Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 15 - Evidence (December 3 Sitting)
OTTAWA, Tuesday, December 3, 1996
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-5, to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act, met this day at 10:05 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we are here today to continue our hearings on Bill C-5.
Today, from the Insolvency Institute, we have Bruce Leonard, its chairman, and David Baird, who is the co-chairman of the Bill C-5 Review Task Force. As well, we have David Richardson, who is the chairman of Ernst & Young, and who is also an active member of the Insolvency Institute and was involved in helping develop their briefs. Rather than have witnesses sequentially, it seemed to make more sense to ask Mr. Richardson to join Messrs Leonard and Baird.
Thank you for coming. Mr. Leonard, please proceed.
Mr. E. Bruce Leonard, Chairman, Insolvency Institute: Mr. Chairman, I should like to provide a brief opening with a little bit of background on the Insolvency Institute of Canada, as well as give some introductory remarks. David Baird will give a presentation on several issues, and David Richardson will address the committee on several other issues. I will then wrap up, after which we are prepared to answer any questions members of the committee may have. We also hope to be asked questions during the course of our presentation.
Mr. Chairman and senators, the Insolvency Institute of Canada is a relatively new organization. We were incorporated approximately eight years ago. It is a non-profit organization. Its objects are the recognition and promotion of excellence in the field of insolvency. We are non-partisan. We limit our membership to no more than 100 leading practitioners from the insolvency area across Canada.
Our goal in Canadian insolvency reorganizational legislation has been and continues to be to find the best insolvency legislation and the best economic framework legislation that can be devised by our collective efforts. That is what Canada deserves.
Over the years, the institute has put in a great deal of time and effort, working with the department in a close relationship, to design amendments to the act. We were involved in the 1991-92 amendments. We were involved extensively in the government's Bankruptcy and Insolvency Advisory Committee process.
With regard to the BIAC process, there were eight working groups, six of which were co-chaired by members of the institute. This shows a recognition for the experience which members of the institute bring to the area.
We made submissions on Bill C-5 before the House of Commons Standing Committee on Industry. We feel privileged to be here today before you.
David E. Baird, Co-Chair, Bill C-5 Review Task Force, Insolvency Institute: Mr. Chairman, I have been asked to deal with the issues involving the Companies' Creditors Arrangement Act and the liability of directors.
A major problem that we see in Bill C-5 as it was amended by the Industry Canada committee is the amendment to the proposed section 11(6) which deals with the burden of proof on the application for a stay of proceedings.
As you are aware, Mr. Chairman, under the bill as proposed, there is an initial application that is valid for a period of 30 days. That initial application gives the court the power to stay proceedings against the debtor company. However, the debtor must come back to court for a second hearing.
We support the concept of a second hearing because, in many instances, the first hearing is done quickly; all parties are not given a full opportunity to address the court and to deal with all the issues. It was felt that a second hearing would be important in order to give all parties the right to prepare material and to have a full hearing before the court.
Bill C-5, as originally proposed, provided that on the second hearing the burden of proof was on the applicant. However, it did not set out any criteria for what the applicant had to prove in order to obtain a second stay of proceedings.
The Industry Canada committee amended this section, deleting the original subsection (6) and put in a new one. It now provides a number of conditions precedent before a court can make an order staying the proceedings, i.e. the second order. The most important change to this provision is a requirement that the applicant, i.e. the debtor company, be required to satisfy the court that no creditor would be materially prejudiced if the order being requested were made.
It is our view, and that of many insolvency practitioners, that it is impossible to go through a restructuring process with no creditor being materially prejudiced. The key to the whole issue is whether or not a stay of proceedings can be imposed on creditors without any creditor being materially prejudiced.
The CCAA is designed for large, complicated restructurings. One example with which you are most likely familiar is the one involving Algoma Steel. The city of Sault Ste. Marie was basically saved as a result of a restructuring implemented through the use of the Companies' Creditors Arrangement Act.
It has been intimated that Canadian Airlines may require the use of the Companies' Creditors Arrangement Act. Cadillac Fairview, a large real estate developer throughout Canada and the United States, utilized the Companies' Creditors Arrangement Act. Dylex Limited, which had 900 stores and over 13,000 employees, used the Companies' Creditors Arrangement Act.
None of these proceedings were implemented within 30 days. No plan was put forward within a 30-day period for restructuring these companies.
The Chairman: Your problem is not with the 30 days because you agree with the notion that, after the 30 days, there should be an ability to apply for an extension. It seems that your problem is with the statement that no -- and I emphasize the word "no" -- creditors should be disadvantaged or materially affected. Is that correct?
Mr. Baird: That is correct.
The Chairman: Let me ask you a question. One of the arguments made by some witnesses is that this clause is designed to give small creditors some clout in negotiations. It will be easier for the company to deal with them by paying them off because they are small creditors.
If there is nothing along this line, then small creditors will simply be ignored entirely and debtors will run roughshod over them. I am not saying that I support the argument, but it is one that has been made.
My question is this: How do you strike a balance to ensure that, as in the large examples you just gave, Mr. Baird, the needs of the small creditors are not totally swamped and ignored by the large creditors?
Mr. Baird: In many situations, the small creditor, the trade creditor, is not affected at all. The plan that is put forward provides for payment of trade creditors in full. This was done in the cases of Cadillac Fairview and Algoma Steel. It is the plan itself that determines how creditors will be treated.
Here we are up against a roadblock which prevents the company from coming forward with a plan. This roadblock is being proposed by groups which have mortgages on specific assets. They want to be able to realize those assets and to foreclose or to sell under the term of a power of sale. Those assets will not be available for the enterprise to be used as part of the restructuring process.
Mr. David Richardson, Chairman, Ernst & Young Inc.: In the Dylex example given by Mr. Baird, Mr. Chairman, the small trade creditors actually banded together through industry associations. For example, the garment trade in Montreal had a significant say in those proceedings as a result of industry representation.
