but I don't think it really worked. As you know, people will wait till the last moment to see a trustee or an administrator. When they come to see they have two alternatives, a proposal or bankruptcy.... I'm talking about consumers; commercial law. We've observed - I'm talking about the Quebec area - that consumer proposals haven't really worked, and I think it's much the same in Canada. The only alternative was the bankruptcy, period; a voluntary assignment in bankruptcy.
Mr. Murray: I'm just not sure I understand you. The proposals didn't work - -
Mr. Tremblay: They didn't really work.
Mr. Murray: - because they were waiting till the last minute to - -
Mr. Tremblay: The level of indebtedness, the very low chances of making viable consumer proposals, the complexity of the process as it is in the act, made the debtor a little reluctant to go through the process, and the debtor was not encouraged to do so by trustees. So it was not used as in 1992 it was expected to be used.
Mr. Murray: I see. Now, would some of this be because of the imposition of a rather onerous schedule on the trustees as well, the fact that it's easier to get paid through the bankruptcy process than to go through issuing cheques to creditors every three months? Do you think that has an impact and perhaps the regulations should be changed to make it more financially attractive for trustees to encourage proposals? Or are you suggesting that normally proposals are just out of the question because of the sorts of things you've already described?
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Mr. Tremblay: This is an interesting question: should proposals be more attractive?
Mr. Murray: To the trustees as well as the debtor, the people who would manage, say, the dispersion of funds.
I believe the trustee gets paid fairly quickly after the bankruptcy, whereas there's an ongoing process involved with the proposals. So essentially there's more work for perhaps less money. This is a matter of regulation, and perhaps regulations could be changed to make it more attractive in order to encourage debtors to bring forward proposals and to make it more attractive for the trustees to manage those.
Mr. Tremblay: Yes, I would agree.
Mr. Murray: On the question of financial counselling, in your experience - if I can go back to my original question - that has not really prevented people from experiencing subsequent bankruptcy. I don't imagine that -
Mr. Tremblay: These vary. In my practice - and I'm more in commercial than in consumer - I've heard that it was not that attractive for trustees to go into the process as it is, given the way people are coming to them and what they are prepared to do at the moment. I really cannot comment at length from general experience in at least the Quebec area on this matter, but from what I've heard it was not something that was -
Mr. Murray: Very effective.
Mr. Tremblay: Well, that people used that mechanism.
[Translation]
Mr. Lebel: You did not make your position very clear on the proposed section 173 which deals with discharges and circumstances which exclude discharges. Was this deliberate or are you not concerned by this provision?
I would be interested in hearing your views on paragraph 173(1)(c). Sections 172 and 173 state more or less that the bankrupt will not be discharged if he is responsible for the bankruptcy. Paragraph 173(1)(c) reads as follows:
c) the bankrupt has continued to trade after becoming aware of being insolvent;
Do you not think that this provision could backfire on lending institutions, in that...
Mr. Tremblay: Institutions which support...
Mr. Lebel: As a rule, a bankrupt's creditors are quite often lending institutions. If a bankrupt consults his banker and advises him of his problems, and both agree that budget cuts are in order - somewhat like the current Canadian government which has perhaps realized that it is insolvent, but has not declared bankruptcy - could his actions be held against him when he applies for a discharge? Could the fact that he tried to save his business be held against him?
Mr. Tremblay: Yes.
Mr. Lebel: Therefore, fearing that they could be criticized later for staying in business when they knew they were insolvent, debtors will close up shop immediately when they first get into trouble, without even trying to fight and save their business and the associated jobs, because they could be accused down the road of continuing to trade after becoming aware of being insolvent or almost insolvent. That is what paragraph 173(1)(c) says. As creditors, are you not concerned by this provision?
Mr. Tremblay: Paragraph 173(1)(c) as it is now worded already makes provision for the bankrupt to continue to trade after becoming aware of becoming insolvent. The legislation already makes provision for this.
The only change here is the wording of this provision which may not be fortuitous. However, the objective is laudable.
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A debtor who knows that he is insolvent should not take any steps that could, unbeknownst to his creditors, perpetuate or aggravate his situation without availing himself of one of the mechanisms provided for in the legislation, all of which are irreversible.
The notice of intent which makes it possible to file a redress proposal protects in some respects creditors from being treated unequally. A debtor who is aware of his insolvency and who persists in trading will generally aggravate his financial situation. That is what is reprehensible, the fact that he continues to trade without the knowledge of his creditors in general, but as is usually the case, with the complicity of one or two particular creditors.
Some suppliers continue to do business with the debtor and the situation necessarily gets worse. That is what we want to put a stop to. Someone who knows that he is insolvent should immediately take action which will benefit all of his creditors, not just one or two of them.
A debtor who continues to trade will not necessarily give more consideration to his banker. Often, a debtor who knows that he will shortly go bankrupt already intends to get back into business in several months' time. Who will he turn to first when he decides to start up another business? Often, he turns to those who supported him until the very last, that is the suppliers, not necessarily his banker. He will get his suppliers backing without the other creditors' knowledge. He knows that in any case, these suppliers will help him start up another business in a year's time. Perhaps he will favour them and continue in a state of insolvency unbeknownst to other creditors. That is why we want such actions to be considered reprehensible.
I think the idea is sound. The problem perhaps lies with the way in which the provision is worded. Perhaps we should specify ``which aggravates his state of insolvency'' or ``without having taken in good faith steps to remedy the situation''. These comments are perhaps indicative of the fact that the provision is not worded in such a way as to reflect the objective sought.
The Chairman: Thank you very much for your presentation.
[English]
We very much appreciate your trip here today to help us out. As you can tell by the questions from the members, there is a great deal of interest in your views and your suggestions. I hope you feel we've given proper consideration to your views. Thank you again. I think you have enough time for your train now.
