[Recorded by Electronic Apparatus]
Wednesday, September 25, 1996
.1539 
[English]
The Chairman: Members of the committee, my apologies to you and to the witnesses for the late start today. One of the members of the committee would like to have a point of order discussed. It will take two seconds now and then we'll discuss it next week.
Please, Mr. Ménard.
[Translation]
Mr. Ménard (Hochelaga - Maisonneuve): Mr. Chairman, you will recall that at our last meeting, we passed a resolution to create a subcommittee on the conversion of defence industries to civilian purposes, having agreed that this was a major issue in Quebec, Ontario and British Colombia.
.1540
For all kinds of reasons, the subcommittee was not struck. Therefore, I would like to table a motion once again, without debate, and propose a draft mandate so that at the next meeting of the Standing Committee on Industry next week, the Chairman is in a position to proceed with the striking of the subcommittee which could be composed of three government members. Ms. Brown's interest in this matter is well known and I believe the Reform Party is also interested. The important thing is that we proceed as quickly as possible and accordingly, I wish to propose some terms of reference for the subcommittee.
[English]
The Chairman: I prefer not to have discussion now. We'll have discussion at the first meeting of next week. Okay? We'll have it translated.
Mrs. Brown, you've been involved with these discussions, so perhaps you can prepare the government members for the nature of this discussion. We'll proceed then, but I don't want to have the discussion today. Thank you very much, Monsieur Ménard.
Mr. Ménard: Everything is all right.
The Chairman: Yes. We shall 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. We have as our first witnesses Professor Jacob Ziegel, Professor of Law Emeritus, the University of Toronto, and Iain Ramsay, also a Professor of Law - but not emeritus - from Osgoode Hall Law School.
You're too young to be emeritus, right?
We are starting ten minutes late so I'll be governed by the committee. If the committee members still need time at 4:30 p.m., we'll take a few extra minutes and make sure people have the time to ask questions of the witnesses.
Welcome, and please proceed.
[Translation]
Professor Jacob S. Ziegel (Law Emeritus, University of Toronto): I am very pleased to have the opportunity to appear before the committee along with my colleague, Professor Iain Ramsay from the University of Toronto's Osgoode Hall Law School, to make several important points respecting Bill C-5. I am appearing today in a dual capacity.
Firstly, I am appearing on my own behalf and on behalf of Canadian law professors Elizabeth Edinger of the University of British Colombia, Ronald Cuming of the University of Saskatchewan in Saskatoon, Iain Ramsay and Vaughn Black of Dalhousie University in Halifax. With the exception of Professor Edinger, we have all taught commercial law and consumer law and have been active in the field of credit and consumer rights and, in the case of professors Cuming, Ramsay and myself, in the field of consumer insolvency law.
Secondly, I am appearing in a personal capacity to present my views on other aspects of Bill C-5. Committee members have already received a copy of my submission.
[English]
Mr. Chairman and members of the committee, Professor Iain Ramsay and I are grateful for this opportunity to appear before you today because you think it important that the committee should have the benefit of receiving some independent, if critical, views concerning the consumer bankruptcy provisions in Bill C-5.
You have before you two sets of submissions. The first set is made on behalf of myself, Professor Edinger of the University of British Columbia, Professor Cuming of the University of Saskatchewan, Professor Ramsay, and Professor Vaughan Black of the Dalhousie University Law School.
The second set of submissions represents only my own views on other aspects of Bill C-5. After I have made my oral remarks, I will, with your permission, Mr. Chairman, ask Professor Ramsay to add some remarks of his own.
I will deal first with the collective submissions. They deal exclusively with those amendments in Bill C-5 concerning consumer bankruptcies and related problems.
The underlying assumption of the amendments in Bill C-5 is that consumer bankruptcies have become a major legal phenomenon in Canada. With this we agree entirely, although we would add that the economic and social problems generating the insolvencies are, in our view, at least as important as the legal results.
Where we differ fundamentally from the drafters of Bill C-5 is in our diagnosis of the causes of the escalating number of consumer bankruptcies. The drafters appear to believe it is escalating because going bankrupt and obtaining a discharge from one's debts has become too easy and too attractive, particularly in light of the 1992 amendments to the BIA.
.1545
Bill C-5 therefore proposes to put in place a complex, bureaucratic, and in our view coercive set of provisions with a view to ``encouraging'' a much larger number of insolvent consumer debtors to make a consumer proposal under part III, division I, of the act.
We do not believe that the provisions, even if enacted, will have this effect. We believe all the available evidence, and we cite a good deal of it in our submissions, most of it derived from government-sponsored studies. It shows that 90% or more of the consumer bankrupts are hopelessly insolvent, have negligible assets, live in the shadow of poverty, and have no foreseeable prospects of being able to pay off a significant part of their indebtedness within a reasonable timeframe. No doubt there may be some individuals who seek to take advantage of the existing rules, but they do not represent the vast majority of consumer bankrupts.
The studies we cite show that the most common causes of consumer bankruptcy are unemployment, ready availability of consumer credit, and inability to budget properly. There's not much Parliament can do about persistent high levels of unemployment, but in our view Parliament can and should express its concerns about the abuses of credit-granting practices and manifest its concern in the BIA.
In our view, consumers' inability to budget properly is closely linked to the ready availability of consumer credit at, it would appear, all levels of income. Our submissions, on pages 28 and 29, contain two random samples of contemporary credit advertising. They could be multiplied many times. They raise this question: how can we expect consumers to adopt prudent and thrifty spending habits when all the advertisements tell them constantly that they do not have to wait, that the desirable good or service or straight loan is theirs for the asking, frequently without a down payment, and with repayment and interest liabilities postponed for six months or more?
It is and should be a matter for keen concern that nothing in Bill C-5 and nothing we have seen in the minutes of working group 1 of BIAC addresses any of these concerns. The only response we have seen is to emphasize the need for consumer debt counselling and to make it a prerequisite to the discharge of first-time bankrupts. We do not oppose counselling facilities - quite the contrary - but we believe it is a mistake to make debt counselling mandatory when we do not impose the same conditions on any other type of bankruptcies, or on directors and officers of companies whose inexperience or lack of financial skill may have led to the downfall of the enterprise.
In the light of our diagnosis of the current problems, our submissions offer the following recommendations.
First, the provisions in the present BIA enabling a trustee to apply to the court for a payment order under section 68, and enabling the court under section 173 to suspend a discharge or impose payment or other requirements as a prerequisite to discharge, are sound and should be left as they are. We would, however, add a clause to these provisions entitling the court to take into consideration the nature of the bankrupt's indebtedness and the extent to which the creditors may have contributed to the debtor's financial problems.
There appears to be a common misperception that the 1992 amendments confer the right to a discharge on first-time bankrupts. This is not correct. The right exists only if a creditor, the trustee or the superintendent does not object. If creditors do not often object, it is because they know the bankrupt's position is hopeless.
Second, consumer proposals should be made more attractive to those consumers who can benefit from them, by offering more carrots and fewer sticks and by adding the following features to part III, division II, of the present act: (a) requiring credit bureaus and other credit-reporting agencies to give consumers credit for taking the proposal route and for successfully completing an approved proposal, and at the moment there is no such requirement, Mr. Chairman, and it has been a matter of considerable discussion; (b) by extending consumer proposals to include secure creditors and allowing the court to override a creditor's objections to a proposal, including objections by a secured creditor, if the court believes the objections to be unreasonable; (c) raising - this is not in our brief, Mr. Chair, I must make this clear, but we should have added it, so with your indulgence, I will add it now - the monetary ceilings for consumer proposals from $60,000 to a substantially higher figure.
.1550
Our third recommendation is that the act should be amended to raise the current ceiling for the availability of summary administrations from $5,000 to $10,000, but without prejudice to further increases by Order in Council.
Fourth, we emphasize the need for further studies of the whole consumer bankruptcy phenomenon and to update existing studies. When we talk about existing studies, we are particularly concerned that an excellent study, completed in 1982 by two officers in the Department of Consumer and Corporate Affairs called Brighton and Connidis, should be updated, because it's by far the most comprehensive study that has been done in Canada so far.
This concludes the summary. It's a very crude summary of what we've tried to say in much greater length in our collective brief.
Let me say a word about student loans. I know that it has attracted widespread attention. We intentionally did not deal with it in our brief because none of us has any special equity expertise in the area and we didn't have time to do any independent research. Nevertheless, the committee is of course free to put any questions to us on this question, as well as on the points that are expressly dealt with in our brief.