Second, if they had pushed Dylex to the wall and had been unable to demonstrate that there would be no prejudice if Dylex were liquidated, then those people who would have suffered substantial prejudice as unsecured creditors. Instead, they escaped unscathed out of the proceedings. There is, and there may be, temporary prejudice through CCAA proceedings; but that is a fact of life. It is a necessary element to preserve jobs and to restructure the business.
Senator Meighen: It has been suggested as well that some large restructurings have been accomplished successfully under the BIA. Birks is an example. What is the fuss? Why is there the necessity of great flexibility of the CCAA and this particular clause which you would like to see removed? Why is it so important?
Mr. Baird: The BIA has very rigid time periods built into it. A plan must be filed within six months. The court is not given the power to extend the time beyond that six-month period. The Algoma Steel restructuring took over one year. It is the inflexibility of the BIA which creates the problems.
There have been successful restructurings under the BIA; however, the majority of the large situations are done under the Companies' Creditors Arrangement Act because of the flexibility which can be achieved through its use. If it is a choice, then under the present legislation one would choose the Companies' Creditors Arrangement Act for most big situations in order to have the most effective and viable reorganization.
Senator Meighen: Would it be correct to infer from your answer that you would not favour folding the BIA and the CCAA into one act but that you prefer to have two different acts?
Mr. Baird: At the moment, there are only two significant differences between the CCAA and the BIA. One is the extent and scope of the stay of proceedings. The other is the scope of the order that can be made by the court, as well as the provisions of that order.
Other than that, if this bill is enacted, the same approval mechanisms and voting thresholds are required. There will be the need for the same disclosure. As well, the use of a monitor and trustee are similar. There is little difference in the form of the two acts. No one has solved successfully the problem of flexibility. The reason I do not support the BIA solely is because of the flexibility. If, after sufficient study, we can come up with proper language to create that flexibility, then we could fold the two together. However, I feel we need something more flexible for large situations.
Senator Meighen: In your view, is "large" $10 million and over?
Mr. Baird: That is a difficult question to answer. What is the right threshold? We think that $10 million is adequate; however, I am aware that some provinces and cities believe it should be a smaller amount. We believe the threshold should be modified by permitting a consolidated threshold for affiliated groups. Most of these situations involve a number of companies. We believe the threshold should be an aggregate of $10 million worth of claims against all the affiliated companies. We think this would help to modify or to lower the threshold for use of the CCAA.
That is one of our recommendations which was not adopted by the Industry Canada committee. We think that it would help to lower the threshold by saying if there are five or six affiliated companies, then you take the total or the aggregate of their claims to determine the threshold. Therefore, more companies and organizations would be able to use the CCAA.
The Chairman: Last night, it was suggested that since the $10 million threshold would eliminate virtually every case out of the Atlantic provinces, Saskatchewan, and perhaps even Manitoba, judges should, perhaps, be given a discretion to lower the amount from $10 million, if it seemed appropriate in the circumstances. Do you have any difficulty with giving the judiciary that degree of flexibility?
Mr. Baird: We were trying to maintain the policy approach of having the smaller restructurings done under the BIA because it is less costly, faster and the most appropriate forum for such situations. When looking at this recommendation, we were concerned that if a judge were given complete discretion as to whether or not the CCAA or the BIA should be used, then this policy consideration would be ignored and the applicant would be given the sole choice as to which route to follow. In these situations, it is usually the applicant which makes the choice. Traditionally, the pressure of keeping a failing company alive imposes such a burden on a judge that the judge goes along with the applicant's proposal.
The Chairman: Do you have any difficulty with giving the applicants that choice, then?
Mr. Baird: Yes, if it were below the $5 million threshold. I might give the court the ability to go down to $5 million.
The Chairman: We have negotiated a 50 per cent improvement so far. That is not bad.
The answer is, yes, some flexibility would be desirable, but you would not want it to go down to the point where it would apply to the one-person company, is that correct?
Mr. Baird: Yes, that is correct.
Mr. Leonard: This issue stirred a reasonable amount of controversy, probably more than it should have; however, we all have to remember that the CCAA is a discretionary statute from the outset. One is not entitled to a CCAA protection. In a sense, there is already a threshold. That threshold is that you have to persuade the court that you are a proper case for reorganization.
I think that the situation will self-correct. If a company with a small amount of debt came into court, the judge would say, "Don't bother me with your case. Go under the BIA. That is why it is there." The CCAA became very popular when reorganizations could not be done under the BIA. Now that the BIA can do reorganizations, there should be less need for the CCAA at the lower level, which is why we support some sort of monetary threshold.
Mr. Baird: If I may return to my discussion of material prejudice, in most cases the creditor that is prejudiced by the order is the well-secured secured creditor. Much of the opposition, particularly in the Bramalea case, came from lending institutions that had specific mortgages on real estate with respect to which the court ordered that part of the rents being generated from those properties be made available to the debtor to finance its operations and to carry on with the general administrative and restructuring costs, which most people now call GAR expenses.
Our institute believes that this provision will be used by secured creditors holding specific assets as their security who clearly will not benefit from a significant restructuring because they are well-secured and will be paid in full in any event. They would use this language to impede a restructuring that would benefit everyone, that is, the ordinary unsecured creditors, the employees and the enterprise in general. In most cases, the opposition to a restructuring is by a well-secured secured creditor. We believe this provision would give ammunition to that well-secured secured creditor to oppose a stay of proceedings.
Mr. Richardson: I would like to amplify that last point. Consider the example of an office or apartment building with respect to which a secured creditor has a charge. Let us say that he is concerned that some of the rents being collected will go to fund the costs of the enterprise, while a Bramalea is going through a restructuring, for example. I have some sympathy for the secured creditor's position in that case, although I think it is inaccurate and incorrect.