Our next witnesses are from the Insolvency Institute of Canada. As they get set up I would like to turn the attention of the committee to a couple of housekeeping items. One is the approval of the subcommittee on agenda and procedure, which will be distributed now, and the second is the budget.
The first item is simply the work done in June by the subcommittee to organize the work we're now doing. Because we haven't had a chance to meet we haven't actually approved the work we're doing. That's one of the niceties in our job, that we do approve the work we're doing.
Moved?
Mr. Bodnar: I move that the report of the subcommittee on agenda and procedure of the Standing Committee on Industry of June 12, 1996 be approved.
The Chairman: Discussion? Question? Approved.
Motion agreed to
The Chairman: I will ask the clerk to explain the budget. The budget is for $47,540, which is mostly to provide for the expenses of witnesses who are coming before us in the consideration of Bill C-5. I'll ask the clerk to take you through each line.
If the witnesses can indulge us.... The number of people for listening to witnesses is different from the one for votes. If you'll just excuse me, I'll take advantage of having everybody here to get my job done.
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The Clerk of the Committee: The committee is seeking budget approval from the liaison committee of the House because we are dealing with Bill C-5. As well, the committee has plans to make a major study on high tech and advanced technologies, the innovation gap in general, and defence industry reconversion. The chairman is asking for authorization from the committee first, and then this would be submitted to the vote.
The reason is that we, like every other committee, are initially given $10,000 to get our work done and this is to ask for extra funds that would cover witness expenses, hospitality, and miscellaneous expenses to a total of $47,540. This is why we need authorization for the major study to be done.
If you will turn to page 3, under ``miscellaneous'' are coffee and juice, 50 meetings, and this would cover the high-tech study and other major studies right through to Christmas. If you need to have working luncheons, that would cover the amount.
When we do our major study on science and technology, we will be using videoconferencing for witnesses from overseas instead of asking them to come over here. We will save a lot of money by having videoconferencing. We are asking for $6,000 for that.
The details are all written in the budget, and we need approval from the committee in order to get it approved by the liaison committee.
The Chairman: Before we start, I will say to the members of the opposition that no items under ``hospitality'' or under ``working lunches'' will be approved without discussion with you.
I would simply prefer not to go back to the committee again.
So from my point of view the major thing is to make sure that we will have the money approved for the witnesses who will come to see us and for the videoconferencing. That's the major intent of this.
The Clerk: That's the motion to be dealt with.
The Chairman: Yes.
Mr. Bodnar: I so move.
The Chairman: It is moved by Mr. Bodnar that the Standing Committee on Industry approve the proposed budget of $47,540 for the public hearings on Bill C-5, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act, and a major study on high tech and advanced technology/innovation gap in general, and defence industry reconversion, and that the chairman be authorized to present the said budget to the liaison committee.
Motion agreed to
The Chairman: I thank the witnesses very much for their indulgence.
You could see the committee in action.
Now could I ask the chair or the lead person from the Insolvency Institute of Canada to introduce himself and his fellow participants, please.
Mr. Bruce Leonard (Executive Director, Insolvency Institute of Canada): Thank you, Mr. Chairman, for the opportunity to address the committee today. My name is Bruce Leonard and I am the chairman of the Insolvency Institute, but I've brought two much more distinguished practitioners with me to deliver the main submissions on behalf of the institute to the committee.
David Baird is a senior partner of Tory, Tory, DesLauriers and Binnington in Toronto. David is one of Canada's most experienced insolvency practitioners and has been a legal adviser to the Senate on some of the previous bills that were in process in 1975 and 1984 to amend the bankruptcy act. He is very knowledgeable in the area.
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Mr. Gary Colter is the chairman of KPMG Inc., the trustee arm of KPMG in Canada. He's also the chairman of the KPMG international corporate recovery services group, which is a worldwide organization in the KPMG firm.
Lisa Kerble Caplan takes the credit, I think, and justly so, for doing an enormous amount of work to put our brief into a presentable condition.
The way we've broken up our time, subject to the wishes of the committee and its members, is I'll make a brief introduction about the Insolvency Institute first. Then David Baird and Gary Colter will talk on a small number of major issues the institute considers important in the scheme of things.
By way of background on the Insolvency Institute, the institute is a non-profit organization. It's a national organization. We're fairly small. You had the Canadian Bar here yesterday, representing 34,000 people. We represent 100 members, but we like to think of ourselves as quality. It isn't meant to be critical of anybody else.
The Chairman: There are too many lawyers.
Mr. Bodnar: The chair is out of order.
Mr. Leonard: I particularly liked the question at the last committee meeting about licensing lawyers as trustees. I think the institute would divide viciously on that issue. But that's for another day.
We're a national organization. Our membership is comprised of some of the most senior practitioners in the insolvency area from the legal, accounting, and financial communities. We have been before this committee before, on the 1992 amendments. In fact, it was almost five years ago last week that we were here last, on the 1992 amendments. We did some extensive work on the 1992 amendments, and we were pleased to see that a number of our suggestions made their way into the 1992 changes to the act.
Our objective in being here today is to assist the committee to whatever extent we can in its study and understanding of Bill C-5. We think insolvency legislation in this country is very important economic framework legislation. Insolvency legislation will potentially impact on every plant shutdown, every closure, every enforcement of security by a secured creditor. It will hit the Consumers Distributings of this world. It impacts right across the board. Our view is that to the extent we can, our organization will help make the insolvency legislation this country has as good as it can be. That's where we're coming from in our submissions today.