I turn now to the second brief, my own brief, which deals with other aspects of Bill C-5. As you will see, Mr. Chairman, I'm afraid I'll continue up this somewhat critical path. I suppose one of the few privileges - some would say it's a death wish of academics - is to tilt at windmills. I do tilt at a good many windmills in this personal brief.
You'll observe that my personal brief begins by dealing with two problematic provisions in Bill C-5. The first one deals with the retention of the Companies' Creditors Arrangement Act. I feel quite strongly that the amendments pursue an entirely wrong path there.
When this committee considered the question in 1991, your committee was firmly of the view that the CCAA should be repealed three years after the 1992 amendments came into force. Let me quote from page 4 of my brief, with your indulgence, what the committee actually wrote:
- The Committee notes the concerns raised by the witnesses in connection with the CCAA. We
too believe that the CCAA should eventually be repealed and that there should be only one
statute dealing with commercial reorganizations. The Committee therefore recommends that:
- 10. The Companies' Creditors Arrangement Act be repealed within three years of the coming
into force of the commercial reorganization provisions of Bill C-22.
I say that conceptually. Instrumentally, this is a grave mistake even if there had been no prior recommendation. The question of the status of the CCAA has been discussed on and off since 1970. Every committee whose recommendations I am familiar with and every study that has been made has either assumed or stated explicitly that we should not have two separate regimes for commercial reorganizations, at least not in different acts. Everything should be rolled into the same act.
I was a member of a working group too, Mr. Chair. I've heard absolutely no reasons why any special provisions that are desirable to deal with large corporate reorganizations cannot be folded into the BIA.
.1555
It seems to me this is a case where counsel have become comfortable with the open-endedness of the CCAA and prefer to retain their own - dare I say it - little club. I can appreciate their sentiment, but they're not in the best interests of bankruptcy reorganization and administration.
Accordingly, I have recommended in my brief that your committee recommend that the proposed amendments to CCAA in Bill C-5 should not be adopted. Instead, industry should be invited to prepare proposals for a new part III, division I(a) of the BIA dealing with the reorganization of large enterprises and to be presented to Parliament in a year. I am arrogant enough to have persuaded myself that my proposal is a viable one, and if the very gifted, intelligent minds we have are applied to introducing this additional part to the BIA with large corporate organizations, we can combine the best of both worlds and address the problems of large, corporate reorganizations by keeping them within the broad structure of the BIA.
Mr. Chairman, the members of the committee must appreciate that when we're talking about the BIA, we're talking about a whole complex of provisions and administration. When we talk about the CCAA, we're talking about an entirely different regime, which operates wholly outside the BIA. It creates enormous problems. In fact, the problems are most basic. We don't even have the most elementary statistics about the number of reorganizations that are initiated under CCAA, because the reporting requirements in the BIA do not apply to reorganizations under the CCAA.
My second remarks deal with major problematic provisions with international solvencies. I must be brief because of the time factor.
The Chairman: We have a ten-minute rule, then a professor's rule, so we'll give you about three or four minutes.
Prof. Ziegel: That is very kind of you.
The Chairman: But I wouldn't mind if you'd summarize in the next two or three minutes.
Prof. Ziegel: All right. You'll find my submissions on international insolvencies in the brief. Again, I depart from what has been done.
There are what I call important loose ends. Bill C-5 has actually nothing to say about resolving the long-standing issue of protection for unpaid wage earners in bankruptcy. Parliament was assured after the enactment of Bill C-22 that a committee would be established to study the problem still further. I'm sorry to say that nothing has happened. I do feel out of a sense of fairness to unpaid wage earners that the problem needs to be addressed. We know the alternative solutions. The question is now to bite the bullet and finally bring this long-simmering issue to rest.
Consider unpaid suppliers' claims on reorganization. Your predecessors, Mr. Chairman, adopted some important provisions, or what at least would appear to be important provisions, sections 81.1 and 81.2 in the 1992 amendment. At least as far as unpaid suppliers are concerned, they've turned out to be a completely pyrrhic victory. My argument is that with a small amendment to section 81.1, we can assure that when a company opts for reorganization rather than bankruptcy, the protection that Bill C-22 intended to confer will in fact take place.
Finally, the concluding part of my brief deals with what I call phase III of the BIA amendment project. It hopefully also has some useful things to say on that score.
Thank you very much.
The Chairman: Mr. Ramsay, please keep it brief.
Professor Iain D. C. Ramsay (Osgoode Hall Law School, York University): I'm going to try to be brief. I'm going to focus solely on the consumer bankruptcy issues. Let me just make a few points.
I think the first point is to substantiate Jacob's point. Policy in relation to bankruptcy should be basically based on assumptions about the norm rather than the exception. That is to say, we could set up maybe three types of bankrupts. We could set up a bankrupt as being an unfortunate person, we could set up a bankrupt as being an amoral person, or we could set up a bankrupt as being - I don't like the word - an inadequate person.
The amoral person is a sort of rational calculator who sees what they can get out of the system. The inadequate person is somebody perhaps who is incapable of managing their affairs. The unfortunate person is someone who perhaps has suffered some unfortunate change of circumstances.
.1600
To the extent that we have data - and this is one problem - it suggests that bankrupts are in general unfortunates, rather than amorals or inadequates, and that therefore our policy should be focused on that.
The second point is that we have to remember that consumer credit is an essential part of our economy. When we talk about consumer confidence, we mean that more people are going into debt. In that economy, bankruptcies are inevitable. They're an inevitable part of consumer credit, and how do we deal with the casualties who we suggest are unfortunate people?
Well, we have a method to allow people to write down debt to make a fresh start. It's important to remember that this has been one of the objectives of consumer bankruptcy since the Tassé commission in 1970, the idea that the overburdened debtor should make a fresh start. In a sense, consumer bankruptcy is like a kind of access to justice. It's a fresh start, though; it's not a free ride, in the sense that often even though you are discharged from bankruptcy you will still have difficulties in getting credit and your name will be on a credit report for some years.
I think the 1992 amendments attempted to provide that model of bankruptcy for the unfortunate individual.
Remember that creditors also are often in a position to monitor overindebtedness, in the sense that they often have a lot of information on debtors and they can apply their own sanctions.
As Jacob suggested, there does not seem to be evidence that there is substantial abuse of the bankruptcy system in the sense that there are many people who could have substantially repaid their debts who are using bankruptcy. We don't have terribly ironclad data on that.
In the U.S., however, a very extensive study has been done by Professors Sullivan, Warren and Westbrook, who did a study based on 1981 data and they brought it up to date in 1991. I can give you a citation to their article in the 1994 American Bankruptcy Law Journal, where they suggested that, even though the U.S. system is more liberal, there was little evidence of substantial abuse there in the sense of individuals who could have repaid substantially taking advantage of the straight bankruptcy rather than going into a repayment program.
One concern I have is that we don't know what the impacts of pushing people towards these repayment programs are, which is one of the thrusts of these amendments. One danger is that it may simply deter people from using bankruptcy at all. Of course, there may be social costs there, because the creditors still may not be repaid and you have problems, for example, of over-indebtedness, where people lose their incentive to work, there's personal stress, there are problems of family breakdown, and there are tendencies to encourage a sort of deviancy in the sense of avoiding debts.
Those are some general points.
Let me make some very specific points that I am concerned about in relation to the proposals.
In the present proposals, which require the trustee to make these reports on income repayments and require the debtor to make these income repayments, the trustee is in a real conflict of interest, because trustees advertise in the newspapers saying, ``Come to us and we will help solve your problems''. They advertise to people who are overindebted, and therefore the assumption is that when you go to the trustee, the trustee is perhaps representing your interests.
In law the trustees are officers of the court, but they're basically representatives of creditors. It's not clear that an individual who is overindebted will know this, and very few ordinary individuals in Canada will be represented by lawyers. In the United States you go to a lawyer if you are going bankrupt and they represent you. In Canada you go to a trustee, and the trustee is wearing two or three hats. So the amendments here, which are drawing the trustee into these sorts of requirements of ensuring repayment, really do put the trustee in a difficult position.
The second point, more specifically, is that if we want to have proposals, repayment schemes, then we really have to think about making them more attractive, as Jacob said.
For example, in the United States, under chapter 13, which is their equivalent, debtors are able to deal with secured credit, which means their home and usually their motor vehicle in terms of being able to keep their assets, but entering into a repayment scheme. It may be that there are social values in that, in the sense of, for example, helping families to stay together.