Let us change that individual office building asset into an aircraft belonging to Canadian Airlines. This morning, there was a schedule in the Report on Business which set out all the leasing companies involved with Canadian. Some 17 aircraft are owned by one bank, the leasing company with which the airline has to deal. If Canadian Airlines had to file for protection under the Companies' Creditors Arrangement Act, and if this sort of amendment that has been proposed in Bill C-5 were effected, then that bank could come in and take the 17 aircraft. In effect, it would have the security of their asset without considering the ramifications on the restructuring of Canadian Airlines. I think such a move would be devastating to a restructuring.
The Chairman: That is a good example. Thank you.
Mr. Baird: The court still has the power to grant leave to a creditor to bring what we call colloquially a carve-out motion to enforce its security. If a secured creditor can convince the court that it is entitled to have the stay of proceedings lifted, then the court can grant such an order. We believe that courts should retain this power to deal on an individual basis with various creditors; however, the court should not have its hands tied on the grounds that it could not make a blanket stay order if any creditor would be materially prejudiced. This is a restrictive provision being imposed on the court to make an general stay of proceedings order.
Mr. Richardson: I wish to comment specifically on securities firms. Over the last 25 years, I have had a rather narrow specialty in one portion of my practice which deals with the insolvencies of securities firms. Over that period of time, I have personally handled the insolvencies of Malone Lynch, L.J. Forget, Osler Inc., McConnell, and a number of smaller ones.
Malone Lynch, in 1971, was the last true liquidation under the Bankruptcy Act. It was coincident with the creation of the Canadian Investor Protection Fund which at that time had $1.5 million of assets to protect the investing customers of securities firms. The experience in Malone Lynch, where all of the accounts were liquidated and the creditors' positions were converted to creditors for the net equity in the customers' accounts, turned out to be an expensive way of handling that administration. One of the reasons for that was that the trustee in bankruptcy was selling those securities into a down market, and yet the investor protection fund was protecting the customers at the equity values in their accounts at the date of bankruptcy.
The investor protection fund has monitored carefully what has been going on in the United States through the Security Investor Protection Act and has brought forward proposed provisions in this bill of which I am supportive and of which the investor protection fund is supportive. It will avoid the necessity of resorting to receiverships, which is what we have done in the last 20 years, to administer these complex insolvencies where there are hundreds of millions of dollars of assets, not assets of the firm but assets of the customers of the firm. A separate regime is appropriate.
We believe that the provisions that are set out are sensible. We have worked closely with the department in defining those provisions. However, there are two covered in the brief of the Insolvency Institute that are rather technical.
I should like to single out two of the four or five items that we feel should be incorporated as amendments to the bill, if any amendments are to be made. I refer to recommendation 16 in our brief on page 9 which deals with investments in subsidiaries. We are talking here not about a Royal Bank/Dominion Securities kind of securities firm which has all the assets of the Royal Bank behind them, but the smaller and mid-sized firms like the McConnells, Oslers and Forgets which seem to be the ones that periodically fall into speculative excesses or frauds and end up having to be liquidated to protect the public.
In this case, the bill defines two pools of assets. They are a general fund which is used to pay trade creditors such as IBM, the landlord or the supplier of stationery; and the customer pool funds, which is the much larger pool into which all of the customers' assets go. We believe that the firm's investment in subsidiaries should be treated as an asset that goes into the customer pool fund. I say that because, in my experience over the last 20 years, if you look at where the moneys that were invested in those subsidiaries have come from, you will see that they have come not out of the capital of the firm but, in many cases, out of customer free-credit balances and therefore can be tracked back to customers' accounts. It is a simple but important technical change that we propose.
Recommendation 17 also proposes a rather simple change to the bill. It would broaden the scope of who can petition a securities firm into bankruptcy under this legislation. In 1971, I was acting for the Toronto Stock Exchange, and we knew there had been a fraud committed in the firm. We were trying to find a creditor who could petition the firm into bankruptcy. The stock exchange itself did not have the power to do it under the then legislation. It took the creativity of one of our lawyers who determined that the Toronto Stock Exchange probably had an account outstanding for printing services for the daily quotation sheets. It was on the strength of that technicality that we were able to go to the court to file the petition.
The legislation as drafted suggests a suspension by the regulatory body, the stock exchange, the securities commission or the investor protection fund of the Investment Dealers Association. I believe that should be broadened to include a temporary suspension since, in the case of both Osler and McConnell, the temporary suspensions which put the company on ice, revoked their trading powers and disenfranchised them from dealing with their customers stayed in place for over a year before the exchange felt it had an ironclad case to take to the board of governors to have the final expulsion of the membership from the exchange. To not permit the regulator to move in to appoint a trustee under the Bankruptcy Act to deal with these assets until the temporary suspension becomes permanent is an important aspect.
The Chairman: Mr. Richardson, in your letter to me of November 15, a copy of which I have circulated to the committee, you indicate that six of your recommendations, numbered 13 through 18, are technical in nature and clearly have the support of professionals in the field. These are the six that dealt with securities firms.
None of these were adopted by the government, which is rather odd. This is not like the RSP issue and other things we have been debating which are clearly of a broader policy question. Have you attempted to determine from the department why it did not accept those recommendations?
Mr. Richardson: I accept some of the responsibility for that personally.
First, I would like to make one clarification. We found out subsequently that our recommendation 14, which concerns the words "subject to the rights of secured creditors", was made and tucked into the proposed section 254(5). Therefore, we are down to five as opposed to six. Of the five, I flagged the two most important ones this morning.
I spoke to the department. We had a constructive and continuing dialogue. These points were made as a result of a final review by the Insolvency Institute. It was only when I got into them that I found these issues, at which point it was late in the hearings before the House committee. They reviewed them and, in their wisdom, did not consider that they were either necessary or material. They advised me that if I had brought them forward and indicated that they were necessary or material, they probably would have incorporated them.
If changes are to be made to this bill, I believe all five of the remaining ones should be effected.
The Chairman: The government lawyers can comment on Thursday about this. However, have they indicated to you any reason other than the fact that they appeared late in the process? There appears to be no policy reason for it.