One other manifestation of our work in the area is that at our next meeting of members we have in mind establishing a formal, full-scale, comprehensive review of the provisions of the BIA and the CCAA. To our knowledge this hasn't been done before in the private sector. We think the Canadian insolvency legislation, in the period we have before the next amendments to the act, deserves a comprehensive and closely detailed look at all the major provisions. A lot of these things haven't been changed since 1919. We're considering, and hopefully our members will approve, taking on the task of doing that review and working with the government and the department to improve, or to continue the process, I believe, of improving, our insolvency legislation.
Before the 1992 amendments the previous amendments to the Bankruptcy Act were in 1949. That's 43 years between revisions. I think the institute believes very strongly we should never let the solvency legislation languish in that kind of inattention again. In our brief we're suggesting that the next review of the Bankruptcy and Insolvency Act and the CCAA be held at a five-year interval instead of a seven-year interval. We think this legislation is important enough that five years will give us enough time to have some real experience with our amendments and to develop some real suggestions for improvement the next time around.
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Those are my opening remarks to describe the institute and its goals and activities. I'll turn the microphone over to Mr. Colter for his submissions on the bill.
Mr. Gary Frederick Colter (Chairman and Chief Executive Officer, KPMG Peat Marwick Thorne Inc.): I'd like to talk to you about two areas, one being directors' liability and the other being two specific aspects related to CCAA.
In connection with directors, all of us have been struggling for some time with what the right balance is between capable and honest directors and people who do not properly fulfil their duties.
Over the years it has become apparent that we have to create an environment in Canada to attract the best possible candidates as directors, particularly when a company is experiencing financial problems.
That does not exist today. We have directors who are facing massive potential liabilities: statutory liabilities for wages, vacation pay, pensions, termination and severance pay in certain provinces. Some liabilities have due diligence defences, while others do not.
When we get involved in a situation, one of the first things that happens is that the directors in place, and directors you often try to bring on board to help in solving the problems, try to determine what kind of protection they have. They look at the directors' and officers' liability coverage. They try to seek appropriate indemnities from the bank or other secured creditors. Often they are not able to get this coverage, or often they are not able to get a clear definition from lawyers who are involved in the matter as to the protections they might have.
We had one earlier this year, the old Canadian Pacific trucking company, which is now known as Interlink Freight Systems Inc., and the situation became so bad that all of the directors walked out. Very fortunately, we've ended up doing the whole restructuring of this company with several thousand employees without a board of directors.
That is not a positive way to do a restructuring. We need boards, we need good boards, in order to be involved.
Generally we feel that we have to have a much more progressive approach for directors who act honestly and in good faith.
We were encouraged by the recent Kirby report on corporate governance, which has been released, which talks about certain changes in connection with directors' liabilities, but our question is whether or not that has gone far enough.
On the other hand, we have directors who do not behave properly and we often have conduct that is somewhere between acting properly and committing fraud, which is in the grey zone, and it's very difficult to commit fraud.
I go back ten years to the 1986 report on bankruptcy and insolvency, where that committee recommended a concept of wrongful conduct where a director got involved in what we referred to as an inexcusable disregard of commercial morality, but not a mistake in judgment. That was our best effort at the time in trying to define, when we got into that grey area, when people should be punished. The types of penalties we were talking about were disqualification from acting as a director for a defined period of time and, in certain cases where creditors and estates suffered losses, to be in a position actually to make claims back against these people in order to recover some of those losses.
Our conclusion on the amendments that are being proposed in Bill C-5 with respect to directors' liability is that there are improvements, but we do not believe that the process we originally set out to achieve under BIAC was successful. We do not think we went far enough. We do not think the balance is right. We do believe further changes are urgently required. Our view is that the government should give serious consideration to the creation of a task force to study this issue further and in some way for this task force to be coordinated with the recommendations that have been made out of the Kirby commission and in line with what we understand from Minister Manley to be the intentions of government to make recommendations to the House in mid-1997.
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I turn to CCAA. When we had the amendments back in 1992, I think it's fair to say there was a consensus at that time, not universal but general, that after 1992 we would see how the restructuring provisions worked in both the BIA and the CCAA, with the intention of trying to get down to one restructuring statute. As time went by and we had a number of additional experiences, many involving large and major corporations in this country, it became apparent that it would be extremely helpful to maintain the CCAA. The BIA restructuring provisions have in the main worked reasonably well. So the question became how we could keep the two statutes but possibly restrict access to the CCAA.
In a country like Canada we often end up in compromises because of the views of the different regions. I think it's fair to say that in this situation in the larger cities people who practise in this area would like to have a reasonably high dollar limit in order for access to occur, whereas in other parts of the country they would like a very low threshold level, or possibly no threshold level, and to leave access available really to all corporations that are experiencing problems.
When you look at the two statutes and the difference between the BIA and the CCAA, some of the major differences going forward largely relate to the complexity of the situation. The CCAA has largely been used for the major corporations in Canada, with more complex problems. It's also important to point out that the BIA has stricter time limits for what has to be achieved within what timeframe. But I have personally never experienced a situation in Canada involving a corporation or set of corporations with liabilities of less than $10 million - total debts of less than $10 million - that could not be solved, that could not be dealt with as a successful restructuring under BIA. So our view, on behalf of the institute, is that the $10 million is a very creative compromise to this problem. It doesn't make everyone happy, but we think it's a sensible approach to this situation and we are strongly in support of the government position of proceeding with that $10 million limit.
In the area of financing, I guess over the years we have experienced significant frustration with companies that have problems when we try to have a defined approach to how a company obtains money and financing while it is going through a restructuring process. Essentially what happens in Canada is if a company does not have an arrangement with its working capital lender during that period, commencing and then trying to go through a restructuring process are doomed to failure. The working capital lender essentially holds all of the cards and you have to enter into an arrangement.
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While it is important that discussions and negotiations be held with the working capital lender, we believe that further consideration should be given to the establishment of principles by which financing might be available on a more defined basis during this period.