Under the existing Canadian repayment scheme, secured creditors still stand outside the repayment scheme. They don't in commercial proposals. You can force the secured creditor into a commercial proposal. So that's an important issue that should be addressed.
.1605
My final point is on student loans. We don't really have any good data on this issue. We know from data provided by a superintendent of bankruptcy that one out of every ten individuals declaring bankruptcy had a liability for a Canada student loan in 1993. We know there have been larger write-offs from student loans. This is not surprising given the general state of the economy. The proposals that have been made to cut off the ability of students to go bankrupt have been made on the basis, as far as I can see, of very little evidence. No systematic study has been done, and in the legislation there doesn't even seem to be the possibility within this initial period of the student making an application for undue hardship.
That is it. Thank you.
The Chairman: Thank you.
Mr. Lebel.
[Translation]
M. Lebel (Chambly): I didn't grasp the gist of his presentation. Fortunately, I understood nonetheless. Can we now move to questions?
The Chairman: Yes.
Mr. Lebel: I would like to congratulate both witnesses and thank them very much for their very interesting presentations. My first question is for Professor Ramsay. Since these hearings began, this is the first time that someone has said to us in such clear, unequivocal terms that bankruptcy trustees are in a conflict of interest situation. That is indeed what you said, is it not?
[English]
Prof. Ramsay: Yes.
[Translation]
Mr. Lebel: Since we didn't catch some of your comments because of the translation, I'm not sure that I understood you correctly. Did you make a recommendation to the effect that conflict of interest situations should be avoided?
[English]
Prof. Ramsay: No, I didn't make a recommendation. I think I was drawing the committee's attention to this problem. The problem is simply that the person who is going bankrupt goes to the trustee for help. The trustee is trying to help the debtor. However, the trustee is also a representative of the creditors. I'm not sure how the trustees deal with this issue. I'm sure trustees do their best at present to deal with this issue. One of my concerns would be to what extent individuals are getting clear, objective advice and information on what is open to them.
[Translation]
Mr. Lebel: I have another question for you, Professor Ramsay. I more or less agree with you, particularly when I look at the bill as it now stands. It says that the bankruptcy trustee can commit sums of money to arrange for treatment or psychological or psychiatric counselling for the bankrupt's immediate family.
In your opinion, how are creditors going to react when a bankruptcy trustee tells the bank: ``I have here a secured creditor and I have a $10,000 dividend that I could distribute, but the bankrupt is deeply affected by his bankruptcy. I'm going to take the $10,000 and send him for psychological or psychiatric counselling or whatever''. Do you not view this as a potential conflict of interest and do you not see the danger of the courts getting bogged down by provisions such as this?
[English]
Prof. Ziegel: I'd be happy to respond to this question. There is a very simple answer. It would be totally improper for the trustee to use the collective funds for the purposes you've described. The Bankruptcy and Insolvency Act sets forth very precisely the classes of creditors and how the net funds of the estate are to be used. Certainly legally it seems to me to be completely impossible for the trustee to decide the funds from the estate should be used for psychological counselling rather than for distribution among the creditors.
.1610
Let me add also that I think your hypothesis is very remote and very abstract. As we've tried to emphasize in our brief, the overwhelming evidence is that 90% or more of consumer bankruptcies are hopelessly insolvent and do not have any assets or estate. We cite chapter and verse. These are not statistics we compiled ourselves. These are statistics we've obtained from government sources. These are reports and studies commissioned by the Office of the Superintendent of Bankruptcy, and presumably we can take them at face value.
The point we would try to emphasize throughout is that the typical bankrupt is completely broke. There is no suggestion of discretionary income, no large amounts of money sloshing around. It is not all an enterprise in order to deprive creditors of repayment. This is not the picture that presents itself. This is why we feel all these complicated provisions about payment orders, about mediation and about reports of trustees do not confront reality. They deal with a very small fraction of the total number of people. This small percentage can be and is, in our view, adequately addressed in the existing provisions of the BIA.
[Translation]
Mr. Lebel: I don't know which of the two witnesses will be able to answer this question, but are either one of you familiar with the code of ethics for trustees published in the Canada Gazette?
[English]
Prof. Ramsay: No. I haven't reviewed it.
Prof. Ziegel: I've not seen them in The Gazette. I've seen some in the Insolvency Bulletin. It was some time ago. I do not remember the details.
But why do you ask?
[Translation]
Mr. Lebel: I'm asking you this question because, if we consider the possibility of a conflict of interest arising, we should perhaps consider whether the trustee has guidelines to follow in such cases and if perhaps his code of ethics might not make up for the fact that the legislation is vague insofar as his mandate is concerned.
[English]
The Chairman: Merci beaucoup, monsieur Lebel.
Mr. Mayfield.
Mr. Mayfield (Cariboo - Chilcotin): Thank you very much, Mr. Chairman.
I appreciate your being here. It's good to hear a fresh voice on this topic. There are a couple of areas I would like to ask some questions about.
You raise the issue of wage-earner protection. I find this interesting. You'll probably gather that I'm not an expert in the field of bankruptcy, but I seem to be learning day by day, and I'm seeking to learn just a bit more today.
As we talk about your suggestion of increments being added to unemployment insurance premiums to cover additional costs, I was wondering if you had thought out how this plan might work with the amendment of the Unemployment Insurance Act. Perhaps you could explain that a bit more, please.
Prof. Ziegel: I will try. I'm certainly not an actuary. Let me put it this way. For the last 25 years there have been three approaches to the problem of protecting unpaid wage earners in bankruptcy. One is to confer super-priority status on the claims. The second is to create some kind of insurance fund. The third is to do nothing. I assume we all agree the third alternative should not be acceptable.
The banks and other secure creditors have strenuously opposed the first alternative because they say it is unfair to them and it will greatly complicate the planning of financial affairs. The banks and other secure creditors have supported the concept of an insurance fund.
.1615
The original version of Bill C-22 actually contained a bill within a bill for the establishment of an insurance fund, but there was much difference of opinion among the members of the committee, among the caucuses of the various political parties, so the government eventually decided to do nothing. This is why we find ourselves back at the initial starting point.
There are in fact a goodly number of statistics available - although they could be greatly improved - as to the number of unpaid wage claims in bankruptcy. I'm suggesting that those claims could be aggregated and then be used as the basis for seeking to determine by how much unemployment insurance premiums would have to be raised.
In 1992 the government advisers estimated that the weekly premium would be in the order of 10¢, or about $5 a year, which seems to me to be a very viable figure. It may be that it has gone up, and it may even have doubled in the meantime, for all I know. But as I say, if our starting point is that unpaid wage earners should be protected, within reasonable limits, then I think we should be willing to bite the bullet and do the right thing by unpaid wage earners.
It's not, Mr. Chair, that the problem will go away. It doesn't.
At the moment, however, what we're doing is imposing the burden on the provinces. The provinces have reacted by in turn imposing the burden on directors of companies and by holding directors personally liable for unpaid wage earners. Not surprisingly, the directors object strenuously, and there is a provision in Bill C-5 that seeks to protect directors by allowing them to be included in reorganization proposals.
So you see, everything has gone around in a circle. We really don't solve anything by pushing the problem under the carpet. The problem persists, and my view is that it's time we responded to it in the most efficient and appropriate way.
Mr. Mayfield: If I may push it a little bit, please, my concern with using the unemployment insurance fund for this extra relates to my concern about it being used for other things - and I'm thinking of long-term disability and this kind of thing. I think of people who would like to have unemployment insurance when they go home to look after their aged mother for a couple of years, for six months, or whatever it is. Because of my concern for that, I guess I would like to have you please explain to me, if you would, what may be some of the pros and cons of using the first option that you suggested.
Prof. Ziegel: As I say, a number of objections have been raised. I have mentioned one on the part of secured creditors. A secured creditor cannot estimate the value of its collateral in bankruptcy, and that's going to lead to a significant reduction in the amounts of credit that banks will be willing to make available to businesses. I'm not saying I necessarily agree with the argument. I'm simply giving it to you as it has been made.
Also - and I think this is the more persuasive argument - it is not going to accelerate payment to wage earners once the bankruptcy takes place. It's going to take a long time - until the estate has been sold or otherwise disposed of and until the trustee actually has funds in its hands with which to make payment to unpaid wage earners.
