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EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 26, 1996

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[English]

The Chairman: Good morning, everybody. 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.

This morning we have witnesses from the Canadian Institute of Public Real Estate Companies. Welcome, gentlemen. We very much appreciate you taking the time from your professional lives to come and help us out with this piece of legislation. We'd like you to present an opening statement and then leave lots of time for members to ask questions. We've found that each of the witnesses has attracted a lot of attention in the last few weeks, and there are a lot of areas for discussion.

Perhaps one of you can take the lead and introduce yourself and your colleagues.

Mr. Lorne Braithwaite (President, Canadian Institute of Public Real Estate Companies): My name is Lorne Braithwaite and I'm president of the Canadian Institute of Public Real Estate Companies. I'm also president and CEO of a public real estate company called Cambridge Shopping Centres, across Canada. If any of you here shop at Bayshore, that happens to be our project.

Before I make a few comments on CIPREC I'd like to introduce Ron Daniel, who is the executive director of CIPREC and runs our trade association, and Terry Dolan, who is working with us and assisting us in putting in our brief and communicating with you.

CIPREC represents about $50 billion of real estate assets in Canada and we have about30 members. We represent commercial real estate, which includes office, retail, residential, and industrial. Most of our members have their assets in Canada, although some have assets in the U.S. as well. That's just a quick overview of what CIPREC's all about. I'll let Ron and Terry pick it up from there.

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Mr. Terence M. Dolan (Member, Canadian Institute of Public Real Estate Companies): CIPREC is here today primarily to speak about the lease repudiation sections of the Bankruptcy and Insolvency Act and in particular to focus on the proposed amendments to this section. This is clause 42, proposed section 65.2. I expect members have had the opportunity to look at our brief. I'll tell you quite quickly what's in the brief. It's not a very long document, in any event.

As a result of the present provisions in the Bankruptcy and Insolvency Act, the BIA committee that looked at it agreed there was clearly a need to revise and reform those provisions.

The present act gives insolvent tenants the right to repudiate their leases of commercial real property. They must pay six months rent and the landlord effectively has no right to vote, file a claim, or claim any different amount. So it's a very simple but very arbitrary system. We have had some experience on both sides of the fence in this matter, and the result has been that six-month figure has turned out to be either too much or too little.

There were a couple of egregious cases, which are noted in the brief, where insolvent tenants repudiated significant leases. They paid about 99%, or 99 cents on the dollar, to all their other trade creditors but their landlords, one of whom had built a building specifically for the tenant, suffered massive damages. It clearly wasn't fair.

What also happened was that in many cases tenants would find, if you took a major retail shopping chain, that paying six months' rent was simply too much money when they had to repudiate a great number of leases. They couldn't make any use of the BIA and would have to go to the CCAA, the alternative statute of which I'm sure you've been hearing quite a bit about, in order to do their restructuring.

Major companies, such as Dylex and Dalmy's most recently, and a number of others before used the CCAA rather than the Bankruptcy Act to restructure their debts. In virtually all of those cases, shedding unprofitable leases was a major part of the restructuring.

In the CCAA, the tenant sits down and figures out what it can afford to offer the landlords whose leases it wants to repudiate. It puts forth a proposal. The landlords have a right to vote and file a claim. It will either be in a separate class, if they're being treated differently, or in the same class as unsecured creditors, generally speaking, if they're getting the same thing. The parties go back and forth. What we've seen with major restructurings is that in most cases a deal is made and the restructuring proceeds.

The amendments do three things. They really look to make the BIA work in a much more similar fashion to the regime that has been in place in the CCAA and would continue to be under the CCAA. The landlord would have a right to file a claim for either the actual damages suffered by the landlord as a result of the repudiation or the formula amount. The tenant - and I think this is quite important - gets to choose which offer is put forward in its proposal.

Once that proposal or offer is made, the landlord can vote the claim. It's established on either the actual damage or the formula amount, as proven in its appropriate class. The landlord can also apply to court for an order determining whether the lease disclaimer is necessary for making a viable proposal. As in the CCAA regime, there is always the right to go to court and seek ongoing directions as you continue through that process.

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So, in my submission, what we have are amendments focusing on lease repudiations that make this BIA provision work in a similar fashion, deliberately simpler, more streamlined, in keeping with the policy of having just that kind of a restructuring alternative in the BIA but incorporating the balance and the fairness that has been hammered out over the years in the application of the CCAA.

To say that CIPREC supports the proposed amendments fully is an understatement. CIPREC members have been very concerned that some amendments should take place to the BIA to correct the imbalance and the possibility for abuse that they've experienced.

We do say in our brief that we think the drafting of these provisions can be significantly improved to make them simpler and clearer. We had the benefit of having some discussions with members of the Insolvency Institute - I personally am a member of the institute - and have added our full endorsement to the revised draft that appears in the Insolvency Institute brief that's been submitted to you. I believe you heard from those people last week.

Attached to the brief is the redraft that's been proposed by the Insolvency Institute for these lease repudiation sections. The CIPREC members support that drafting and say that it does exactly the same thing as I've described in the general principles but it expresses those thoughts in a way that's much easier for people to understand and is clearer. It doesn't either overregulate the issue or possibly confuse it with some unnecessary repetition, which we ended up by having in the provisions that are in the current bill. So we give it support in substance, but we think the other drafting is better.

Where CIPREC disagrees, of course with the greatest of respect, with the Insolvency Institute is that the latter went on to suggest that the right of the landlord to apply to court for an order, saying, ``This repudiation of my lease'' - or this disclaimer, as we're now going to call it - ``is not necessary to make a viable proposal'', should be deleted. We want it to be clear that, in our view, this is an essential thing to have in the legislation.