As a number of you are aware, in the United States we have a system under chapter 11 that provides for debtor and possession financing so that super-priority can be obtained by a debtor to obtain new money to finance the operations of the business under certain conditions in order to get it through this period in order to achieve a successful restructuring. We're not here to endorse chapter 11 and we're not here to say that the DIP financing approach is the way to go, but we are here to say that this issue must be dealt with. While we are recommending that there be a five-year review process, we were also hopeful that some type of task force could be struck on this particular issue, maybe as part and parcel of other issues that could be considered at an early date.
We have seen a couple of situations in Canada where court orders have been obtained to give effective priority security to companies in these situations, in particular the Dylex and the Bramalea matters, but it's fair to say that these situations should not be considered as legal precedents. At the end of the day this area is very uncertain; it is not solved and it needs further work.
I'd like now to turn it over to Mr. Baird.
Mr. David E. Baird (Senior Partner, Tory Tory DesLauriers and Binnington; and Co-Chair, Bill C-5 Review Task Force, Insolvency Institute of Canada): There may be some questions on your points, Gary, before I go ahead.
The Chairman: Go ahead with your presentation. Then we'll open it up and go around, if you don't mind, sir.
Mr. Baird: Thank you very much for the opportunity of appearing before you.
I've been very interested in law reform, particularly reform of the bankruptcy act, over many years. It has been a frustrating process, but in 1992 we got somewhere; we got partway along in 1992 and we're getting a bit further ahead now.
We're very pleased that Parliament is attending to the matters, but I heard a question earlier that said, ``Do we need it?'' Yes, we do need new legislation. We didn't have time to do it all in 1992. There are issues in this bill that were not touched in 1992. There are international matters, securities corporations, and other issues on which we just ran out of time in 1992. So we really do need more improvements, and, as Gary indicated, we'll need more as we go along.
We're far behind the United States and England. They introduce bankruptcy law reform regularly and frequently. In Canada it has been a disgrace. Fortunately, we're catching up, but we're still far behind in reforming our bankruptcy law.
I worked on the amendments back in 1975 and 1980. We worked very hard on those, but nothing ever happened. A lot of effort went into them, but nothing happened.
We urge you to get this legislation, which I think is very important, passed.
While I am making a plug, we also need amendments to the Winding-up Act. So you could put that on your list.
After I get my personal plug in, I'll deal with the issues in Bill C-5. I'd like to talk about the landlord and tenant issues, the environmental liability issues, international insolvency, and consumer issues.
I understand that you haven't yet heard from the shopping centre group, but one of the major issues that has come out of the 1992 amendments has to do with the problems concerning disclaimer of leases. This was something new that was introduced in 1992. Prior to that, if you had a large chain of retail stores you could never restructure it. You could not carry on business. You had to go bankrupt in order to disclaim leases and cancel the leases in the unprofitable stores and keep them alive in the profitable ones, because that's the only way in which you restructure a chain of retail stores.
They tried that in Consumers Distributing and failed, but we did it in Dylex and it's working very well.
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We needed that right. It was introduced in 1992, but the result of those amendments produced unfairness. The debtor who made the proposal was able to disclaim leases and pay six months' rent. It had to pay a six-month rent penalty for disclaiming a lease.
There could be a long-term lease. In one case there was a twenty-year lease. The debtor, the tenant, got out of the lease upon payment of six months' rent and paid all the other creditors almost 100¢ on the dollar. The landlord screamed about the unfairness of it all. The landlord complained. It went to court, but he lost because of the wording of the current Bankruptcy and Insolvency Act.
This is why amendments are proposed in Bill C-5 in order to rectify this problem.
We've looked at the amendments as our institute and we are quite comfortable with most of them. We think they're improvements.
We now have proposals in Bill C-5 that give the landlord whose lease is disclaimed the right to file a proof of claim in the proposal and the right to vote in the proposal.
The debtor is given a choice of determining what kind of claim he's going to be permitted. It can be either a claim for actual damages or a claim based on a statutory formula. Nevertheless, by being able to file a claim and vote, the landlord is going to be given treatment similar to that of other creditors.
The big complaint has been that landlords were being treated unfairly, that they were given worse treatment than other creditors. The bill rectifies the situation, but as an institute we think it goes too far.
Under the current statute, if the landlord is unhappy with the repudiation or disclaimer of its lease, it can go to court and challenge it. But in most cases the landlord has lost that challenge.
In the new legislation they have tightened up the challenge. The new legislation gives the landlord three rights: the right to file a proof of claim, the right to vote on the proposal, but also the right to go to court and challenge the right of the disclaimer.
We think that goes too far. We think that tilts the scale in favour of the landlords and inhibits or makes it more difficult for a debtor to reorganize a chain of stores.
So we would like to see the right to go to court to challenge the disclaimer removed from the legislation.
You'll hear screams from the shopping centre people when they learn that we don't like what they're doing. They've been very successful in getting proposals changed, but we think the changes have just gone too far.
The scale was tipped way against the landlords under the 1992 amendments. We think the scale is now being tipped too much in favour of the landlords. We would like to see a more level playing field by deleting the right of the landlord to go to court.
The right to go to court has real problems. It means the debtor does not have certainty as to what it can do with a lease. It doesn't know whether it can cancel a lease, because there is always the right of appeal to the court.
So if you have a business strategy and you want to close five stores, until the court makes a ruling you're uncertain as to whether you can do it. This hurts. All these decisions must be made within a very tight and short timeframe. You have people buying merchandise. You have employees. You have suppliers. You don't have the luxury of having a court hearing and the possibility of appeal to deal with these sorts of things.
Unfortunately, in an insolvent situation, time is very important.