There has been some suggestion that the trustee should be allowed to go out and borrow the money, subject to some guarantees of repayment, but as critics rightly point out, this is going to raise new complications. This is why some kind of insurance scheme seems the best solution. Most European countries have in fact adopted some kind of insurance scheme.
Ten years ago the federal government asked a committee of experts to review the position on a comparative basis. The committee actually visited a number of European countries with insurance schemes and reported in favour of the adoption of insurance schemes to meet the claims of unpaid wage earners.
Mr. Mayfield: Thank you very much. I would like to come back later.
The Chairman: Thank you, Mr. Mayfield.
Mr. Shepherd.
Mr. Shepherd (Durham): Thank you very much. I enjoyed your presentation. I'm going to be asking more general questions, because I think it's important that we get through the general problems before we deal with the specifics of the legislation.
You talked about rising consumer bankruptcies, and you indicated that these were not devious people. They simply, possibly through no fault of their own, ended up in these situations. Yet we centre a definition of abuse around people who have been clever enough to try to use the law to escape their indebtedness.
.1620
Is the essence of people's indebtedness inappropriate spending habits?
There are two theories developing in this dissertation. There's a group that believes bankruptcies are really the result of economic cycles, and there are a lot of people in this country who are underneath the poverty line and are just using credit to survive. There's another theory of thought out there that says no, the majority of those bankruptcies are really people who spend it on beer and a good time; they weren't very clever at what they did and they're the cause of their bankruptcy by inappropriate spending behaviour. Which do you think is more prevalent?
Prof. Ziegel: We do touch on this in the reports to which we refer. The Connidis and Brighton study made it very clear there's absolutely no evidence of consumers having a good time at the creditors' expense. They give a very detailed demographic profile of the average bankrupt debt and make it clear that they are low-income consumers with not much in the way of skills. They are encouraged - and this is a critical point - to use credit.
As to whether they use it for improving their lifestyle or in place of essential income, probably both hypotheses are correct. But the question is why would a careful and prudent credit granter allow the debtor to be put in this position?
Certainly I have no evidence that would suggest the typical person who goes bankrupt is one who lives high on the hog at someone else's expense, but again, it shouldn't be possible if all credit granters exercise the care and prudence they should in running their business.
The unfortunate part is the interest rates, and we haven't had time to develop this problem at all. The interest rates are so high for certain types of available credit, particularly credit from department stores, that they can afford to take very high risks, relatively speaking.
Mr. Shepherd: Yes, the essential being that they can then turn around and charge other customers for their bad debt losses.
From a government policy position, the object of the exercise would be to reduce the number of bankruptcies, not find ways to administer them more effectively. It's been argued back and forth. Other than usury laws, we don't seem to have upward limitations on consumer interest rates.
Is there a role for government to say that within certain types of credit the interest rate should not exceed x, and therefore we would find more prudent credit lenders?
Prof. Ziegel: I think that's a hornets' nest, Mr. Shepherd.
Quite simply, my answer would be that bankruptcy is in fact a safety valve for hopelessly insolvent people. As my colleague rightly said, it's the price we pay for the ready availability of consumer credit, and the credit industry should be willing to pay the price. They can't have it both ways. They can't say they want to penetrate all segments of the community and give them access to consumer credit and then complain bitterly if there are a substantial number of debtors who do not use it wisely, indeed are not encouraged to use it wisely. You can't have it both ways.
It's important to emphasize, Mr. Shepherd, that we have wrestled with this problem since the 1970s. If you look at table 1 on pages 7 and 8 of our brief, you will see that during the 1970s the rate of bankruptcies climbed much more steeply. It climbed by 600% in a 10-year period, compared to the 300% escalation between 1985 and 1995. So we're dealing with a long-standing problem. It's simply that the absolute figures are much larger now than they were in the 1970s, but it's a mistake to think the problem has suddenly exploded in our faces. It's a long-standing problem, and in my view it's closely associated with the phenomenon of consumer credit.
The Chairman: Thank you, Professor.
Please be very quick, because I want to make sure everybody gets a chance to ask questions. Go ahead.
.1625
Prof. Ramsay: I won't say anything about the causes because Jacob has talked a little bit about them.
In your argument about responsible lending, I think you're raising the issue as to whether there should be regulation of lending practices. One could have that.
We would want much more information on how creditors use information now in granting credit, because they do have an awful lot of information on debtors. How, for example, do they decide that somebody is too overdrawn on their credit card? We don't really know that.
In some European countries, there are incentives along the lines that you're talking about. For example, in Holland, if a lender doesn't check the negative credit-rating agency before granting credit and the credit turns sour, the lender can't recover the debt.
There are possibilities for doing that. I don't think it has been the tradition in North America to focus on the lenders. I think Jacob would agree with me. We have a relatively open credit system and we see bankruptcy as a safety valve.
The Chairman: Thank you. Mr. Lastewka, do you have questions?
Mr. Lastewka (St. Catharines): Thank you, Mr. Chairman.
I think Mr. Ramsay talked earlier about whether you consider the house and the vehicle outside the bankruptcy, and so forth. I want you to comment on RRSPs. Should they be included or not? Should they be exempt? Which ones?
Prof. Ramsay: The RRSP issue is more complex sometimes, because I'm thinking in terms of the home and the car as basic exemptions. The RRSP may be more complex in the sense that it may be higher-income earners who have these RRSPs, and there is some question as to whether you would want to exempt an RRSP. But we don't really have very generous exemptions for basic stuff, for lower incomes. I think the policy questions around RRSPs are quite complex.
I don't know if you wanted to add to that, Jacob.
Prof. Ziegel: Yes. I think the problem is a separate one. The problem is this: what exemptions should there be from the assets that fall into the bankrupt's estate?
At the moment, the exemptions are governed by a provincial law, not by federal law, and this is what causes the difficulty. The exemptions vary widely among the provinces. There is no exemption in Ontario for RRSPs. There is exemption in some of the western provinces, and that's why there's been a good deal of litigation both in Saskatchewan and British Columbia, for example, about what types of plans are and are not exempt.
In my view, the key issue here is that we lack consistency across the country. There have been suggestions made from time to time that Parliament should determine what the exemptions should be, but this has encountered political opposition from the provinces.
Nevertheless, I am of the view that the BIA should at least mandate what the minimum exemptions should be, subject to perhaps a certain degree of flexibility from province to province.
Mr. Lastewka: I have just one more short question.
As you were making your presentation, you talked about the trustee being in a difficult situation and possible conflict, and so forth. You got into lawyers, and of course that made me a little worried for a minute.
I'm having some difficulty in understanding this, because it seems that in everything we have been talking about, more and more we create the system to get to a bankruptcy and get it over with, rather than designing a system to prevent that bankruptcy. I'd like to have your comments on that.
What is missing in our act that maybe we should be doing more proactively, thus saving that individual from bankruptcy? Professor Ziegel mentioned that the three main reasons for bankruptcy were unemployment, availability of funds, and training and counselling. I'm trying to search for something in that training and counselling that should be part of our system so we can at least eliminate that one or minimize it.
.1630
Prof. Ziegel: With respect, I think you're much too optimistic in thinking there is an easy answer for avoiding bankruptcies. If we didn't have consumer credit, I think the scenario would be significantly different. We had a lot of impoverished people during the Depression, but the number of bankruptcies during the Depression was minuscule compared to the number of reported bankruptcies that we have today. I think the reason was that during the Depression there was very little consumer credit. People either had money or they didn't. If they had no money, they couldn't get it and they had to make do with what they had, which was precious little.
Today we live in a totally different environment. People who don't have money at all don't worry about it. As I said, and as we say in our brief, today the motto is, ``Buy now, pay later''. That's why the media inundates us on a day-to-day basis with advertisements. There are point-of-sale labels in every conceivable medium that say something is yours for the having, and don't worry if you don't... In this kind of environment, how could we...? It would be amazing if we didn't have large numbers of consumer bankruptcies.
You're asking me what we can do about it. As I said, I think you should start at the credit level.
How far are you willing to go to police and discipline the credit granters themselves? I think it would be a very difficult exercise. That's why I personally find it simpler to tell the credit granters to put their own house in order. If they can't put their own house in order, then the bankruptcy will be the solution and we're not going to... The state should not be a collection agency for credit granters who should be perfectly capable of looking after their own interests.
Mr. Lastewka: Thank you very much.
The Chairman: Thank you.
Mr. Mayfield.