If you step back and look at it, this is, to my knowledge - and your learned counsel may find some other examples for you - the only provision in Canadian law where the actual party to a contract has a statutory right to disclaim that contract. Of course anybody can breach a contract, but to my knowledge we don't have any statute saying that it's all right for you to walk away from that contract.

We have, of course, and have had for a long time, the right of a bankruptcy trustee who is parachuted into a company's situation and says that he is there with the statutory duty to sell off the assets in pieces, sell them off as a going concern, shut the doors, whatever else he has to do. That person has to disclaim contracts and has a statutory right.

When a restructuring tenant disclaims a contract, that restructuring tenant is carrying on. The president and all the management are going to continue with their jobs. The company will continue, but free of its contract.

So to give a statutory right to repudiate a contract is a fundamental interference.

We're not saying that the interference should be deleted from the statute, but that, for the purpose of ensuring fairness and, importantly, the appearance of fairness, it's essential to have a right to apply to court.

I can't tell you how often that will be used or how often it will be effective. Personally, I think it will be difficult to persuade a judge that lease repudiations, in the kinds of cases that we've seen, are not necessary to make a viable proposal, but in any event the right should be there.

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The reason it should be there is to give both the business community in Canada and foreign lenders and foreign investors the assurance that what we have is a balanced system and a balanced regime. When you look at the U.S. chapter 11 proceedings, which I'm sure you've heard about in these hearings if not elsewhere, they're the most debtor-friendly group of legislation in the world, as far as I can say, and there, there is a right to apply to repudiate leases or other executory contracts, subject to approval of the court. You have to get the approval of the court to do this. The landlords are saying to keep the right to go to court in and put this issue before the judge.

That really takes me through the support and the comments we have on the lease repudiation provisions. We think it's essential to have the repudiation clauses there. We think they can be improved in the drafting and we think it's important to keep the right to apply to court.

To turn briefly to the CCAA provisions, CIPREC felt it important enough to add its support to the procedural reforms that are there, and in particular to point out that the statutory provision that would go into the CCAA adding an obligation to pay as you go, essentially, to pay post-filing expenses, specifically including ongoing rent, is very important to the landlord community. It's already in the BIA, and it's just another instance where procedural reform should be incorporated into the CCAA to take the good from the BIA, just as on the lease repudiation we take the good, i.e. the flexibility, from the CCAA and the bill puts that into BIA. To my mind that develops properly and rightly a convergence between the two restructuring regimes. That is just good sense.

Finally, CIPREC submits that it's important to continue the study, looking to refine the two restructuring regimes, with a view to ultimately having them even better coordinated than they will be after these amendments are passed. One of the issues we've touched on and should be included in that further study is the whole issue of how you deal with the benefits shareholders will get out of a restructuring. We're not here to say we have solutions. That's a very difficult issue, but one that should be added to the list.

Finally, we see these coming together. Perhaps at some point they can be incorporated into a single statute with a different regime, or there may be reasons to keep it in separate statutes I'm not clear on. But the continued development of balancing of interests is what is required, and therefore CIPREC is here to support that.

The Chairman: Thank you very much for your overview of your ideas.

Mr. Lastewka.

Mr. Lastewka (St. Catharines): I have just a couple of points. I want to make sure I understood it correctly. At one point you had talked about how there were many other items you wanted to be included because they made things simpler and clearer and you have forwarded that on to.... I'm not sure who received that information.

Mr. Dolan: Yes. It's appendix A to the brief that CIPREC submitted and it's simply a copy of what is submitted in that portion of the Insolvency Institute brief. We had discussions with the Insolvency Institute members who were doing this. The credit for cleaning it up should go toDavid Baird in particular, and the other members. We do support it, just as a clearer and better expression of those thoughts.

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Mr. Lastewka: Thank you. I will pass to Mr. Milliken.

Mr. Milliken (Kingston and the Islands): As I understand it, your argument about having the court involved in adjudicating the repudiation and the landlord's right to seek damages for breach of the lease and the landlord's right to challenge the repudiation of the lease on the limited terms that are there...is one that should remain in the act.

As I understand it, they are remaining in the act. Bill C-5 does not take them out. Because CIPREC recommended that they should come out, you're arguing against that position, but the bill in fact has them in.

Is that correct?

Mr. Dolan: No. I haven't made it clear.

Today the lease repudiation section, which does not give a right to vote or a right to file a claim in the proceedings, has a right to go to court to challenge. It is simply a fall-back to question whether the repudiation is necessary. That is continued in the proposed amendments in Bill C-5. That's fine, and we support that.

What I'm anticipating is that my learned colleagues at the Insolvency Institute, who should be heard with great attention and respect -

Mr. Milliken: Are wrong on their submission.

Mr. Dolan: - are wrong on their submission.

I like what they did with the redrafting. I think it's wonderful. But I think they overshot in saying that since we have cleaned up the drafting, we should take away the resort to the court. I submit that it's a useful balancing feature to retain.

The Chairman: So, like us, they like to pick and choose.

Mr. Dolan: That's right. I would expect that that's one of the functions of this committee, to find the best in all of these suggestions.

Mr. Milliken: May I ask another question, then? If you have a situation where a tenant elects to terminate his lease and uses his statutory right to do so, if the tenant is a subtenant and you have an intermediate landlord, is a problem created for that intermediate landlord in respect of the head lease?

In other words, suppose that the intermediate landlord was in fact a former operator of the business. He sold the business, but he did not transfer the lease but granted a sublease of the premises. He was carrying the lease at some kind of modest loss as part of the transaction. Are you aware of a problem that has been created that should allow that landlord then to terminate his lease with the head landlord?

Mr. Dolan: I'm not aware of a particular problem. I can see that clearly there would be a difficult situation for that sublessor, the intermediate landlord, because his subtenant has got into financial difficulties and says, ``I've got to get out of here. I'm hitting the highway.''

Mr. Milliken: You carry the lease.