It's also costly. I'm a lawyer. I like earning fees, but it involves the legal costs of going to court and fighting it. That's an additional burden that both the landlord and the tenant will have.
So we can remove the time problem and we can remove the costs, and I don't think we'll be removing any unfairness because I think the other amendments proposed are fair to the landlords.
But you will hear a different story when they come before you.
We already know that because a member of our association has been representing the landlords and he's vigorously opposed to what we have put forward.
Is that right, Bruce?
Mr. Leonard: I think that's right.
Mr. Baird: Now I'd like to turn to the environmental liability.
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Back in 1992 was the first time any attempt was made in the bankruptcy act to deal with environmental liability issues, and the trustee in bankruptcy was given a certain amount of exemption from liability. It was given exemption from any environmental liability incurred prior to its appointment, and it was also given exemption from any liabilities incurred if it exercised due diligence.
The problem with environmental liability is that it's very hard to know when it has occurred. If you have seepage from a gas tank, when does that happen? It's a constant flow of problems. You can't draw a bright line to say when the environmental problem started and when it finished.
We've recognized this in the new amendments. We have looked at the new amendments and said, ``This is the only situation where we have said that a claim for environmental liability can cover a situation whether a problem arose prior to the date of bankruptcy or after the date of bankruptcy, because of the difficulty in practice of drawing a clear yellow line when the problem started''.
If you have seepage into a river, when did it start and when did it end? It's impossible to tell, and I think the government, in proposing the amendments, has recognized this.
The major problem is orphaned sites. The problem we face is that most provincial legislation says that if you take possession you have the responsibility to clean up the property. If a trustee in bankruptcy takes possession, it incurs the personal liability to clean up the property unless it can prove it was diligent.
No one knows what constitutes due diligence. That standard has not been clearly marked out. It has not been clearly spelled out, and the result is that trustees won't take possession. That's what's happening in the real world. If there is any doubt, they walk away. So you have environmental problems that are left to fester without any treatment.
This is really an economic test. By taking possession a trustee does not know how much it's going to cost to clean up, but it knows that it's only going to get a few fees for administering the estate. It's not worth taking the risk.
A secured creditor involved will not indemnify the trustee against an unknown amount of liability.
So we're left in a situation in which people won't take the risk.
In many cases they go to the provincial governments and negotiate occupation agreements to get relief from liability, from the risk of the unknown. This has been very time consuming. The governments, particularly in Ontario, have been cutting back their staff, so the delay and time involved in negotiating these occupation agreements have been very expensive.
We think the amendments proposed in the bankruptcy act go a long way toward improving the situation. You asked earlier why we want the amendment. Well, we've found that the amendments of 1992 just don't go far enough, and these amendments now improve the situation.
They introduce a standard of care of gross negligence and wilful misconduct. The trustee in bankruptcy is on the hook, liable, only if it is either grossly negligent or guilty of wilful misconduct. They're quite known standards. They are a lower threshold than due diligence, but we've been told by the insolvency practitioners that they are prepared to take possession of property based on that standard, rather than the current standard of due diligence, where they have shown their attitude by refusing to act. So we had to come up with a standard that was acceptable to the practitioners or we were wasting our time, and I think the government accepts that.
Another situation is that the new bill proposes the right of a trustee in bankruptcy to abandon the property if it turns out that the cost of the environmental clean-up exceeds the realizable value in the property. What advantage is this? This has a big advantage. It gives the right of a trustee to take possession, to arrange for an assessment of the cost of the environmental clean-up, and it therefore puts a responsible person in charge of an environmentally troubled property.
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In my view, there is much more chance under the proposed legislation of seeing the property cleaned up than there was before.
The institute strongly supports the proposals that have been made in Bill C-5; however, there has to be a balancing. The balancing approach that is suggested in Bill C-5 is to give the environmental authority a super-priority charge for the clean-up costs on the real property and any contiguous property that is related to the activity that caused the environmental problem. This is strictly a trade-off.
We as an institute feel that there should be priority for the costs of an environmental clean-up. We think it's fair to give them a super-priority over the property that has the problem.
Right now that's not the case. Under the present bankruptcy act, the costs of clean-up are just unsecured claims that rank with all other unsecured creditors.
So the proposals here are an attempt once more to produce a level playing field, to give the environmental authorities better protection for the environmental clean-up costs and to give them a super-priority over the property itself.
There was nothing in the previous BIA dealing with international bankruptcies, but they're becoming more common as the world shrinks.
We support the proposals to put in Bill C-5 provisions relating to international insolvency proceedings.
There are two approaches to administering a bankruptcy of a debtor that carries on business in several jurisdictions.
One approach is to have a consolidated administration where all the assets are transferred or realized and all the money is taken to one central jurisdiction and distributed. That's really a consolidated approach for administering international insolvency.
The other approach is a concurrent approach; that is, to have the assets of the international debtor administered in each of the jurisdictions where it carries on business.
Bill C-5 opts for the second approach. It gives a trustee in bankruptcy from a foreign jurisdiction the right to come into Canada and to use Canadian bankruptcy laws to assist in the realization of the assets of the debtor. It gives it the right to commence proceedings in Canada as if it were a creditor of the debtor. It gives it the right to apply for a court order for a stay of any proceedings against the debtor, the right to apply to the court for appointment of an interim receiver, and also the power to order examinations under oath.
We believe that the Canadian bankruptcy law and Canadian insolvency law should continue to apply to Canadian debtors, to people who have loaned money in Canada who have anticipated that their business conduct will be governed in accordance with Canadian bankruptcy law, and that they should not be subject to the laws of a foreign jurisdiction solely as a result of a debtor carrying on business in a foreign country.
The last area I'd like to cover is consumer debtors.