Mr Mayfield: If I might, just for a moment, please... We've talked a bit about trustees. I was wondering if you could tell me whether or not there are requirements that a trustee must fulfil before he can hang out his shingle.
Prof. Ramsay: Yes, they have to be licensed by the superintendent's office. The requirements are set out in a directive of the superintendent, so you have to meet certain requirements. I can't remember all of the exact requirements, but you generally have to have knowledge of financial affairs, for example. In general, trustees are often accountants.
Mr. Mayfield: If a trustee is not performing his function in a proper manner and for whatever reason, would you see any value in the superintendent having the power to cancel the trustee's licence until such time as he's had his - -
Prof. Ziegel: Well, he does.
Mr. Mayfield: He does have that power?
Prof. Ziegel: He does. First of all, the trustees are required to write examinations before they are even eligible to be made trustees. I think the overwhelming majority are chartered accountants. They have their own association, which I think is called the Canadian Insolvency Practitioners Association. Indeed, there have been cases in which a trustee's licence has been pulled or has been suspended. I think you'll find that the insolvency bulletin published by the Office of the Superintendent of Bankruptcy carries a lot of details about incidents of this kind.
I'm not aware - and I think it would be wrong to leave the impression, Mr. Chairman - that some of the trustees are in a conspiracy to elevate the number of consumer bankruptcies. Sure, it's a livelihood for them, just as it's a livelihood for lawyers to have clients. But I am totally unaware of any evidence to indicate that it's the trustees who are responsible for the escalating number of consumer bankruptcies.
Mr. Mayfield: My apology. That's not my implication at all. I'm talking about competence, and I guess beyond that. How insistent should the legislation be that because of incompetence, or for whatever reason, the money should be returned? How strong do you think that should be made in the act?
.1635
Prof. Ziegel: I think it's quite adequate now. A trustee has to submit his accounts. They have to be approved by the inspector. It is already regulated in considerable detail in the act itself. The accounts can be taxed before the registrar of the court if necessary. I think there are lots of safeguards at the moment.
Obviously, when you have several thousand trustees, there may be the odd bad apple, but again, I'm not aware of any systemic problems in the administration of the existing schemes. It is the superintendent's role. One of his primary roles is to supervise the activities of the trustees and to take action where appropriate. As I have indicated, action is taken from time to time where necessary.
The Chairman: Thank you. We have a final question from Mr. Milliken.
Mr. Milliken (Kingston and the Islands): Professor, I'm new to this area, and we've mentioned this exempt property definition that is determined by the provinces. Under the Constitution, in section 91 bankruptcy rules are given to the federal Parliament. In your view would the definition of exempt property be one that falls within that definition, and could the federal Parliament therefore determine what is exempt property?
Second, while I assume the answer is yes - I would expect it is - even if you think that, why hasn't it been done that way in the past? Is there a historical reason for it?
Prof. Ziegel: You answered the first question absolutely correctly. The answer to your question is that it's political. The western provinces traditionally have been more debtor-oriented than the central and eastern provinces, and the western provinces have strenuously objected that their exemption is being interfered with when a debtor goes bankrupt.
I assume successive governments have not found it politically worthwhile to tangle with the western provinces over this particular issue.
In my own view the time has come where we can no longer defer it. When the Bankruptcy Act deals with almost every other issue, it is anomalous that it should not deal with one of the most important issues in personal bankruptcies. But it is also a political question, not a legal one.
Mr. Milliken: I see. Thank you.
Prof. Ramsay: For example, in the western provinces there are the homestead exemptions that allow individuals to keep certain... A homesteader goes back a long way and he can keep his house up to a certain degree of equity. In some provinces it's much easier to keep an automobile. In Ontario you may or may not. It depends.
Basically, the exemptions you have as a bankrupt depend on which province you go bankrupt in, and that was not an issue, I'm afraid, that was addressed in these reforms.
The Chairman: Is that it, Peter?
Mr. Milliken: That's it. I'm sorry, Mr. Walker, I didn't hear you say Milliken. I thought you said Mifflin and I was wondering who you were talking to.
Some hon. members: Oh, oh!
Mr. Milliken: Thanks.
The Chairman: I would say ``Minister'' in that case.
Mr. Milliken: Yes.
The Chairman: I thank Professor Ziegel and Professor Ramsay. Both of you have been excellent witnesses. You can tell by the questions that the members were very interested in what you had to say, and you bring an interesting critique. In other words, Professor Ziegel, you describe a critical path, and I think the members will want to consider your comments in their deliberations in the next week.
Thanks very much to both of you. I know you find an hour compressed, but we've had several witnesses and that's the nature of this compression.
Prof. Ziegel: Thank you, Mr. Chairman.
[Translation]
I want to thank the members of the committee.
[English]
The Chairman: While the next witnesses from the Credit Union Central of Canada are getting prepared, I'd like to talk to the committee about our meetings next week. Les derniers témoins are on Tuesday.
[Translation]
Immediately after that, on Wednesday, we will begin our consideration of the amendments.
[English]
The government will provide the amendment to the opposition parties by Monday, and that Monday if you'd like a meeting with the government officials
[Translation]
respecting the amendments,
[English]
through Mr. Bodnar or through the minister's office, they will contact you and make sure you understand what's happening because
[Translation]
there are a considerable number of technical amendments, given the nature of the bill.
.1640
[English]
The following week Mr. Bodnar will arrange for us to have as witnesses the Canadian Tourism Commission, which has never been in front of this committee. They will come the week before Thanksgiving. The clerk and Mr. Bodnar will arrange that.
They didn't come up for estimates, but they were under the Ministry of Industry, and we'd like to have them in front of us to talk about what they've been doing since their inception.
[Translation]
For your colleague's information, we will be discussing the matter Tuesday in the sub-committee prior to hearing from witnesses. I believe he is in agreement, but we will discuss the matter at that time.
[English]
We'll discuss the subcommittee on defence industry reconversion before we hear from our first witness.
I want the committee members to note, because we all do these things out of habit and we sometimes don't look carefully, that the meeting tomorrow morning begins at 10:30 and not the regular time of 9:30.
Mr. Milliken: Is there a steering committee?
The Chairman: We have a steering committee, but we meet at a different time.
Now we go to the witnesses from the Credit Union Central of Canada.
Thank you very much for waiting. We're sorry to be late. We try to keep to our schedule, but we had an item come up unexpectedly at 3:30, so that's why we're slightly behind time.
Not to be rude, but I may have to leave about halfway through your presentation, in which case the vice-chair, Mr. Lastewka, will take over, so don't be disturbed by seeing me disappear. But I want to hear your presentation first.
Perhaps one of you can introduce the other. Who's on first?
Ms Mary Pat MacKinnon (Director of Policy, Credit Union Central of Canada): My name is Mary Pat MacKinnon. I'm the director of policy with Credit Union Central of Canada.
The way we'll organize our presentation this afternoon is I will briefly present just a bit of background on Credit Union Central of Canada and then I will turn to my colleague, legal counsel for the Credit Union Central of Ontario, David Guiney, who will speak to you on the bankruptcy issues raised in the brief that was sent to you in August. Then I will speak to issues raised by Credit Union Central of British Columbia, who was not able to be here today. I will be presenting on their behalf. Then we will take questions.
Credit Union Central of Canada is the national trade association and central finance facility for credit unions in Canada. Canada's 968 credit unions are full service financial institutions serving more than 4 million members and employing 18,000 Canadians. With over $44 billion in assets, credit unions are an integral part of Canada's financial services industry and are a consumer alternative to Canada's chartered banks.
CUCC provides a national voice and coordination in all areas, including the development of national products, services and systems, communications, taxation and market research. Currently Canadian Central is the system's direct link to the Canadian Payments Association and the Bank of Canada.
I'm going to turn it over now to David Guiney, who's with the Credit Union Central of Ontario. He's their legal counsel. He will address the issues that were raised in the brief that was sent in on August 6.
Mr. David Guiney (General Counsel, Credit Union Central of Ontario): Thanks, Mary Pat.
I want to thank the committee for having us as witnesses today and explain why Ontario credit unions specifically are interested in meeting with the committee to discuss the Bankruptcy and Insolvency Act.
Mary Pat mentioned issues, but I should say we really only have one issue to raise today. It's a single-minded purpose that I've been sent for today by our member credit unions, representing about 1 million Ontarians who belong to credit unions. The issue is the enforceability of a type of security interest that credit unions have had available to them for 50 years and that was invalidated in 1992 by the Bankruptcy and Insolvency Act amendments. It's called wage assignment security.