Mr. Dolan: You carry the lease, and the only right that would be there to challenge that repudiation if the subtenant is filing a proposal under the BIA is to go to court and say that that subtenant doesn't need to repudiate the lease in order to make a viable proposal.

That's a pretty narrow ground. It doesn't solve the headaches of the intermediate landlord, who may not be insolvent and may not want to jump into the debt restructuring regime. He's just got to take that lump.

Mr. Braithwaite and all the other landlords - never mind the intermediate thing - have been getting a lot of lumps as they maintain their properties and find that, with tough economic times, a lot of large and small tenants have been leaving the premises and abandoning their leases in one way or another.

What CIPREC is looking to do is to say that we recognize that this is a tough situation. We have to deal with it, and we are just trying to find a balanced way in which to cope with the problem.

Mr. Milliken: So you're not disagreeing with the way it currently does or with the amendments in Bill C-5 as it stands, except for the wording?

Mr. Dolan: That's right, in a nutshell.

Mr. Braithwaite: I'll give you a comment to illustrate the point that has been made about keeping the right to go back to the court.

In the Dylex restructuring, with their Bi-Way operation, they repudiated a number of leases with Cambridge. They had one lease in particular, in Edmonton, that was a very successful store in western Canada. It made their corporation a lot of money, notwithstanding that they were going through restructuring. They ended up repudiating that lease - and it was a fairly long-term lease - even though it was a very viable operation, because they wanted to shut down all the western Canadian operations. They were able to shed the liability for that lease to tie in with a business strategy that related to the restructuring, not relating to the actual financial difficulty of the location.

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By having the right to go to court in that scenario, we could go to the courts and they would have to prove that in fact repudiating that lease was a definite requirement for the restructuring. We think that's necessary and appropriate to cover off these kinds of situations that come up periodically.

The Chairman: Mr. Mayfield.

Mr. Mayfield (Cariboo - Chilcotin): Just to continue on this point, I was wondering, with your experience, how successful you would have been in approaching the courts for some relief. Have the courts been very beneficial to you in this? Has it made quite a difference?

Mr. Braithwaite: We've had no success with the courts in the last couple of years. In a number of cases we've had more success sitting down directly with whoever the restructuring company was and doing direct negotiations with them, if you will. In a number of cases where we were unsuccessful in the negotiations and it obviously was not an integral part of the success of the restructuring, we failed. As a result, we the landlord, and the financiers, mortgage companies, and others, ended up getting hurt very badly. I think it's because we didn't quite have the balance we need here in terms of what Terry is asking for.

Mr. Mayfield: I'm wondering why the move to have application to the courts is being pushed as hard as you are pushing it today if you've not been successful by that route, or not as successful as you had hoped to be.

Mr. Braithwaite: I'm not sure I fully understand your question. I don't know that we have the full right now to go to the courts. Typically what happens in a restructuring now is the corporation presents you with a restructuring proposal and you have a monitor and a bunch of meetings and you either come up with something your class can work with or you get outvoted in your class. There may be circumstances similar to what I mentioned earlier in the Bi-Way lease and there's virtually nothing you can do about it as a landlord.

Mr. Dolan: Remember that historically, because the BIA wasn't that good, unless you had a situation where you could really take advantage of that six-month rent clause and hammer your landlord, in a word.... So most of the restructurings we've seen with retail chains have taken place in the CCAA, and there certainly have been fights in the CCAA proceedings over how the landlords are going to be classed: fairness hearings and the whole thing. There has been resort to the courts.

The landlords are simply saying as you look to create a structure and a balancing, whether or not you have been successful in going to court in the past, it's all going to be driven by the particular facts of the restructuring. What I think is the best argument for retaining the right to go to court - because it's there now - simply to question whether the disclaimer is necessary, is that we are then presenting to the world a regime for restructuring that's balanced and fair.

I'd be concerned to try to find in how many cases it worked, in how many cases it didn't work. It's so factually driven in these cases that I think it's hard to draw a good principle for it.

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I frequently act for lenders, and whether they be lenders on real property or lenders financing aircraft or other things, they say, ``Okay, McCarthy, tell us about the CCAA. What's this thing you have up there?'' Lenders are usually coming from south of the border.

They also ask how certain it is. They all, of course, want certainty, and they have an elaborate code. We have to say, ``Well, I have to tell you, the party who's borrowing money from you can go into the CCAA and its restructuring with chapter 11 with no rules''.

So it's important - and I don't think I can overemphasize this - to have both the procedural safeguards and the balancing in the CCAA and the similar benefits in the BIA, because I know that's tremendously important to the general Canadian business economy and to its ability to raise money when developers and other parties want to borrow it.

Mr. Mayfield: It's the nature of my job to hear perhaps more commercial tenants than commercial landlords talk about their problems, and I very much appreciate your presentation. Thank you very much.

The Chairman: Are there any further questions from the committee?

I just have one quick question. Some people have come to tell us the background of how long it's taken to get the act to this stage and so forth. One of the provisions is that the government would like to review this on a regular basis every seven years. One thing we're interested in from our witnesses is whether or not it should be up for more regular review. It seems to me that because it's such a complicated area of law - and I say this as a total amateur listening to this - it should be -

Some laws you'd like to settle and other laws you'd like to be reviewed on a very regular basis. Is this one that should be reviewed on a regular basis or allowed to settle in for a few years before changes are made? Do you have any opinions on that?

Mr. Dolan: I'll give, if I may, my personal opinion and ask Ron or Lorne Braithwaite to agree or disagree.

I think a regular review is important. It's a fast-changing field. We will have more cross-border insolvency situations to deal with as we go forward. It's a very fast-moving area, and I think regular review is necessary to this, because as I always tell my colleagues at my firm, all commercial law is insolvency law. They don't always agree with me, but I think it's fundamental to our commercial structure.