Mr. Richardson: I am not aware of any policy reason, Mr. Chairman.
The Chairman: Setting those six representations aside, can I ask you collectively, then, with respect to the 32 that are in your brief are there others of paramount importance other than the ones you have mentioned?
In other words, inevitably, in the course of going through legislation, you get a bunch of technical amendments and others that really do not matter. I am not arguing that the technical ones do not matter but there is a different order of priority.
Other than your comments so far, are there others in the set on which you place a much higher priority?
Mr. Leonard: Mr. Chairman, my thoughts on the CCAA are comparable but not identical to those of David Baird. Mr. Baird and I have no more than four or five amendments which we would like to highlight for the committee.
Starting with my two cents' worth on the CCAA, it is difficult to over-emphasize the gravity of our situation under this amendment. This amendment has the potential to destroy the CCAA as a reorganizational vehicle.
The Chairman: You are referring to the amendment to clause 124, with the emphasis that Mr. Baird made that "no creditor" shall be disadvantaged.
Mr. Leonard: Yes. It says if you have a CCAA reorganization, the company must file its plan within 30 days. It has never been done.
The Chairman: It is just not feasible.
Mr. Leonard: It is not impractical; it is impossible. If Canadian Airlines filed tomorrow -- and we all think they will not -- they could not file a plan in 30 days. At the end of 30 days, the stay would be lifted. The banks and the leasing companies would repossess their aircraft and that would be the end of Canadian Airlines. What have we gained by having a legislative policy that allows that to happen?
Senator Angus: That is why they are not filing, I suppose.
Mr. Leonard: That is one of the reasons, yes.
Senator Angus: They are doing a lot of talking, though.
Mr. Leonard: Yes, they are doing a lot of talking.
Senator Meighen: If they are doing a lot of talking, then why is the 30-day delay absolutely impossible, in your view?
Mr. Leonard: It goes without saying that any non-filing option is better than a filing option. If the 30 days were 90 days, then that is another way of coming at it. You must have some time.
Originally, I said that the CCAA is a discretionary statute. You must put together a lot of material and a lot of supporting evidence to persuade a judge that you are entitled to protection. To do all that work and have the judge agree with you and then give you three weeks to complete the process is ludicrous. It will not work.
Senator Angus: What is the comparable requirement in Chapter 11, or are these things seen as apples and oranges?
Mr. Leonard: In Chapter 11, there is a period of exclusivity of 120 days. That is routinely extended. That was one of the problems with the 1992 amendments. People up here did not want that kind of system. Perhaps out of an apprehension of Chapter 11, we overreacted the other way. It just boggles the mind that we would over-react to the extent of saying: No matter how complicated your financial structure, you have four weeks to fix it.
Senator Meighen: What would you prefer in terms of wording? Would you prefer no wording at all?
Mr. Leonard: We prefer no wording at all. Do you know why the CCAA works these days? It works because you are constantly guarding yourself against the judge. You are in court all the time. This is not non-stop litigation, but you are on call to go to court all the time. The court has a case management approach to these things. The court is balancing the interests of the creditors and the debtor. The court moves the process along. You cannot let your attention drag for a minute or the court will be there saying: "I have a discretion to extend the protection, Mr. Leonard, and why should I if you are not doing your job in getting this reorganization going?" If you do not keep your reorganization moving along smartly, you run the risk that the court will withdraw its protection. Then where are you?
Putting in a 30-day date beyond which, if a single creditor is prejudiced, the thing stops, turns the rehabilitational philosophy of the CCAA on its head. A reorganization has to be the greatest good for the greatest number. All of the stakeholders have to come out with something that is more or less satisfactory to each of them.
That is what the CCAA does. That is what the court involvement in the process stimulates. What this amendment does is turn it on its head and says: If there is any creditor out here who suffers a material prejudice, then the reorganization that could benefit everyone else has to come to a halt. That is bad public policy.
Senator Kenny: My question may have been answered. I was going to ask what one does in a situation where the assets are deteriorating or where things are getting worse. If the answer is that the judge is balancing that on an ongoing basis, then I am satisfied.
Mr. Leonard: That is the answer.
Senator Stewart: As you know, Mr. Chairman, we have had some discussion under the present reference about patterns of bankruptcy, particularly among consumers. We are talking about remedial procedures. I assume that there is a relationship between the aptitude of remedial procedures on the one hand and the situations to which they are to apply on the other hand.
Here we have experts in the field of insolvency; they are experienced experts. Have there been changes in the patterns of insolvency, let us say, in the last 20 years? What does the record of insolvency in Canada tell us about the evolving economic situation which prevails, let us say, with regard to finance companies and to other major companies? What is the situation which produces insolvency and the insolvencies for which we are trying to devise remedial procedures?
Mr. Baird: There has been a significant change in the insolvency practice in the corporate side over the last 20 years. Up until about 1980, you had mainly receiverships and liquidations. You had situations where the assets were sold and the proceeds were used to pay off secured creditors. Sometimes there would be something left over for the unsecured creditors, but it was a liquidation philosophy.
Starting about 1980 and moving forward, the concept of restructuring and rehabilitation started to come forward in a big way. I know the chairman was involved in the fishing industry where there was an issue of restructuring there. Chrysler Corporation was a major one; Daon and Carma from out west were major property companies that went through the restructuring mode. As the depression came into Ontario, we had the United Co-operatives of Ontario coming forward.
The general trend went toward a restructuring approach as opposed to a liquidation approach. Frequently, this was as a result of self-interest. The secured creditors who previously were able to get paid in full found they could not. The banks who wanted to realize on the assets realized that, if they put the company out of business, there was no one available to carry on the business. Therefore, they would allow a company to carry on business because they felt they would produce a much higher recovery. This, of course, benefited employees and other stakeholders as well.