We've set out a number of provisions or comments on consumer debtor legislation, which is proposed in Bill C-5.
One area that we feel strongly should be changed is the provisions relating to the payment of surplus income by a bankrupt. We believe that they're too cumbersome. Under the present law the trustee, with the approval of the inspectors, has the right to apply to the court to require a bankrupt to make payments to its creditors. Also, when a bankrupt comes up for its discharge the court has the right to order payment to the creditors.
We support in principle the concept that a bankrupt who can afford to pay should be required to pay, but these are the exceptional cases. Unfortunately, what is happening is that the publicity is given to the abuses, where a person who has substantial earnings goes bankrupt and fails to pay a significant amount to its creditors.
In most cases a bankrupt can't afford to make any payment, and to put in a very complicated procedure to cover the majority of indigent bankrupts is going to be a costly process. It's going to impede rehabilitation of the bankrupt. We believe the process that's outlined in this bill is just too cumbersome and too expensive.
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I don't know if anyone has had a chance to study it in depth, but I can highlight the problems. You just hear them when you read it.
It provides that the superintendent, by directive, shall establish in respect of the provinces or one or more bankruptcy districts the standards for determining the portion of the total income of the bankrupt that is necessary to enable the bankrupt to maintain a reasonable standard of living. So you have a superintendent determining standards, possibly different levels across the country.
The trustee in bankruptcy is required to fix the amount the bankrupt is required to pay to the estate and inform the official receiver in writing. If there are material changes in the circumstances of the bankrupt, the trustee has the right to take those changes into account and amend the amount fixed. If the official receiver determines that the amount required to be paid by the bankrupt is substantially not in accordance with the applicable standards set out by the superintendent, the official receiver shall recommend to the trustee and to the bankrupt that an amount be paid in accordance with the applicable standards.
If the trustee and the bankrupt are not in agreement with the amount that the bankrupt is required to pay, the trustee shall send to the official receiver a request for mediation.
In addition, a creditor has the right to make a request in writing that the matter of the amount the bankrupt is required to pay be determined by mediation.
Then it sets out that the mediation will be in accordance with the regulations. Where the bankrupt disagrees with the recommendation made by the official receiver or the bankrupt fails to comply with the requirement to pay the amount determined by the trustee, the trustee may, or, on the request of the inspectors, any of the creditors, or the official receiver, shall apply to the court for a hearing.
This is like using a sledgehammer to kill a mouse.
What you want is, in exceptional cases, the right to go to court, as we have now, to require a person with a high income to make payments. That's accepted by everybody. But don't introduce this costly and expensive process, particularly the mediation.
Mediation happens informally in these circumstances anyway. If it looks as if the debtor or the bankrupt has a high income, the trustee in bankruptcy goes to him and says to him that he will be hammered when he goes to court so he had better start making some payments, and negotiates. The creditors negotiate how much will be paid, and if they can't agree, the court decides.
To set up this formal process for every bankruptcy, where maybe 75% of them can't afford to make a payment, is just too costly, too expensive, too time consuming.
The other submissions I've read seem to support this view.
The other area of consumer bankruptcy we want to talk about, but only briefly, is student loans. As you will have read in the paper, this has been considered a problem.
The Chairman: It's up to you as witnesses, but we usually allow an hour. So we're going to be down to about 15 minutes for questions. With your indulgence, I'd like to give the members a chance to ask a few questions, if you don't mind.
Mr. Baird: Sure. Okay.
The Chairman: Mr. Lebel.
[Translation]
Mr. Lebel: I have here a summary of your brief which was prepared by the Library. Congratulations. It is well written and well thought out. You touch on aspects of the law which interest me, in particular when you point to the constitutional problem that could arise as a result of the charge against the cost of cleaning up a property versus existing charges. You make a suggestion which I do not understand very clearly. Could you clarify it for me?
[English]
Mr. Baird: Bill C-5 provides that the federal government, the bankruptcy act, will create a charge or a lien or a privilege or a hypothec - I think ``hypothec'' is the correct terminology in the province of Quebec - that will rank in priority to all other hypothecs.
It's our submission that to create a hypothec or charge may have a constitutional problem for the federal government. We would recommend that instead the bankruptcy act recognize a hypothec or charge created by provincial legislation or other federal legislation and that the bankruptcy act itself not create a charge.
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There are no precedents of the bankruptcy act ever being used to create a charge, to impose a mortgage, to create a statutory hypothec. We feel it's a very cumbersome approach being taken in the new legislation, and there is a much easier way of dealing with it: by recognizing charges or the provisions of provincial legislation. I'm sorry I didn't deal with that more specifically in my opening comments.
[Translation]
Mr. Lebel: I have another question concerning subsection 14.06(7) and the priority claim against clean-up costs. Yesterday, I put this question to a person who, I would hope, unintentionally mislead me. A charge is created which may have priority over existing hypothecs.
Pursuant to subsection 14.06(7), the trustee is not required to use this particular piece of property or a contiguous property to cover clean-up costs. The trustee can recover the cost from the bankrupt's overall assets. Subsection 14.06(7) makes provision only for secured payment. It does not require that the money be taken from the value of the property. Do you agree?
[English]
Mr. Baird: I think your interpretation of the proposed section is correct. It does not require the trustee to take the other assets of the bankrupt estate for the purpose of cleaning up that particular piece of property. We think this is fair. We see no basis whereby the other assets should be charged with the cost of a clean-up of a particular site. This could deprive other creditors who have loaned money against other properties, other unsecured creditors, of their recovery if the money was used from the general estate to do the clean-up. What the bill proposes, and what we support, is having the money realized from this particular property, the property subject to the environmental problem, used to clean it up.
[Translation]
Mr. Lebel: Are you certain that that is where the money needed will come from and not from somewhere else?