So I would definitely endorse regular and fairly frequent review, perhaps not with the kind of BIAC process you had before, but on a three-year basis or something like that. I would think that would be very important, just to deal with our experiences as they happen.

Mr. Ronald A. Daniel (Executive Director, Canadian Institute of Public Real Estate Companies): I would support that.

We found the BIAC experience very valid. It was a large meeting place and there was a lot of discussion and disagreement. We were a little disappointed that we didn't go farther with the CCAA at that time, but we support the changes that are going forward and would like to see the review continued in a timeframe of two to three years, to take another look at it and see what can be done to improve it.

Mr. Braithwaite: I would agree with my two colleagues. The only comment I would make is that perhaps three years is a little too often. Maybe four or five would give more of an opportunity for it to settle in. But it certainly should be reviewed on a regular basis.

The Chairman: Thank you.

I'd like to thank Mr. Braithwaite and his colleagues for coming. I very much appreciated the testimony. It was clear and right to the point.

As you can tell by the questions, the members took an interest in what you had to say and contribute to this. Thank you for your time today here in Ottawa; I appreciate it.

We're running a little early, but I see Mr. Daniels is here.

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Mr. Daniels, I take it you'll take the lead. I'd like to welcome you and members of the Canadian Life and Health Insurance Association to the committee.

Mr. Mark Daniels (President, Canadian Life and Health Insurance Association Inc.): Thank you, Mr. Chairman.

The Chairman: Perhaps when you're ready you could introduce yourself and your colleagues formally and tell us how you'd like to proceed. As you know, the format we like to have is a brief overview of what you would like to say, then questions and answers and so forth.

Mr. Daniels: Thank you very much, Mr. Chairman.

Good morning, ladies and gentlemen. I'm president of the Canadian Life and Health Insurance Association. With me today are two senior industry lawyers, both of whom happen to be withSun Life. Paul Cozzi is vice-president and association general counsel of Sun Life. He is also chairman of the CLHIA committee on bankruptcy and insolvency. Sam Steel is assistant vice-president and associate general counsel of Sun Life. He is also chairman of the CLHIA committee on environmental liability. So we have the main machinery on these matters from the industry.

In recent years we've had the pleasure of appearing a number of times before parliamentary committees on issues pertinent to Bill C-5. We appeared before the Standing Committee on Consumer and Corporate Affairs and Government Operations in 1991 to present our views on proposed amendments to bankruptcy legislation. We also appeared before this committee in 1994 to offer some views on the industry's relationship with small business. We welcome the important opportunities these occasions provide to discuss significant issues in the financial services sector with members of this and other parliamentary committees.

It's in a spirit of constructive cooperation, I hope, that we offer today some of our thoughts and observations on Bill C-5 and the proposed amendments to the bankruptcy rules it contains. I'd like to note that as the review of these proposals proceeds, my industry colleagues and I are at your disposal, Mr. Chairman, to make further contributions to your committee's work in whatever ways you might find useful.

Before I ask Mr. Cozzi and Mr. Steel to comment as the undeniable experts at this end of the table on some of the specifics of our submission, I would like to make it clear that generally the industry is strongly supportive of Bill C-5 and its proposed amendments to the Bankruptcy and Insolvency Act, and to the CCAA as well. The industry believes most of the government's initiatives in Bill C-5 will contribute significant improvements to these acts.

For example, in the context of insurers acting as landlords, the industry endorses the proposed amendments relating to commercial leases, with the drafting changes recommended by CIPREC a few moments ago. The purpose of these changes is to stop any further abuse of those provisions of the BIA that allow an insolvent commercial tenant to repudiate a lease of real property. Misuse of these provisions by some tenants was not contemplated when these provisions were passed in 1992 and it has resulted in significant problems for some landlords. The proposed changes to the rules for insolvent commercial tenants to make proposals to disclaim leases would result in a more appropriate balance between the rights and responsibility of landlords and insolvent commercial tenants, as we believe was intended in 1992.

Industry also supports the continuation of periodic reviews of the bankruptcy rules. Such framework legislation is an essential component of a properly functioning economic system and should be regularly updated.

Our submission presents comments and recommendations on two particular dimensions of Bill C-5, and that's what we're going to focus on in our brief remarks here. The first of these is the issue of an environmental superpriority. Second is amendments to the Companies' Creditors Arrangement Act. Our suggestions in both these areas are aimed at making the bill even more effective.

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Before I ask my colleagues to comment on these two issues, I would like to take a minute to comment specifically on the process that led to the development of the proposed environmental superpriority provisions.

Specifically, I would like to make the point that the life and health insurance industry did not have an opportunity to comment on the proposal prior to its introduction in the bill. We understand that some other lenders were consulted on the issue, but this did not include the life and health insurance industry. As I think is very clear in our submission, that exclusion may well have led officials to misjudge the potential impact of the superpriority proposals that have found their way into the bill before you.

Fortunately, I think the problem is easy to fix.

I would like now to ask Mr. Steel if he would continue some discussion of this superpriority matter and the difficulty we see with it.

Mr. Sam Steel (Chairman, Committee on Environmental Liability, Canadian Life and Health Insurance Association): Bill C-5 proposes to create a superpriority for environmental remediation costs that would rank above all claims, including those of secured creditors such as mortgagees. The environmental clean-up would be paid for through a first charge on the bankrupt debtor's real property and any adjacent real property of that debtor.

The proposed amendments recognize that trustees and receivers are not polluters and are therefore relieved from personal liability. They are given time to assess the cost of complying with environmental orders, as well as the ability ultimately to abandon the property.

By the same token, lenders are also not polluters. However, in the case of contaminated property in an insolvency, lenders are exposed to major financial loss, if not complete loss, of their security and investment in the property.

The essential point of the superpriority proposal contained in Bill C-5 is that environmental remediation would be secured by a charge on the affected real property of the debtor. It would not be secured on any other business assets of the debtor, such as machinery and equipment.