.1645
As legal counsel to the credit unions, I'm handling hundreds of calls every year on issues of administering, collecting, and documenting loans to members - and credit unions are primarily in the business of consumer loans.
One of the causes of the most frustration in the credit union system is bankruptcies. The frustration has grown after the 1992 revisions to the act because of the fact that the act took a focused view of Ontario credit unions and specifically said that wage assignment security, the form of security upon which they had relied for some 50 years, was now ineffective.
So not only was it ineffective going forward, but the existing loans that were written on the books of the credit unions were now in effect unsecured loans, whereas they'd been written as secured loans prior to that time. All the things that happened in the negotiation of a loan at the beginning of the loan were thrown into chaos. Secured loans generally get a lower rate of interest, but now these were in effect unsecured loans, and those loans were not paying an effective return for the level of risk credit unions were taking.
The subsection of the Bankruptcy and Insolvency Act that was added is subsection 68.1(1), and it in effect says that after the date of bankruptcy, a credit union's wage assignment security is unenforceable. A similar provision could have been added saying that after the date of bankruptcy your security in an automobile or a boat or a house is unenforceable, but it wasn't because that's not what secured lending is all about.
A specific provision dealing only with the Ontario credit unions' rights to take wage assignment security took away one form of security, in addition to boats and cars, that credit unions have traditionally taken. In our view, by negating that security, section 68.1 singled out Ontario credit unions for an expropriation of our security interest rights, for reasons that have not ever really been made clear to us. As a result, members have been encouraged to assign themselves into bankruptcy in order to defeat the wage assignment security.
The ultimate result of this has been a negative effect on credit unions and ultimately on their members. Credit unions had to write off more loans than they were expecting to and they had to contract the amount of credit that was made available to their members, because members of credit unions generally come to the credit union for loans that they likely can't get elsewhere.
I'd like to tell you a little bit about this background on the wage assignment, because it's a unique issue. Ontario credit unions developed a little bit differently from credit unions in western Canada and in the Atlantic provinces or caisses populaires in Quebec. The Ontario credit unions were organized around industrial offices and plants. Many of them were small, and at one point there were 1,500 credit unions in Ontario. They're not the result of farming or fishing co-ops; they're the result of industrial-based occupations or associations.
Because of that unique position, credit unions have always had the right to take an assignment of somebody's wages in that plant as security for the loans. What the credit union does is to ask the member to promise that if they can't repay the loan, they will allow the credit union to take 20% of their wages each week and apply that against the loan. It almost forces them to make payments. As long as they have a job, that security is very important to credit unions. It's almost as important and likely easier for the credit unions to enforce than to take security in automobiles and have to sell them and so forth.
The Ontario legislature recognized that the link between credit unions in Ontario and their industrial-based employment was so close that under the Wages Act of Ontario, the legislature of Ontario as a specific policy item has allowed credit unions to continue to take wage assignment security, notwithstanding the fact that no other financial institution, and in fact no other person in Ontario, can take wage assignment security.
.1650
The credit unions through the years have gone all the way to the Supreme Court of Canada to have decisions rendered that support enforcement of wage assignment security. Yet in 1992, with a single stroke of the pen, all those plans and work were brought to nothing. In 1992-93 credit unions suffered from an unusually high number of bankruptcies because it was now in the best interests of the members to declare bankruptcy. They could get away from the wage assignment security due to the new Bankruptcy and Insolvency Act. Increased loan losses at credit unions through the 1993-94 period are evidence of the effect of this subsection.
Also evidence of this subsection is the increased liquidity in the credit union system. Liquidity is the amount of money credit unions take in as deposits that they cannot make as loans. Credit unions are in business to take deposits from members and make loans to other members. Where they can't make those loans, because it's imprudent or because regulatory rules will not allow it, they must keep the money. Credit unions are now maintaining 23% of their deposits in what's called liquidity - money they would rather lend to members, but they can't find members with the security they need now to justify the risk of putting the depositors' money out in loans.
Our view is that the 1992 amendments expropriated a right we had long fought for and thought that public policy supported, or at least it did in Ontario. But the 1992 amendments are gone, and credit unions adapted. So in 1995 and 1996, as I said, fewer loans based on wage assignment security were made. Fewer loans, period, were made, and losses were reduced. We've adapted to the new policy.
Then when the 1996 amendments came out, the other shoe dropped for credit unions. One of the amendments the government is considering allows trustees in bankruptcy greater access to bankrupts' wages. We were told that wage assignment was the disruptive influence in some way in the bankruptcies in Ontario, that we were enforcing them and the cashflow of the bankrupts' salary was being disrupted by our activities in enforcing our security. Yet in 1996 a proposal that we support undermines that rationale for the section that did away with the wage assignment. Now the trustee in bankruptcy will be encouraged to disrupt that cashflow.
Where will the benefit flow? The benefit will flow to people who have lent money to those bankrupts on an unsecured basis, who didn't negotiate, as credit unions have negotiated, for wage assignment security. So they get a windfall. Extra cash will be available to be disbursed to the unsecured creditors, and credit unions will unfortunately be included because of subsection 68.1(1). We'll have some benefit, but not a lot. Credit unions will have seen their rights transferred to unsecured creditors. Credit unions lend at lower interest rates than unsecured creditors, yet the benefits will go to those people.
In the 1992 amendments we made our case and were advised that there were reasons to withdraw the wage assignment security. In 1996 we're questioning whether those rationales still apply. Does it make sense that trustees and unsecured creditors get a windfall over Ontario credit unions that have specifically negotiated wage assignment security with their members - wage assignment security that is part of the public policy of the Province of Ontario specifically related to credit unions? If it makes sense, why does it make sense?
We do support a provision that allows creditors to have greater access to the cashflow of bankrupts who can afford to make further payments towards the debts they owe to their lenders. But we will support it more wholeheartedly if section 68.1 of the Bankruptcy and Insolvency Act is repealed and credit unions are allowed to go back to their basic business of making loans, granting credit to their members, and following practices that had been in place for 15 years prior to the 1992 amendments.
.1655
The credit unions want to make loans to their members. Their members belong to the credit union because they believe in the cooperative spirit of the credit union enterprise. Yet we're finding the 1992 Bankruptcy and Insolvency Act amendments are hindering our ability to continue to do something the public policy of Ontario encourages us to do.
That's my presentation, Chair. I want to thank the committee for their time and I will be pleased to respond to questions once we've had Mary Pat discuss the other items.
Ms MacKinnon: I'll be fairly brief. Credit Union Central of British Columbia has, similar to Credit Union Central of Ontario, really one issue of concern in bankruptcy. This is with respect to subclause 15(1), which provides a lien to anyone who performs remediation on a contaminated site.
Unfortunately, as I said earlier, it wasn't possible for the representative from B.C. Central Credit Union to be here today. So I will be presenting their views, which are supported by Credit Union Central of Canada as well.
B.C. Central is very concerned about the provisions regarding liens associated with environmental clean-up. In our view and their view, the Bankruptcy and Insolvency Act is not the appropriate place to address environmental clean-up issues. Instead, the act should restrict itself to merely reordering the priority of charges against a bankrupt and/or his or her property. If liens are to be created at all in regard to environmental clean-ups, they should be created in pieces of legislation that deal specifically with the environment. A good example is section 20.93 of the British Columbia Waste Management Amendment Act.
However, should this committee decide to maintain this lien in Bill C-5, we propose that it be narrowed in the following two ways.
First, we propose the lien be made available to a narrower group of people. In the British Columbia act the lien is available only to the provincial government whereas the lien in Bill C-5 appears to be available to any person who cleans up contaminated land. If we are going to allow the creation of a lien with the extraordinary effect of bumping prior secured creditors, we should ensure such a lien is made available to the narrowest possible group of people.
Secondly, we propose the lien attach itself to a smaller parcel of land. In the British Columbia act the lien attaches to the contaminated site, whereas the lien in Bill C-5 appears to attach to the contaminated site together with adjacent or contiguous land. Again, if we are going to allow the creation of a lien that has the extraordinary effect of bumping prior secured creditors, we should ensure such a lien attaches itself to the smallest possible parcel of land.
In conclusion, we recommend the removal of the lien from Bill C-5. Alternatively, we would recommend that the lien be made available only to the federal government and that the words:
- and on any other real property of the debtor that is contiguous thereto and that is related to the
activity that caused the environmental condition or environmental damage
- in proposed subsection 14.06(7) of subclause 15(1) be deleted.