We have had a significant change in philosophy over the last 20 years from a liquidation philosophy to a rehabilitation philosophy. As a result, up until 1992, the Bankruptcy and Insolvency Act could not be used to stay proceedings by secured creditors. Therefore, the Companies' Creditors Arrangement Act was used for that rehabilitation process.
Bruce Leonard mentioned that this amendment starts to turn things on its head. This amendment, we believe, moves back to a liquidation philosophy.
It gives the secured creditor, who has a value, its asset, the right to take possession. The courts have been lenient and generous but also receptive to rehabilitation because of the public benefit. The courts have moved from a strong secured-creditor bias to a restructuring bias because of the need to keep enterprises alive, the need to keep communities like Sault Ste. Marie alive, the need to keep companies like Quintette Mines in British Columbia alive. That was another restructuring implemented under the Companies' Creditors Arrangement Act.
Senator, I hope I have given you a bit of a flavour of what has happened in the corporate world in terms of restructuring.
On the consumer side, there has been a great increase in consumer bankruptcies. I think the high rate of unemployment and other problems have been a cause of that increase. The extent of credit granting has also been a cause, as has the lack of public sanction for bankruptcy. The trend is less public opprobrium for bankruptcy. Increased publicity about bankruptcies has increased the tendency of consumer debtors to go bankrupt. As a result, there has been a significant change in the statistics.
Senator Stewart: Mr. Baird has talked about the changes in the remedial procedures and has given an interesting and valuable answer. I was really asking something else, that is, are there patterns of changes in the causes of financial difficulties for the major companies? Perhaps this is a question to which you have not given much thought because you have been so busy dealing with immediate problems. I would understand if that were the case. If the question is one with which you do not wish to deal, I will be perfectly satisfied to hear that.
Mr. Baird: I am sorry, I missed your question and I apologize for that.
You have to look at specific industries. The real estate industry in western Canada collapsed because oil and gas prices dropped. In Ontario, with the decline in the manufacturing industry, many branch plants seem to have closed because of consolidation. There is a lot of industrial property in Ontario that is vacant. You see a lot of properties for rent. A number of different economic conditions have caused the collapse. The decline in real estate prices, of course, has caused major problems for large companies such as Olympia & York and Cadillac Fairview. Office rents dropping from $40 per square foot in downtown Toronto to $8 or less has been a significant reason for insolvencies.
I cannot pinpoint one particular cause for it. Traditionally, it is because of economic conditions. For the individual, it is high unemployment. With an unemployment rate of 10 per cent, people living at the edge who lose their jobs are going bankrupt.
Mr. Leonard: I think that is a good answer, Mr. Chairman. From my perspective, insolvency follows the economic cycle. We had a wave of retail bankruptcies in the early 1990s, followed by a wave of real estate bankruptcies. In a way, the retailers took down the real estate lenders because they were not paying their rents. The real estate lenders went under. Therefore, the financial institutions who lent them money had financial difficulties. I do not think it is systemic to the late 1980s or the early 1990s. I think it is just general business conditions or the general business cycle largely tied to the decline in real estate prices. If there is one supervening factor, that is it.
What we have not analyzed -- and maybe you are looking for the answer and we cannot give it to you -- is the astounding rise in consumer bankruptcies. Perhaps as many as 85 per cent of bankruptcies in Canada are consumer bankruptcies. What is perplexing is that as the unemployment rate seems to go down, consumer bankruptcy rates increase. I do not think our system under this act is dealing effectively with consumer bankruptcies. I am not an expert in that area and I do not know what the answer is.
Senator Kenny: Participation rates are probably going down, too.
The Chairman: Do you mean participation rates in the economy?
Senator Kenny: Yes.
The Chairman: I would ask you to enlarge a bit on that last comment you just made, Mr. Leonard, which was that this act is not dealing adequately with consumer bankruptcies. We had some testimony from Professors Ziegel and Ramsay, who went on at some length on this very question. Can you enlarge on your viewpoint?
Mr. Leonard: I come at it from a fairly fundamental level. Consumer bankruptcy is not my field of expertise. It is something that washes over us all.
In 1992, the act was amended to include consumer proposal provisions as a solution to the problem that existed at the time. If you fast-forward to 1996, you can see the same problem. Consumer proposals have not worked.
The Chairman: They may have been an effective mechanism but they have not worked in the sense of reducing the number of people applying.
Mr. Leonard: That is right.
That is where we come to an impasse. I do not know the answer to halting this wave of consumer bankruptcies. Without making access to credit more restrictive, I am not sure there is anything you can do about it. Systemically or structurally under the Bankruptcy Act, we have not created a structure that assists in solving that problem.
Senator Meighen: You are talking about consumer bankruptcies. We have heard some rather critical evidence of the proposed mediation process. Do you have any comments on that one way or another?
Mr. Baird: We do not think the mediation process will work. We think the final arbiter should be the court. The court should be given the power to make the final decision. Mediation goes on right now on an informal basis, but the mediation structure adds another level of complexity to a situation. Right now, it is a struggle. The bankrupt does not want to pay anything. Creditors want a large payment. Someone has to decide what is fair and reasonable. At the present time, the arbiter is the court.
We believe that the court should remain the arbiter and that we should not have the official receiver or a government officer involved in the mediation process because it just adds cost, complexity and delay to the system.
Senator Kenny: What about the overcrowding of courts and delays in terms of getting access to courts? Would mediation not ameliorate those problems?
Mr. Baird: If it were binding mediation, yes, that would be an alternative. If we were to set up a tribunal or some body that can make the final decision and avoid having to go to court, that would do the same job. This issue of how much a person has to pay is not a complex legal argument but more a social question. Having two processes is the problem. The problem is not whether it should be the court and/or mediation. Either one is better. "Mediation" may not be the right word. If you gave the official receiver the right to make that decision, that may be the right answer. However, I do not think it would be helpful to have mediation and then have the court as the final determinant.