The life and health insurance industry does not accept that lenders on the security of the real estate should be subject to the superpriority lien for the cost of remediating environmental damage, while lenders on other business assets used in the activity resulting in the contamination are not similarly required to share liability for the clean-up.

We are asking the committee to amend the proposed superpriority provision in the bill in order to make both real property and other business assets of the debtor subject to the superpriority lien. Such an amendment would make the superpriority provision more consistent with the principle of ``beneficiary pays'' that was set forth in a report to the Canadian Council of Ministers of the Environment, the Contaminated Site Liability Report of March 1993, which states that those who will benefit from the clean-up of a contaminated site should not be unfairly enriched and that people benefiting from the activity resulting in the contamination should share liability for its clean-up with other responsible persons.

As well, our suggested change would make the superpriority lien more consistent with the principle of fairness enunciated by the CCME.

The difference in treatment between lenders on real estate and lenders on machinery and equipment is of paramount importance to our industry, since, among all financial institutions operating in Canada, life and health insurance companies are the largest source of financing in commercial mortgages. Life insurers provide more than 50% of commercial mortgages, while banks, for example, account for only 25% of such commercial mortgages. For our industry that represents $32 billion, as opposed to $15 billion for the bankers.

Comparatively speaking, other lenders would not be affected to the same extent by the application of the superpriority lien, since they finance primarily on the security of such property as equipment and current assets. Life and health insurers, on the other hand, do a lot more lending secured by commercial real estate, and that is the type of property from which the remediation costs would be mostly drawn.

As well, we suggest that provincial regulators would agree that lender environmental liability should apply to all types of creditors.

With respect to provincial regulators and the superpriority proposal, it is worth while to note that there may be a question as to whether the proposal is a matter that falls under federal jurisdiction. We believe the application of the superpriority to real property only is inequitable and inappropriate. Therefore our industry recommends that the superpriority should apply to both real property and other business assets of the debtor.

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We also believe the extension of the lien against adjacent real property of the debtor would be very problematic for lenders on real estate. We suggest before a lien can apply to adjacent property there should be a causal connection whereby the use of the adjacent property has contributed in some significant way to the situation existing on the contaminated site. Lenders don't like uncertainty and the adjacent property provision will add uncertainly and confusion to the environmental landscape.

It has been suggested to this committee that there is an analogous contiguous property provision in Ontario. In fact the Ontario provision, section 154 of the Ontario Environmental Protection Act, requires something to have been done by the Crown on the adjoining property as a result of activities or conditions on the subject property, whether or not the work is actually done on the subject property. This allows the Crown to recover costs of remediation on an adjacent property where such remediation is required as a result of the activities or conditions on the subject property. An example of that would be whether there has been migration of contamination. It is not enough that the property merely be related to the activity that caused the environmental condition or environmental damage. It should also be made clear that such a lien is on behalf of the Crown.

While the deep pockets of some lenders might seem attractive targets for the solution of contaminated sites, to target lenders in this way would be self-defeating in practice, resulting in a restriction of the flow of credit, more abandoned sites, and a scarcity of funds for rehabilitation.

My colleague Mr. Cozzi will now briefly review our position and suggestions on the proposed amendments to the Companies' Creditors Arrangement Act.

Mr. Paul Cozzi (Chairman, Canadian Life and Health Insurance Association):Mr. Chairman, today Canada has two statutes, each dealing with the same objective, the reorganization of commercial enterprises where that's possible. One is the Companies' Creditors Arrangement Act, which is a statute that was passed in the 1930s, and the other is the Bankruptcy and Insolvency Act, which was passed by Parliament in 1992, after considerable deliberation and research. People usually refer to the Companies' Creditors Arrangement Act as the CCAA and the Bankruptcy and Insolvency Act as the BIA, and with your permission I'll do the same.

Since 1991 the life and health insurance industry has been advocating the repeal of the CCAA. We believe this 1930s statute lacks the framework and the parliamentary direction required in the 1990s to promote efficient attempts at restructuring and to strike a balance among the participants in the restructuring process. The result is often adversarial proceedings that are unnecessarily time-consuming and exceedingly expensive. All creditors as well as the debtors suffer from this, and seemingly only the professionals benefit. In addition, since 1992 the CCAA regime duplicates the extensive restructuring provisions that were added to the BIA at that time.

Our industry recognizes that Bill C-5 proposes a number of changes that start to move the CCAA towards the BIA. However, it's our position that in the case of commercial reorganizations the rules that ought to apply should be the same in all cases. Consequently we believe the CCAA should be repealed and the rules of the BIA, appropriately amended, should be the ones that apply to all commercial restructurings.

Notwithstanding this position, we do recognize and appreciate the process and the effort that have led to Bill C-5, which is before you, and its specific objectives. In this regard we support the changes to the CCAA that are contained in Bill C-5, for example the minimum of $10 million in debt that a debtor company would have to have before being able to take advantage of the CCAA.

In our submission, our industry details suggestions and recommendations we believe will improve the achievement of these objectives. I'll refer to them briefly. There's one concerning the need, in our view, to keep accurate statistics on the CCAA, which doesn't happen right now. That's not a criticism of anybody, by the way; that's just the way a certain order happened to fall out.

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Others include: rules relating to obtaining and extending orders that apply to debtor companies and creditors; the responsibilities of monitors that are going to be allowed under the proposed changes to the CCAA; and the need for Parliament itself to state the test that a debtor company must have to obtain a court order, rather than delegating that power to the courts, as is done under the CCAA. In similar circumstances in the BIA, Parliament has set out that rule. Under the CCAA it has not directed its mind to that; it's delegated that power to the courts, in effect.

Finally, there's a need to have some finality in the process in order to promote timely negotiations and minimize expenses.