In closing, I want to say thank you for the opportunity and to open it to questions to David Guiney or myself. If I'm not able to answer it on British Columbia, we can certainly get back to you very quickly from legal counsel in British Columbia.
The Chairman: Thank you, Ms MacKinnon. We don't always get a good insight as to how we're affecting the credit union movement, so I appreciate you coming here today with David.
I'll turn it over to Mr. Mayfield to start the questions.
Mr. Mayfield: Mr. Chairman, I appreciate the attendance of the witnesses.
I've enjoyed listening to you very much, but quite frankly I'm not technically qualified to ask you questions.
Thank you very much.
The Chairman: Ms Brown and Mr. Shepherd.
Ms Brown (Oakville - Milton): Thank you, Mr. Chairman.
For the witness from the Credit Union Central of Ontario, you're suggesting we repeal section 68.1, but in your discussion you talked about other changes that are suggested in Bill C-5 as the second shoe falling. Do you want us to do anything with those as well, or will repealing section 68.1 solve your problems?
.1700
Mr. Guiney: Thank you for the question. In my view, repealing subsection 68.1(1) accomplishes what we need to do, which is to return to the status quo prior to 1992.
Ms Brown: So as for these extra rights that have been given out in Bill C-5, you would be happy to allow those to stand.
Mr. Guiney: Yes, absolutely. I think they are fundamental to improving the Bankruptcy and Insolvency Act.
Ms Brown: Provided 68.1(1) -
Mr. Guiney: Precisely.
Ms Brown: Okay, thank you.
Thanks, Mr. Chairman.
Mr. Shepherd: I have a few points. First of all, take the wage assignment. I know you're going to argue because of the cooperative movement, but why should the co-ops have a wage assignment security whereas other lenders do not? If I'm in the Bank of Montreal, I'm not allowed to take that security.
Mr. Guiney: That's right. The question does beg answering. Looking back at the history of the credit union movement in Ontario, I think you'll find the answer. It's the same question you sort of ask yourself about the Bank Act and why banks under section 427 of the Bank Act have special security.
There's no answer other than this: under section 427, historically, banks have been granted the right to take special security and register it federally, as opposed to under personal property security legislation, because banks were regulated federally and the federal government wanted to provide a registration system for bank security.
In the Ontario context, with respect to wage assignments, the ideas has been to ensure that the credit unions have a way of having the funds they're lending out repaid in an expeditious manner.
You have to remember that unlike a bank, the members of a credit union are kind of a closed group. I'll give a really simple example. If there are 100 members in a credit union, 50 of them have deposited money that they are saving for their retirement or for future purchases, and 50 of them are borrowing money. It's the job of the credit union manager to ensure that those 50 who borrowed the money return it so that the 50 who are depositing have that money to take out at the end of the day.
So it's a unique situation, coupled with the unique link of Ontario's credit unions to the industrial base of Ontario that's led to the special security called wage assignment security that's sanctioned by the Government of Ontario through the Wages Act.
Mr. Shepherd: I guess when you use wages, the difference between the security is past or present. If I walk into a bank and say I've got my house or my car, I'm giving them security that exists in a physical form. What you're really doing is securitizing future income streams, which is, in other words, money we haven't earned yet.
Mr. Guiney: Correct.
Mr. Shepherd: The next question I would have mainly has to do with the credit union in B.C. I don't know if you can answer it or not.
I'm fascinated by this concept of contiguous land. Some people will say we may not have enough security from the one property to solve the environmental clean-up bill. That's one of the reasons, I guess, why we talk about contiguous land.
A second concept, which I believe is in the act, is that the contiguous land is contributed to the contamination. There's that concept. In other words, it may well not be a contaminated site itself, but somehow it contributed. In other words, we drew the ore body out of this area, but we processed it on the other property and we threw the tailings on that property. This is the one that's polluted, but the other one from which we took the ore body is not. Therefore, they're contiguous and therefore I'll use the whole bunch of them as security. I'd be interested in what their answer is to that argument.
Ms MacKinnon: I can get more detail from the B.C. Central Credit Union. They would be happy to provide more, but from my understanding of this, by making that lien effect larger on a parcel of land, it certainly has a negative impact on the ability of the credit union to be able to get anything back from it in terms of a security, a mortgage. If there's a situation with a bankrupt and we have a lien on the larger piece of land, they may have a mortgage on a piece of land adjacent to the actual site that's contaminated. But if they make it the whole site, then they're not able to recover anything on the site that's adjacent but not directly contaminated. It's a practical concern that leaves them out in the cold.
.1705
Mr. Shepherd: This is a practical problem to them in British Columbia.
Ms MacKinnon: Yes, and they solved it through a different act. They've created their own separate act to deal with this, rather than putting it in the federal Bankruptcy and Insolvency Act.
Mr. Shepherd: When I stand back and look at it, it looks like a checkerboarding scheme in some ways. In other words, I might have one lender over here. I might have numerous lenders involved in numerous properties all trying to anticipate what the activities of the mortgager is going to be over a long period of time. In other words, that mortgager could buy some piece of property 10 years from now, find out that it's polluted, and wipe my mortgage out on a property that was not polluted and never was polluted. I had no control over them buying this property in the future. Is that kind of an issue?
Ms MacKinnon: I don't think that's the nature of their issue with B.C. First, they think it's inappropriate where it's placed. It shouldn't be placed within the Bankruptcy and Insolvency Act. They think if it is there has to be more control on it and limited to the federal government and to a smaller piece of property.
Mr. Shepherd: Just the property that we've defined as being -
Ms MacKinnon: Yes. I can get more detail for you on that.
Mr. Milliken: I just wanted to clarify both of these points. On the B.C. one, is it your position that under the B.C. act, if a company owns a single unit of property they got by one deed, there's a factory on part of the property, a waste disposal site behind the factory on open ground, and if the clean-up is done on the open ground behind, it is treated as a separate parcel for the purposes of affixing this lien or claim? Is it separated from the factory for the purposes of that claim? Is that your position?
Ms MacKinnon: I'm going to ask David to address this. I'm not a lawyer.
Mr. Milliken: I see.
Mr. Guiney: I shouldn't address this either. One of the members of the committee said they're not qualified to ask a question. I'm not sure I'm qualified, because I only practice in Ontario.
Let me take a shot at it. I think you're right. The position is that if the properties are distinguishable through some type of security or land registration system, then there shouldn't be a link of the lien to that contiguous property.
Mr. Milliken: If they're distinguishable. But if title was taken in one lump, they are not distinguishable.
Mr. Guiney: Again, not being qualified to comment on it and ready to go home and tell my insurance company that I may have made a mistake, I think you're right.
Mr. Milliken: Okay. I'm not asking for a legal opinion. I'm trying to clarify your position of what you want here.
It seems to me that if the property is one and you've got a factory with the usual things that go with a factory around it - I think the act does say ``contiguous'' and I'm just trying to check the exact words in our bill - it seems to me reasonable that the lien would apply to the whole thing. I wouldn't want it argued that we should apply the lien just to the little waste pond at the back and not to the plant, business office, manager's house and all of those other things that may be located on the property elsewhere. That's my concern.
I thought the word ``contiguous'' would be sufficient to ensure that only the lands that are adjoining - maybe ``adjoining'' is a better word - would be covered by the lien.
On the other hand, if a public street ran through the property, with the waste site on one side of the street and the factory on the other, I think ``contiguous'' may be the better word, because they're not adjoining, but they're obviously there. You might have a pipe running across the street or something.
I'm trying to clarify what you mean.
.1710
The Chairman: The discussion that took place as part of the ongoing consultations before this bill came before the House was on adjacent and adjoining properties and how to define them. Part of the process is trying to figure it out, so your questions are very germane to the whole structure of the bill and why you feel it needs to be more descriptive.
Mr. Milliken: Well, I'm not sure it needs to be more descriptive, but I'm trying to find out what the witnesses are trying to say here.
Are you trying to limit the lien to the land that is the subject of the contamination only? Or if a mortgage contained security on four different properties owned by the same company in four different locations, are you saying it only applies to the one location where there happens to be a waste problem?
Mr. Guiney: You've pointed out the absurdity of one of the possible interpretations of our position.