This is a relatively simple process. The bankrupt produces a lis of its expenses. The person who adjudicates sees hundreds of these going through. That person gets a good idea of what is a normal expense and can do a good job in adjudication. It does not have to be the court. We do not need two processes.
Senator Meighen: The Canadian Life and Health Insurance Association gave evidence before us last night to the effect that they were surprised and somewhat dismayed to discover a provision in the bill which provides for super-priority for environmental remediation that would fall upon lenders of security of real property. They pointed out that if someone must pay, why would it not also fall upon the lenders on personal property whose equipment, or machinery, or whatever, is probably more likely to have caused the environmental damage. It did not seem to be a level playing field, particularly when they discovered that life and health insurance companies provided over 50 per cent of the commercial mortgages in Canada. Therefore, they felt that they would be carrying a disproportionate share of the costs.
Have you any comments on that?
Mr. Baird: I chaired one of the BIAC task forces which dealt with environmental issues. It was a difficult question as to who should bear the burden of paying the environmental clean-up costs. This issue was well known during the deliberations of that committee and with respect to that report. There was always the tension between whether the burden should be borne only by the real property, or whether it should be both the real property and the machinery and equipment that was located on it.
The issue came up relatively suddenly. In our task force that reported ultimately to BIAC, this was a significant issue. It is a policy issue whether or not the personal property should be subject to it. The act, as it comes forward, is correct in that, ultimately, the real property stays. It is a relatively simple and pragmatic way to deal with the issue.
To talk about having charges against movable property on the premises would be a difficult administrative task to sort out. If there is a truck there and the truck moves to another site, is that truck subject to a charge for environmental clean-up? I think it would be extremely difficult and impractical to run a system where assets frequently being moved from different premises should be available, subject to the environmental clean-up costs. A most pragmatic and effective method is that proposed in the bill, which makes the real property subject to the environmental clean-up costs.
The Chairman: Mr. Baird, was the CLHIA represented on your task force?
Mr. Baird: It was not on our task force but it was on the BIAC.
The Chairman: There was no question that they would have known this was coming down the road, then.
Mr. Baird: I believe they should have known about the issue because our report was made to the BIAC task force.
Senator Meighen: To overgeneralize a bit and to take the other side of the argument, could not one characterize your answer as saying, "The simplest thing is to put it on the real property. Who cares about the level playing fields? It is a way to get the money paid. To heck with them"?
Mr. Baird: That is a different categorization of my argument.
The Chairman: It sounded somewhat different.
Senator Meighen: Mr. Daniels is not here this morning, so I thought I should speak for him.
Senator Stewart: That technique also has the advantage of concentrating responsibility. Presumably, there will be one lender for the real estate, but you may have hundreds as far as the machinery, chemicals, et cetera. You are saying that the people who put up the money to provide the site are the superintendents or the supervisors of what occurs on that site.
Senator Meighen: How would they control what happens on the machinery?
Senator Stewart: Exactly. It may not be fair.
Mr. Baird: We must balance pragmatism against fairness. I ended up on the side of pragmatism.
There is no point in having a fair system if it cannot be administered effectively and if it causes more expense to try to produce absolute fairness.
Senator Meighen: The other side is a better unfair system that is workable.
Mr. Baird: Yes, provided it is better than the existing system. We want an improvement. I acknowledge that we are not achieving 100-per-cent perfection, but we are at least improving the situation. We are giving the provincial authorities a secured charge for clean-up costs and, hopefully, we are helping the environment. We are allocating that responsibility to the secured lender against real estate.
As the senator said, before they make the loan, they know what they their responsibilities are. They know what their risks are when they are making the loan. Therefore, they are in a position to protect themselves. It is only if you introduce something like this halfway through the process when there is security already in place that causes real unfairness. A bank can insist on an environmental study and an environmental assessment before it even makes the loan. There is a risk that something will happen in the interval, but it knows the type of business to which it is lending. You cannot achieve a perfect world here, but we can achieve an improved world.
Senator Meighen: I am missing something. Assume for a moment that I lend on the security of the land. The operator then negotiates with you and borrows on the security of his equipment and machinery, which causes an environmental damage.
Mr. Baird: You can put a covenant in your mortgage that they cannot use it for anything environmentally dangerous or hazardous. If they do, then you can obtain an injunction to stop them. That is a worse case scenario.
You can restrict the use of your property through a covenant in your mortgage. You can trigger the mortgage. Hopefully, that type of Draconian penalty will help you.
Mr. Leonard: Are we not overlooking something here? If someone has done something bad to a property that depreciates the value of the mortgage, is there something here that says the mortgagee cannot go after the person who did the bad thing? We are not letting the wrongdoer off the hook here. It is not that the mortgagee must take the entire responsibility and has no other recourses. With the number of law firms these people use, surely they can find one that would take an action against the polluter and recover damages.
Senator Kenny: What if they are bankrupt?
Mr. Leonard: It is too late, then. You should monitor your loans more carefully.
I was at the point where I was saying that the object of the CCAA and of reorganizational legislation generally is to provide viable businesses with an opportunity to have time to negotiate solutions to their financial difficulties. The CCAA, conceived as it was in the 1930s, has performed brilliantly in that function by giving the court the supervision of the reorganization and letting the court decide what the appropriate period of time for reorganization should be.
There has never been a major reorganization carried out in Canada that has ever been completed in 30 days. On behalf of the Insolvency Institute, we strongly recommend that this committee report back that this recommendation is contrary to the policy of the government in promoting reorganizations and rehabilitations of companies in financial difficulty. We need a reorganizational regime that produces the most favoured result for the largest number of people. We do not need a reorganizational regime that turns every creditor into a veto holder, which would be the result of this amendment.
With that, I have completed my remarks on the CCAA.
The Chairman: You did not address the other items.
Mr. Leonard: No.
The Chairman: I wish to return to them. You have 32 recommendations. We understand the six that Mr. Richardson dealt with vis-à-vis securities firms. That leaves 26. I am not asking you to rank them 1 through 26, but to tell us what the top 5 to 10 are.