Our industry believes that by offering constructive suggestions, we can make a meaningful contribution to the improvement of Bill C-5 and to legislation dealing with insolvencies and restructurings.

Thank you, Chairman.

The Chairman: Thank you very much for your opening statements.

Mr. Mayfield, do you have any questions?

Mr. Mayfield: I think so, Mr. Chairman, but I'd better let it percolate.

The Chairman: I know you like to perk.

Mr. Shepherd.

Mr. Shepherd (Durham): I was interested in your comments on contiguous property. You've added a new element to our dissertations here in that you want the liability, the superpriority, also to apply to what I would consider the possibility of movable property.

From the point of view of enforcement of the act, how do you physically do that? You're arguing that a contiguous property must have a causal relationship to the event that resulted in the contamination. Now you seem to be focusing on a corporate entity that could have many properties, but you seem to want to attach yourself to their accounts receivable, to their inventory, etc., which may well be located in downtown Toronto, say, as opposed to some resource property in northern Ontario.

Do you see how we could enforce that?

Mr. Steel: Mr. Shepherd, you've raised two issues, and perhaps I can address them separately.

One issue is whether the lien should apply just to real estate or to real estate and personal property. The other issue is whether it should apply to the property that is contaminated, to property that is adjacent or to other property that somehow is causally connected to the property that is contaminated.

With respect to the issue of personal property, as I have indicated in my remarks, our industry, which accounts for more than 50% of commercial mortgages in Canada, feels it would be discriminated against if the superpriority lien applied only to real property and not to equipment, machinery and other assets of a personal nature, if that's what you want to call them, that are secured by other lenders. Those lenders have the same ability to influence the activities of the debtor.

The anomaly.... Let me perhaps give you an example of a situation we were involved in where we were a lender on the real estate. A bank was a lender on the equipment, machinery and inventory. That equipment and machinery was used to contaminate our real estate. At the end of the day, the bank was able to come in and take the accounts receivable. It attempted to take the equipment and machinery. At that point the Ministry of Environment and Energy in Ontario threatened the lender, the bank, that if it did so, it would be held to be in control, charge and management with respect to contaminated assets or property and would have to be accountable, or at least the ministry would try to hold it accountable, for remediation.

The bank walked away. It took the accounts receivable but did not attempt to take the equipment and machinery, because it did not want to set a precedent. It took the accounts receivable and walked away from the equipment and machinery. We were left with the real estate; that was our security. The cost of remediating the real estate, which was contaminated by the activities carried on with that equipment and machinery, exceeded, for us, the appraised value of that real estate in the year before. We don't think it is fair that only lenders on real estate should be subject to picking up the costs of remediation.

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Mr. Shepherd: I guess the problem is that the focus on this superpriority has been a fixation of property itself. We could, however, have a corporation with many properties but only one that is contaminated, and the mortgager's liability is therefore subject to that contamination. But you're sort of expanding your own security, if you will, by allowing other assets to come into play here and to rank along with you in this superpriority.

Mr. Steel: No, sir, not rank along with us. What is happening is that you're giving a lien to the Crown ahead of our security. We are one lender of the debtor. We're saying that if in fact there is a causal connection and you have equipment that has been involved in the contamination of the site, other lenders of the debtor, regardless of the nature of the assets that they have lent on, should be subject to the same superpriority lien. So if a bank has lent on the equipment, the bank should not be able to walk in and take that equipment away. It has been involved in creating the contamination.

Mr. Shepherd: I understand your point, but I guess it seems to fly in the face of the philosophy that's in the proposed legislation in that it has a fixation on contaminated property, whereas your fixation is on the total corporation itself, along with its operations.

Mr. Steel: Well, if you wanted to restrict it to the assets on the contaminated site, I would certainly have no problem with that. The problem I have is that a bank with security on equipment that has been used to contaminate my property can go on the property, walk away with its assets, and I'm left to remediate my property.

Mr. Shepherd: But what if the inventory is stored 500 miles away? Whatever it is that they process, it's physically 500 miles away. It's not on the site. How does your indebtedness therefore rank in that situation?

Mr. Steel: I'm not sure it's a question of ranking at this point. The superlien comes ahead of my mortgage. I have a mortgage on real estate. I don't rank vis-à-vis the bank. The bank has security on the equipment. What I'm saying is that if you're going to give the Crown a superlien over me, I think there should also be a superlien over the other lenders to that debtor.

Mr. Shepherd: I think we have a problem of two different philosophies.

Mr. Daniels: If I may, Mr. Chairman -

The Chairman: Just make a final comment, sir. I want to go on to Mr. Milliken, please.

Mr. Daniels: If I may just add something, I can see your focus in the immediacy of the circumstance of the contaminated property, but I'd also like the committee to consider the broader point that we raised as well.

Our industry is providing the bulk of the long-term commercial mortgage money here, so we really have an industrial policy issue that lies behind this at some moment. Our industry has 21% of its assets tied up in commercial mortgages. The banks have 3% of theirs, albeit they have four times the assets. But the problem here is that we will end up in a situation like this having a theoretical impairment on 21% of our assets, as opposed to 3% in the banks.

I think you're all aware of the level playing field arguments that so dominate, Mr. Chairman, the finance committee in the run-up to the 1997 legislation, so we really have an issue here that is of some moment.

The Chairman: Mr. Milliken.

Mr. Milliken: I have a question on the same point. When I heard you first and then read the brief, the idea had an immediate appeal. I'm wondering, though, if the holder of security on other equipment in fact has the same rights as the mortgagee on real property. For example, assume the company has a machine on which there's a chattel mortgage, the machine generates waste that is dumped on the property and forms a cesspool of some environmentally disastrous proportion, and the property needs to be cleaned up.

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I'm wondering how the chattel mortgagee can insist that his machine not be used in such a way as to generate this particular waste, since it's not the generation of the waste that's the problem, but, rather, it's the dumping of it on the property that creates the contamination problem.