The land registration systems provide for parcels of land that are distinguishable. You put a mortgage on and register it against that part of the property that's described in the charge itself, and that's where the lien would apply. We wouldn't take what I think is the reasonably absurd position of saying that little puddle is the lien. I don't think that works.
Mr. Milliken: Okay.
Ms MacKinnon: In the B.C. case - and I'm just talking about B.C. - the lien attaches to the cleaned up parcel of land, which will be smaller than the larger surveyed parcel of land that's registered at the provincial registry. It could be dealing with a much larger parcel, so it seems to me it's not black and white here.
Mr. Milliken: Well, I hope it isn't, because it seems to me that if that were the case in Ontario, you'd have severances created contrary to the Planning Act of the province, which would create a nightmare.
I don't know why we wouldn't leave it as it is. I'm having trouble seeing the rationale for the argument if we're going to restrict it to the contaminated site - the pond, as it were - and not to the land that's adjacent to it that has created the contamination.
I feel if people loan money on the security of a property, they ought to look at it to see if the place is being contaminated or ask if the person they're loaning the money to is creating an environmental hazard in operating the plant or whatever they're doing on the property. If they don't make that inquiry, I think they ought to pay the consequences.
Ms MacKinnon: We'd be very happy to bring back a lot more information on this from Credit Union Central of British Columbia, as they have the practical experience of dealing with this in their own province with a different kind of piece of legislation. We'll certainly get back to you and provide you with that information.
The Chairman: On that point, I was wondering if you could make a special point of contacting Mr. Bodnar, the parliamentary secretary, as quickly as possible on this issue, because we'll be moving on the amendments next week, and if there's anything we have to clarify, we'd like to hear from you directly and feel that we fully understand your position.
Mr. Shepherd.
Mr. Shepherd: I would just like to clarify my understanding. We have legal counsel here. As I understand the act, it's based on legal title. In other words, if the contamination is on a legally titled property and that owner also owns other legally titled property that is contiguous or thought to be adjoining, there would be a prioritization of the environmental clean-up that would apply to both pieces of property.
The Chairman: Would the committee feel comfortable if the counsel joined the table for a minute to clarify this point as to the intent of the act?
Some hon. members: Yes.
The Chairman: Please come forward. Since this is your first appearance, we'll ask you to say for the record your name and relationship to the department, if you don't mind.
Mr. Gordon Marantz (Legal Adviser, Department of Industry): My name is Gordon Marantz. I'm counsel for the Department of Industry.
The issue of contiguous property also carries with it property that contributed to the contamination. The idea is to protect the environmental authorities, the other side of which is letting someone have access to the property to take it under control so the receivers and trustees can go into the property and do what has to be done to see whether it's worth preserving. But if they abandon the property, if there's an environmental problem, you want to protect the position of the environmental authorities so they can gain title to the property.
.1715
Contiguous may mean a road running through the middle and you get both sides of the road, but the other test is whether the contiguous property, whether it's separately deeded or not, contributed to the contamination. The details of what that constitutes are not spelled out in the legislation, because you can't cover every contingency in the legislation. It's a broad framework.
I don't know whether that is responsive to the committee's question, but that's how the legislation was framed.
The Chairman: Thank you very much, Mr. Marantz, for coming.
I don't want to get too sidetracked here. On a technical point the witness should only explain the intent of the act and not be drawn into too much of a conversation.
Ms Brown.
Ms Brown: I have a point of order and a question for you, Mr. Chairman, and you may decide Mr. Marantz could help us. It seems to me that all our witnesses have been telling us about little parts of the act that they think should be changed or certain things that should be added. Maybe I'm a sap, but they all make eminently good sense to me, and if the department is not going to change some of these things, I want the department to defend what they're defending or tell me early what they're going to amend. If they're not going to present amendments, maybe some of us would want to.
The Chairman: Maybe Mr. Bodnar can respond to you, because he's responsible for the position of the department.
Ms Brown: But we really haven't had a briefing from the department on these changes.
Mr. Bodnar: Ms Brown, if you've heard some of the discussions going on around here, what we're trying to do is arrange a meeting for Monday afternoon for all members, from the opposition side and from the government side, to meet with the departmental staff to discuss amendments before we even have a further meeting.
Ms Brown: Oh, excellent.
Mr. Bodnar: That should be on e-mail for you within the next short while.
Ms Brown: You see? Our minds are in sync.
The Chairman: Mr. Mayfield has been very patient here.
Do you need Mr. Marantz to clarify anything, Mr. Mayfield?
Mr. Mayfield: I was just trying to recall a point made by previous witnesses on this particular point. You can correct me if my memory fails, but it seems to me their point of view was that with the environmental point being as broad as it is, there were difficulties for trustees in getting involved with it for ongoing liability. Perhaps you could clarify that, sir.
Mr. Marantz: You can't just look at one part of the environmental section, because it's a package. It's designed to ensure that a receiver or a trustee can take control of a property and determine whether or not there's an environmental problem and whether or not it's worth cleaning up, and to provide the trustee with protection from being chased with deep-pocket liability.
The trade-off of the environmental authorities agreeing to give that freedom to a trustee is that the environmental authorities get the lien on the property, so if it's abandoned to them, they have an easy means of getting title, remedying the damage and then recouping their cost out of the sale of the property. But it is a package designed to protect the entire system.
Mr. Mayfield: Does that give weight to Mr. Milliken's argument that perhaps it shouldn't be isolated to simply the contaminated property but should include the whole property?
Mr. Marantz: Well, when you say the whole property, it's contiguous that contributes, but if you have a borrower who has properties in one city and other properties in another city, and then properties that cross into another province, clearly it's not fair to attach all of the properties of the debtor. You have to have some fence drawn around the properties. The language attempts to do that without being entirely specific. There's some discretion left to the courts.
Mr. Mayfield: Thank you very much.
The Chairman: As the witnesses can see, it's been a very interesting couple of weeks. It's a very interesting piece of legislation that draws a lot of professional attention.
A lot of us have gone through the learning curve as to what this involves. There have been some fundamental disagreements on the strategy of the department and there's also been an openness on the part of the department to respond to amendments and specific points. As I said, there will be a whole series of them.
.1720
Before you leave, feel free not only to talk to Mr. Bodnar but also to the legal counsel sitting at the table behind you. Make sure your B.C. group has the proper contacts and they can clarify the point, because you've touched upon one of the more significant pieces. I think it's fair to say - and perhaps others can elaborate more fully - that as part of the consultation process, this is one of the more difficult ones to resolve properly for people. We just want to make sure everybody who's concerned about it has a real understanding of what the government strategy is and that if there are still comments and criticisms you have a chance to put them on the record and so forth.
Mr. Milliken?
Mr. Milliken: Mr. Chairman, I wanted to go back to the wage assignment issue. I presume that these wage assignments are protected by registration in Ontario under the Personal Property Security Act?
Mr. Guiney: Yes, they are registerable under the PPSA.
Mr. Milliken: Are all registrations under the PPSA except wage assignments treated as secured creditors under the Bankruptcy Act?
Mr. Guiney: If you have a valid security interest that has priority under the PPSA and you've registered it or perfected your security interest possession, yes, you have priority over the bankruptcy trustee.
Mr. Milliken: So every other kind is protected except this kind?
Mr. Guiney: I can't say every other kind is, but the intent of the PPSA is to set up a system of priorities that gives secured creditors priority over a trustee in bankruptcy -
Mr. Milliken: Can you give us some information as to whether there are any other kinds? For example, are conditional sales contracts protected? If you seize the item under the conditional sales contracts under PPSA, is it protected in the bankruptcy as though you are a secured creditor?
Mr. Guiney: Yes. A conditional sales agreement, a chattel mortgage, those types of -
Mr. Milliken: Leases?
Mr. Guiney: If you have a security interest connected with a lease, yes. As a generalization I would say that it's the policy under the personal property security legislation to set up priorities that give secured creditors who register or take possession of property a priority over a trustee in bankruptcy, and that's just not the case now with the wage assignment with respect to wages.
Mr. Milliken: So the wage assignment is only allowed to credit unions, and normally you register to protect your security interest?
Mr. Guiney: Yes.
Mr. Milliken: Thank you.
The Chairman: No further questions?
Mr. Milliken: No.
The Chairman: Ms MacKinnon and Mr. Guiney, I'd like to thank you very much for taking the time to come in to explain the position of the credit union. Hopefully the legislation will be satisfactory to you.
The committee is now adjourned until Thursday, September 26, 1996 at 10:30 a.m., in the same room.