[English]
Mr. Baird: The bill provides that the claim for environmental clean-up will not be an administrative expense. A claim for environmental clean-up will not be an administrative expense. We felt that was sufficient certainty to avoid the money being taken from elsewhere.
[Translation]
Mr. Lebel: I understand. A charge means that there will be a first claim against the asset. Isn't that right?
However, the trustee is not required to use this asset to cover the cost. He can take the money from somewhere else. He doesn't necessarily have to sell off this asset to cover the costs. On reading subsection 14.06(7), I do not come to the conclusion that the trustee is required to use this piece of property to recover the money. It is merely a security interest for him. You seem to hold a different.
[English]
Mr. Baird: No, I think your interpretation is correct. There is no requirement that the trustee take money from another asset and use it to clean it up. What is available to pay the cost -
[Translation]
Mr. Lebel: But he can do so.
[English]
Mr. Baird: Yes, he could do it. But he doesn't have to.
[Translation]
Mr. Lebel: Exactly.
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[English]
Mr. Baird: If he does spend the money, he gets a first charge on the asset for the cost of the clean-up. Any party that expends funds on cleaning up the property will be entitled to this super-priority charge.
[Translation]
Mr. Lebel: One final point. In one of your subsequent recommendations, you say that the trustee could act at some point for a secured creditor. If we link this interpretation of subsection 14.06(7) and the fact that the trustee can act for a secured creditor, do you not feel that this has all the makings of a conflict-of-interest situation?
[English]
Mr. Baird: No, we don't have an element of a conflict of interest, because that secured creditor will have a first claim against the asset in any event. Therefore the cost of clean-up will rank ahead of that secured creditor. So if that secured creditor wants to sell the property, it will have to clean it up or it won't be able to sell the property, or it will have to sell the property subject to the mortgage or claim for clean-up cost.
[Translation]
Mr. Lebel: I merely wish to make the following observation. Supposing I were a secured creditor in respect of a contaminated piece of property and I were to ask the trustee to have the property cleaned up using money from the estate. Supposing I then asked the trustee to return the property to me so that I could take out a first mortgage against it, he could find himself in an embarrassing situation. He would not have been required to pay for the clean-up costs out of the sale of the property and could have found the money for this anywhere. That is why I have some difficulty reconciling these two possibilities without seeing the potential for a conflict of interest. Thank you.
[English]
Mr. Baird: That would be challenged by the other creditors. The other creditors would challenge that and say the trustee was not acting in accordance with its fiduciary duty because it was preferring one creditor over another. It's similar with any asset. It's nothing different. In any bankruptcy the trustee in bankruptcy cannot take assets that are available for unsecured creditors and use them for the benefit of a secured creditor. That would be challenged.
The Chairman: Mr. Mayfield.
Mr. Mayfield: Thank you very much, Mr. Chairman.
First of all, I want to thank you. I'd gladly trade my ability to say ``indigenous'' for what you know about bankruptcy.
You mentioned that in international bankruptcies a couple of routes could have been taken, and the government chose the concurrent approach. Is this fairly consistent with other constituencies and other national jurisdictions, or does that mean anything?
Mr. Baird: Bruce is the expert on international bankruptcies. He may wish to answer that.
In my view the international situation is a mess. There is no consistent approach. People have been advocating, and I think Bruce is one of them, a more consolidated approach. Other people don't share that view. So there are significant differences of opinion.
Bruce, you might want to respond. Is that a fair comment?
Mr. Leonard: Both the United Kingdom and the United States have provisions in their legislation that are intended to encourage cooperation where you have a company that's in financial difficulty in more than one jurisdiction. It's a question of the extent to which those are perceived as working effectively or not. In our deliberations we had some people say the United States provision doesn't mean what it says, isn't being interpreted to mean what Congress intended it to mean. Nonetheless, each of our major trading partners has a provision in its legislation mandating some form of cooperation internationally. I think the government's proposal here is that we have something comparable in our legislation, because we've never had anything remotely like this in the Bankruptcy and Insolvency Act before.
The criticism you may hear from others who appear before the committee is that the legislation doesn't go far enough, that there should be more extensive means of cooperating internationally. But during the BIAC process this issue was extensively canvassed and the result that came back from the BIA Committee represented a compromise that was very hard fought, very tightly contested. I think it's a workable compromise. It's a step ahead in our legislation and it brings us into line with what our major trading partners themselves are doing.
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I don't know whether that answers the question or obscures it.
Mr. Mayfield: Anyway, I'll think about what you said.
With the last people who were here there was a discussion concerning creditors' meetings and whether they should always take place or not. I was wondering if you have any comments on that.
Mr. Baird: The problem we've had with creditors' meetings is that the creditors don't show up. That has been the major practical problem. Only in large situations or where they feel the bankrupt has been guilty of some skulduggery do the creditors show up. They've already lost the money and they don't want to spend the extra time. So, frequently, meetings have been held where they can't even get a quorum, particularly in the small debtor situation. This is the reason for the proposals that have abolished creditors' meetings: it's the lack of interest on the part of creditors.
So, rather than go through a formal process that is a waste of time....
The old bill abolished meetings for pure consumer bankruptcies; the new one goes a bit further and abolishes meetings for consumer proposals. But the real reason is that creditors have not shown an interest in attending those meetings.
Mr. Mayfield: I realize that our chairman is looking after our interests in questioning you, but I would like to have you make a comment on the subject you started, which is the student loan bankruptcies. I'd like to hear what you have to say on that.
Mr. Baird: Student loans have been a real dilemma and the courts have not been consistent. If you read the bankruptcy reports, you will find courts all over the lot between rehabilitation versus the obligation to pay and the duty to society to repay money that's used for education.
I think the legislation is trying to balance these two approaches.