Mr. Baird: Recommendation 19, which concerns the CCAA, deals with the issue of affiliated companies. We talked about this earlier. It would allow the debts of the affiliated companies to be included in the $10 million amount.
The Chairman: Could that same effect be accomplished by lowering the $10 million amount to $5 million, as we negotiated earlier?
Mr. Baird: Yes. Sometimes a smaller company should be included in the restructuring process.
Senator Meighen: Do you mean by way of a judicial decision or by way of statute?
The Chairman: What the witness said before was that there should be a floor. That is to say, the judge should not have the authority to go from $10 million to $50,000, for example. The witnesses were prepared to accept the notion of either a lower floor, and the number that was mentioned was $5 million, or leaving the $10 million amount, giving judicial discretion with the floor. Is that correct?
Mr. Baird: That is correct.
Senator Angus: Which one of the two do you prefer?
Mr. Baird: My preference would be the $5 million figure alone. Giving judicial discretion is just another argument that we could avoid. I opt for certainty.
Mr. Leonard: I would go for judicial discretion.
Mr. Richardson: David Baird's point makes a lot of sense. The essence of why the CCAA works is judicial discretion. I do not know why you would rule it out on one more area. We have had great judges working with the statute over the last 10 years and it does work.
The Chairman: Will you continue, please, from where you left off?
Mr. Baird: Recommendation 21 is the next one. This recommendation deals with the monitor under the CCAA. We think that the monitor under the CCAA should be given the same protection as the trustee under the BIA. We can see no reason for not doing that. We have not been told of any valid reason. It is just that this suggestion was ignored when the amendments went forward.
The Chairman: Is it just an oversight?
Mr. Baird: We think so. We see no policy reason for it.
Recommendation 22 deals with an amendment relating to the liability of a monitor. We would like to broaden the scope of the present provision. The way the current bill is drafted is it would only protect the monitor from liability for claims arising before or upon the monitor's appointment. We believe the protection should also extend to claims arising after the appointment of the monitor. The current provision refers to the monitor carrying on the business of a debtor company or continuing the employment of the company's employees. Monitors do not usually do this. It is very unusual and almost unknown for a monitor to carry on the business or to employ the employees. A monitor, as the word indicates, is basically a watchdog. We believe there should be no reference in the bill to the monitor carrying on the business or continuing the employment of employees.
We believe the amendment we are proposing in our recommendation 22 gives greater protection to the monitor.
What we would like to talk about next concerns protection for officers and directors. This is found in recommendations 6, 7, 9 and 10 which all flow together.
One of the puzzles we have is that the bill as drafted gives the power to propose in a proposal under the BIA the right to compromise claims against directors. We propose that officers should be given the same right. The proposal should be able to come forward to compromise claims against officers. In many provinces, there are statutory liabilities imposed on officers, something which the bill seems to ignore. We believe the same protection that is given in the bill to directors should be given to officers. We can see no reason for such an omission.
Senator Angus: They are different animals.
Mr. Baird: Yes, but they are still statutorily liable for wages and vacation pay in some jurisdictions. Why should they not be given the power to compromise those claims to be included in the BIA?
The Chairman: I do not want to get on to the whole corporate governance issue; but, surely, there is a difference in the level of responsibility that needs to be attributed or ought to be attributed to an officer who is responsible for the day-to-day management of the operations of a company and a director, in particular an outside director. Surely, to lump those two together takes management off the hook to an extent that is probably not desirable.
Mr. Baird: There are two provisions being proposed. The first is that there could be a compromise of claims against officers. I am using officers because that is what we are suggesting. The creditors could be allowed to vote on whether they want to relieve officers of this responsibility. Right now, they cannot. There is no statutory provision for even giving them that power to vote. We want to permit a stay of proceedings against claims against officers during the restructuring process. Right now, there is nothing in the bill that gives such a stay of proceedings.
If there is a compromise proposed and voted on, we would like to see both directors and officers released from liability, whether or not the debtor carries out its obligations under the proposal. We would like the flexibility of putting forward a proposal which says that directors and officers are released after they do certain things, rather than having to wait until all the payments are made by the debtor company.
We are not asking that directors and officers be released from all responsibility. Basically, we are asking for the flexibility of putting forward a plan of arrangement that includes in it a provision to release officers from liability.
The Chairman: You are requesting that a judge be given a degree of flexibility as opposed to a mandatory type of arrangement.
Mr. Baird: It is not the judge who would be given that right; it is the creditors who would be given that right. If the creditors were to vote for it, they can release it.
Senator Kenny: I have to wonder whether we want officers in a situation like this to be focusing more on their own personal situation or on the situation of the company. Obviously, it will be a stressful situation no matter what happens.
Mr. Richardson: Last February, with Interlink, we had the alternative situation where the board of directors felt obliged to try to mitigate this liability, or potential liability, and they abandoned ship. They took with them the best and brightest minds that were best able to help steer the company to a restructuring. We should be building in some protection for them.
Senator Angus: Do you feel that the recommendations you have made respecting directors and officers would change that? If that were the law today, do you feel that the CAIL board would not have resigned? I feel that that would not have happened. I feel they would have resigned in any case.
Mr. Richardson: I am not close enough to the individual liability considerations that they were worried about to know whether or not this would remedy it. My view is that this would go a long way in most of the situations in which I have been involved.
Mr. Baird: It does not go all the way. We would like to see due diligence for every type of liability. However, I am not sure if that is within the scope of the Bankruptcy and Insolvency Act.
The Chairman: This committee has done a report for Industry Canada on the corporate governance provisions of the CBCA. We received a letter from the minister in which he states that the recommendations we made will be adopted when the changes to the CBCA are introduced some time next year, presumably after the election.
Could we deal with many of these proposed changes through the liability provisions affecting directors and officers, as you would say -- I would say directors -- in the CBCA or do they have to be dealt with through the Bankruptcy Act?