I presume that if the waste was pumped elsewhere and was not there, there'd be no difficulty and no superlien would be created. But the argument is going to be that because there's a pond sitting there, when there was a mortgagee of the equipment that generated the waste it's unfair to pin the cost on the mortgagee of the real property.

It seems to me that the mortgagee of the real property has a very strong remedy, which is that he can insist that waste not be committed on the property. My recollection is that every mortgage has a covenant by the mortgagor that the mortgagor will not commit waste. I'm going from memory, since I haven't practised law for eight years, but if that covenant is there, as I believe it is, can the mortgagee not enforce the covenant by saying, ``If you're committing waste on this property by dumping material, or creating an environmental disaster, you must stop, or else I will terminate the mortgage and demand payment of my loan''?

Is there not a remedy there for the mortgagee to do that, and is the superlien not being put in place, as a matter of public policy, to force mortgagees to exercise some control over dirty mortgagors?

Mr. Steel: Yes. Certainly today I think our practice would see every mortgage having those kinds of provisions. I think a lender on equipment would also provide provisions in his mortgage that the business carried on by his borrower will comply with the law in terms of disposing of waste and things of that nature. I think both lenders would have the ability to insist that the debtor comply with the law in carrying on his business.

The reality of it is very different. Let me give you two examples.

In the example I was describing earlier, there was $1 million worth of inventory on which the bank had security. Because of the uncertainty in the law, it took some six to seven months for negotiations among us, the bank, and the Ministry of Environment and Energy. By that time, the inventory, which was insecticides and household cleaners, had become waste under the law. This was inventory on which the bank had security.

Mr. Milliken: It was banned from sale?

Mr. Steel: It was waste. Yes. Not only was it banned from sale, but also it was waste that now had to be disposed of in a certain fashion because of the volume of it. It's the kind of stuff that you and I would have in our kitchens, but because of the volume it was now waste, on which the bank still had security.

Who do you think should come in and dispose of that waste? It's not going to be the bank, and it wasn't the bank. It was the lender on the real estate, because we can't walk away from the real estate. That's the difference: we can't walk away.

It's not fair that we should pick up the burden of that remediation.

The Chairman: Would you like to pursue another issue?

Mr. Milliken: No, I think that's clarified the point for me. Perhaps I was looking at the real property remedy too directly. It certainly raises a point, and you might want a situation where there is some discretion in the court as to who should be the one who pays, in effect, by the creation of the lien and who it stands in front of, and let the court order priority.

Mr. Steel: It's not a question of priority between the two lenders.

Mr. Milliken: It might be.

Mr. Steel: It's a question of where you go to remediate property.

Because of their deep pockets, it's tempting to look to lenders in any case to remediate the cost of contamination. But it's not realistic to think that lenders are going to pick up the total costs of that.

Mr. Milliken: I wasn't suggesting that, but you might look at where the court would put the priority.

For example, in the situation you describe it seems unfair to make the owner of the real estate the one responsible for cleaning up that particular problem, since it was inventory and not a dump or a spill.

You might put the priority for payment below the real property and ahead of all the other secured claimants, for example. I don't know how many other secured ones there were, but you might place it somewhere in the order of secured creditors.

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Mr. Steel: The thing is that the bank doesn't have to go and pick up or take those assets. If it doesn't do that, it has security but it doesn't have to go and realize on those assets if it feels in doing so it's going to have charge-control management. So it just sits back. The lender on the real estate doesn't have that option. We can't walk away.

The Chairman: Mr. Lebel.

[Translation]

Mr. Lebel (Chambly): I would like you to clarify something for me. On reading subsection 14.06(7), I automatically assumed that the reference was to the land or property itself that was polluted. However, this witness has just enlightened me somewhat. This isn't always the case.

For example, if I were to store on a piece of property pesticides which had been banned in Canada, even if the site itself was not contaminated, as a rule, it will be the preferred mortgage creditor who will have the unpleasant task of disposing of these products.

Is that what you're saying with respect to subsection 14.06(7)?

[English]

Mr. Steel: That is correct. It's either the owner of the property that's going to be responsible for the disposal, if it's waste.... If the owner of the property disappears - abandons the property - then the lender has an option. The lender will have to make a decision on whether or not the costs of remediation and the risk of becoming in charge control of the property are worth while.

[Translation]

Mr. Lebel: My question goes further than that. If the property as such is not contaminated but banned products have been stored on site, the owner, or the creditor if the owner is insolvent, is responsible for picking up the tab for removing these products, even if the land is not in the least bit contaminated.

[English]

Mr. Steel: Yes, that's correct. But in some cases the disposal of that waste may be prohibitive. If in fact it's a cost the lender feels...if you have a mortgage of $1 million on the property and it's going to cost you $100,000 or $200,000 to remove that waste and you don't think there are other risks involved in having charge control of the property by virtue of taking possession of the property, then yes, you'll go on the property and you'll spend the $100,000 or $200,000 to remove the waste. Sure you'll do that. You don't have a choice, because that's your security; whereas the lender on the inventory has no obligation to come back. If he figures it's waste, he's not going to come back.

[Translation]

Mr. Lebel: In your opinion, in a case such as this, would clean-up costs be recovered from the bankrupt's overall estate?

[English]

Mr. Steel: That would certainly be our position.

The Chairman: Mr. Mayfield.

Mr. Mayfield: This is an issue that keeps coming back to this committee. I'm pleased you've raised it again.

In listening to you, though, I've been thinking about some of the areas of my own province, British Columbia, and in my own constituency, for example, where mining has been an important part of the economy. I think of the detailed environmental assessments that go into those projects before they're approved by the various government agencies. I'm becoming aware of some of the implications of this type of superlien. I wanted to ask you, in light of the licensing arrangements, the obligations of the owner, the lender, what your opinion is. Would you care to say something about the wisdom of this type of lien being included in the act?