It's a question of policy. We as an institute think the two-year rule is too short. The student should be given three years to get rid of his student obligations before being allowed to go bankrupt.
The problem is, of course, that in the current days of unemployment students have real problems in getting employment and therefore they can't start paying back their student loans quickly. It's not until they get established that they have the ability to pay back. Therefore to let them go bankrupt after two years and a day and to avoid the liability seems to us to be unfair, and that's why we propose three years.
We agree with the concept that a hardship escape clause should be built in, and the government has proposed that. We have just changed the words. We like better our words - we think they are more effective - that the student has had to look out and seek employment, because if a person has not sought employment and has just sat back and done nothing, they should not be relieved from their liabilities. We think a duty should be imposed on the student actually to go out and look for work.
Mr. Mayfield: There was a news report in which a young man took off in his sports car saying that he didn't pay it back because he couldn't afford to.
I have appreciated your presentation very much.
Mrs. Brushett: I appreciated your comments.
Under chapter 11, the Americans have financing secured during the framework of restructuring or collapse. We don't have that in Canada. Why don't we have it? This is a question that callers to my office pose frequently. If we're depending only on the goodwill of our banker to provide that financing in that very critical interim, what do you suggest?
Mr. Colter: We don't have the final solution. I think it's fair to say that this is just one aspect of the differences between the United States and Canada when you're looking at restructuring. It's important to note that our systems in Canada, certainly in my view, work better and have a much higher success rate in getting companies to the point where they can be successfully restructured.
So when we look at this one aspect, the financing area, it's something that we think is worthy of improvement in Canada.
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One of the reasons why we have not had significant movement on it so far is that there has been a strong push, certainly by the Canadian Bankers Association and other financial institutions, to the effect that they are not prepared to support any type of legislation that puts them in a position of having to provide financing in every situation. We think it is worthy to continue to try to find a halfway house between what we have today and what we have in the United States, to make some improvement.
But we don't have the solution yet. That's one of the reasons why we think we need some more people to work on this. That's something certainly the Insolvency Institute of Canada would be prepared to volunteer to take a major role in.
Mrs. Brushett: I'm not a standing committee member here all the time, but as a member of Parliament I'd certainly accept your offer.
Mr. Baird: The big fight in the U.S. is the issue of adequate protection; what constitutes adequate protection. The lenders we've talked with have had horror stories that the courts have determined there is adequate protection when in fact there isn't. They were forced to permit super-priority and therefore they lost a lot of their securities. Giving the courts the right to value assets has been a major problem in the U.S., from what we're told by our clients.
The Chairman: Mr. Lastewka.
Mr. Lastewka: Like Mr. Mayfield, I want to ask a question on student loans. I'm just wondering if there isn't some way of approaching the student loans rather than just extending by a year. We do have some problems with students who can't get jobs, for one reason or another. I'd be open to hearing any other comments on student loans; how mechanisms might be put into play other than just extending by a year.
I have a short comment. In one of your sections you suggested that certain factors do not apply to farmers, and you made some short comments on that. I haven't heard anything about the farmers who are becoming large business people.
Mr. Baird: I could talk forever on these topics.
About the student loans, one of the choices, although I don't think anyone has strongly proposed it, is that debts not be discharged, that they not be released by bankruptcy. That's a very Draconian step, because it would mean the student would be saddled with the student loan for the rest of his or her life if you put that kind of provision forward. We haven't proposed that, but that's one side of the coin.
The other side of the coin is the current status, where a student can go bankrupt one day after he leaves school and get out of liability.
The problem is bringing it together and balancing it. There are so many different points of view on what the balance should be that it's very difficult to say what is right, where the median point is. We think three years plus an escape hatch is a median approach, but we aren't sure we've got the perfect solution. We've had a lot of discussion on this one.
Mr. Colter: We did put in the brief...and everybody should realize that in the United States at seven years you still have the ability to go in and get relief from that. Some of us would have preferred to have moved the two years up to four or five years, but we didn't know whether that would be politically acceptable.
Mr. Baird: We don't want to be looked at as the fat cats.
On the other one, the farmers, the proposal is that farmers should not be sanctioned if they don't keep proper books and records. We think a sanction should be imposed on farmers if they don't keep proper books and records. We can't understand why you would remove that sanction, and that's what the bill proposes.
The Chairman: Thank you very much.
I have one very quick question. I think Mr. Colter raised it first. It's to have the legislation reviewed more frequently than it's scheduled to be, and Mr. Baird's comments about the evolution of the act.
With some of the other legislation we're dealing with we find the five years is almost too fast. For example, the Bank Act is being reviewed but in five years it hasn't really been settled how the new arrangements are working out. Do you feel this field is stable enough that a five-year review would be more appropriate than a seven-year review?
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Mr. Leonard: We're in a mode where there's a lot of catching up to do. This act didn't get any judicial attention for 35 years. It's now had one review, and we need to do a tremendous number of things to bring this legislation up to the 20th century before we get into the 21st century.
The Chairman: We'll have to keep at it.
Mr. Baird: There is the catch-up problem. If we got caught up, then maybe you could put in a seven-year period, but not right now. We really need more catching up. We're not there yet. Maybe people think it's good, but we need improvements.
The Chairman: I'm sure I speak for all the committee in saying what a tremendous presentation you've had.
I'm sorry I interrupted you, Mr. Baird, but I just wanted to make sure that the committee members would have a chance to ask at least a few questions of you. You could tell that there was a lot of pent-up desire to ask you questions.
Yours will be one of the documents that will help us in our consideration of this legislation. We take the spirit of change and getting on with it at the same time as trying to steer the middle ground and understand the consensus among professionals like you. Thank you very much.
The committee stands adjourned until tomorrow at 9:30 a.m. in room 209.