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Mr. Steel: Different jurisdictions have different ways of dealing with the problem. A lien is not the solution in every jurisdiction. In fact, under the Canadian Environmental Protection Act, the solution is to give the Crown a right of action against the debtor for remediation costs incurred by the Crown.

My preference would be to have a right of action, because I think in that case there's a greater chance that other persons or person responsible, or the person having some causal connection, will end up bearing that cost.

I think it's interesting that the other piece of relevant federal legislation, the Canadian Environmental Protection Act, does not provide for a lien; it provides for a right of action on the part of the Crown.

The Chairman: If you're finished, Mr. Mayfield, Mr. Shepherd has a final question.

Mr. Shepherd: Yes, I have a very quick, general question, which you touched on.

I noticed that some of you people are from Sun Life. I'm looking at your asset portfolio. There's 23% in commercial mortgages, so much in bonds, etc. This act comes into force the day after that. I'm sitting around the table thinking about our investment strategy. I look at the 23% of commercial mortgages and then I prorate and divide that into the resource sector, residential mortgages and so forth.

Is the passing of this act going to reduce the amount of money you make available to resource properties?

Mr. Steel: I think it is only reasonable to assume that any provision of this nature is going to have an effect on the flow of credit. I think it's going to have perhaps a greater effect on medium-sized businesses and on small businesses in which the lender can't look to other assets or other security as collateral for a potential environmental liability. In other words, what you've taken as security is all that the debtor has.

There's no question that lenders are going to have to assess and reassess what effect these kinds of provisions have on their ultimate security when they to go realize on their security. They will be looking at certain industries and businesses and wondering about the risk: should I be lending on this kind of business or am I safer lending on another business on which I don't have that same risk? I think that's just a natural, reasonable, logical result of this kind of legislation.

Mr. Shepherd: I guess the point is that I posed this question to, I think, the Canadian Bankers Association and they seemed to say it wasn't a big deal. But in view of your comments, when they have such a small portion of their total portfolio invested in commercial mortgages and then by definition such a small portion of even that in resource properties, maybe it isn't a big deal.

A voice: No, it isn't a big deal. That's right.

Mr. Steel: I'm not aware of any comparable study in Canada, but there was a study done by the U.S. EPA called ``The Impact of Uncertain Environmental Liability on Industrial Real Estate Developments''. Here are a couple of points that came out of that study. One out of every five banks reported a mortgage loss or default due to environmental contamination, and seven out of ten banks indicated that there were now some classes of loans that their institutions would not write due to environmental liability concerns.

So there's no question that this kind of legislation is bound to have some repercussions.

The Chairman: With the indulgence of the committee, I would just like to ask two quick questions. First of all, is personal property easy to define in the law? Is it a common enough expression such that everybody would know what you're talking about?

Mr. Steel: Yes. I don't think there would be any problem in doing that. There are jurisdictions that do have a superlien on both real estate and personal property. I believe Mr. Mayfield referred to the B.C. legislation. I believe that legislation provides for a superlien on both personal and real property.

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The Chairman: Here's the second question. Mr. Daniels, in your opening statement you thought your association had been missed in the final discussions regarding this. A pretty wide-ranging discussion took place with most of the actors leading up to this legislation. Do you treat this as an oversight, or what happened in the process?

Mr. Daniels: I think we just call it an oversight. We would make regular calls. As the committee is aware, Mr. Chairman, it wasn't clear right until the end whether there was even going to be this particular kind of treatment for the environmental contamination issue. We didn't even see this particular proposal until it came out in the bill. Let me just call it an oversight, Mr. Chairman.

The Chairman: Mr. Assad did you have a question?

Mr. Assad (Gatineau - La Lièvre): I have just a short question. As for the statistic you gave on the United States and the ramifications, there's no doubt that the provisions you proposed are incorporated. Banks will be very leery when they come to lend money for a project knowing that if there's a problem with the environment, they could be held responsible along with the people who have mortgaged the property. You can see that there could be a diminished role for the banks if they fear they could be held responsible.

Mr. Steel: It's not any different from the assessment we have to make when we make a loan.

Mr. Assad: No doubt, but the banks will probably hold back on a lot of investments, or rather, some people will have difficulty getting money out of the banks because the banks will analyse the situation and say there's a risk involved, because down the road there could be some kind of environmental problem. We'd be held responsible along with the mortgage of the property.

Mr. Daniels: If I may, Mr. Chairman, that may well be the case. But, Mr. Assad, you'll understand that our concern here is that, in relative terms, the life and health industry, which bears the lion's share of the burden under what's here, doesn't get to carry the can for the lending community.

Mr. Assad: I understand. I think the position is well taken and justified.

A voice: It's to be shared.

Mr. Assad: Yes, it's to be shared.

The Chairman: Thank you very much for coming here with your colleagues and giving us such a well-prepared brief. As you can tell by the members, they are interested in what you had to say. There are officials present in the room. Before we do our final consideration on amendments, we'll make sure that we understand fully the route they've taken and make sure your concerns are discussed fully.

Mr. Mayfield: If I may lend some emphasis to what you say, a number of sectors of the business community raised this particular issue as being of deep concern for them. I would hope that the committee and the Department of Industry would seriously consider and review this before it continues with the legislation. I think particularly of the ramifications upon the lending climate for resource industries. I say that without any intention of jeopardizing the environmental stability of the areas involved in this. I think it's an issue that's very complicated and needs to be looked at very carefully.

The Chairman: Thank you. In the absence of Mr. Bodnar, who left just a minute ago, can I assume that officials have heard this and understand the concerns being expressed by members and will respond? Thank you very much.

We'll adjourn now until Tuesday, October 1, at 3:30 p.m., when we'll hear our final witnesses.

The meeting is adjourned.

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