Mr. Baird: Clearly, they have to be dealt with in the Bankruptcy Act because of the numerous provincial statutes that impose Draconian liabilities on directors.
The Chairman: Could that not be done in just one of the pieces of legislation?
Mr. Baird: No, unfortunately, it could not. Our research tells us that there are over 100 provincial and federal statutes that create personal liability on directors.
The Bankruptcy Act is really something of a catch-all. It is designed to give the directors some relief, once the liability has been incurred. However, it is not a perfect world. The suggestions that we make do not cure the problems; they reduce the problems somewhat, and we believe they are improvements, but they are not perfect.
Senator Angus: Could they go further? Do you have any suggestions as to an amendment that would go further?
Mr. Leonard: We thought this would be a little bit outside our scope. We were trying to limit ourselves to the things that had been before the House of Commons committee. However, there is a lot of work that could usefully be done in this area. If we had the opportunity, that is something the Insolvency Institute would be interested in getting involved in. Whether it is opportune or timely at this point, I am not sure.
Senator Angus: It seems to be timely. However, "opportune" is a relative term in terms of this bill.
Mr. Baird: We would have to establish a task force very quickly. We each have our own ideas. I would like to consult my colleagues before we come up with an answer.
If we felt there were any significant purpose, we could attempt to come up with a task force to make a recommendation. However, that would take at least a month.
We discussed recommendations 6, 7, 9 and 10 together. The basic principle is officers as well as directors. The second is to provide flexibility for the purpose of presenting a plan of arrangement or a proposal that would protect both officers and directors.
Mr. Leonard: While we are on this area, can we have a quick look at recommendation 5? Recommendation 5 strikes an anti-reorganizational tone to the bill. I am pretty good at ferreting those out.
That is the section which says the court, if it thinks that a reorganization will not be successful, can stop it before it ever gets to the creditors.
The whole philosophy of the BIA and reorganizational legislation has always been that the creditors decide on their future and the disposition of their claims in negotiation with the debtor. The court acts as a referee to forestall any violence breaking out.
This is a section that says the court knows better than the creditors what this reorganization really means to the creditors. I think that is bordering on a degree of legislative arrogance that we do not need to wander into at all. Let the creditors vote. If they accept it, it is done; if it is turned down, it is over. Why the court needs to get involved in the meantime is not entirely clear.
This is probably directed at a fairly well known case of abuse; however, I do not think legislation can be built on single cases of abuse.
Recommendation 11 deals with the landlord situation. Prior to 1992, there was not a regime of reorganization for landlords. There was no way that a tenant attempting to reorganize could dispose of an onerous lease. If a tenant had a lease which encompassed 30 years, he was stuck with it. The only way a tenant could get out of a lease was through a bankruptcy because, under provincial legislation, a trustee in bankruptcy has a right to disclaim a lease.
As part of reorganization prior to 1992, we would go into bankruptcy if we had to get rid of a lease. The trustee would disclaim the lease, the assets would get sold to someone else, who would come back to negotiate a lease with the landlord and carry on.
In 1992, there was a valiant attempt made to fix that by having a trade-off. The tenant in a reorganization would be able to get out of a lease, but he would have to do two things. First, he would have to persuade a court that it was a proper thing to do. We are not trying to abuse the landlord but wanting to ensure that the landlord has an ability to have his day in court.
Second, there had to be compensation for the landlord, that compensation being six months' rent. If the tenant could disclaim the lease, then the landlord would get six months' rent.
There were a few cases of abuse that came up, one in Ottawa and one in Quebec. A landlord had built a building to suit the tenant and before the end of the first fiscal year the tenant went into bankruptcy, took advantage of these new opportunities, disclaimed the lease, paid the landlord six months' rent and the landlord's lease was blown. He had a building that he could not lease. Obviously, this was a case of abuse, a complete travesty.
The Insolvency Institute came up with some wording that we thought worked. Basically, the thrust was to treat landlords like other creditors. This is something that had not happened before. We thought we had come up with a solution to the problem. The solution was a formula-based quantum for a landlord's claim. If a landlord was stuck because his tenant walked out of the building, he would have a claim, just like any other creditor, for the loss he suffered. He would file his claim in the reorganization, vote and receive dividends. That, to our mind, worked.
The one recommendation we made was not accepted. It was to the effect that now that this system is in place whereby landlords are treated exactly like other creditors, this requirement to go to court to prove that he needs to get rid of the lease is probably not needed. If the lease is to be gotten rid of, the landlord will be treated the same as everyone else. No one else goes to court; therefore, this is not needed. However, the clause has been left in. What we have now in that clause is a requirement that the tenant in the reorganization go to court. Therefore, we have a solution to a problem that no longer exists. It would be nice to clean it up to take care of that.
My last comment refers to recommendation 32 which is based on the historical development of Canadian secured lending law. This comes to us because the provincial courts of appeal have run amok in interpreting their own legislation.
The Bankruptcy Act has always said that if you have a security and an assignment of receivables which is not properly registered, it is void against the trustee. That was never said about other pieces of legislation.
This section has not been touched since personal property security legislation came to Canada in 1976. This legislation relates to uniform commercial codes that we have adopted from the states. It replaced conditional sales and chattel mortgage legislation. Those pieces of legislation, when they were in effect from coast to coast, were so rife with dire consequences that if you did anything wrong -- for example, if you did not have an affidavit -- any technical deficiency could cause the security to fall away and become void. Armed with those consequences, there was no need in the Bankruptcy Act to say that if a statute is void, then the trustee took priority over the secured creditor, because it just happened.
The B.C. Court of Appeal says that in an unperfected security interest under modern PPSA legislation, it is not within the power of the province to create a priority in favour of a trustee, which is a creature of a federal statute.
The other provinces have not gone along with this, but have said that an unperfected security interest, at least in B.C., will have priority over the interests of a trustee, even though their legislation says it does not. That change in that system giving the trustee priority over unperfected security interests must be brought about in the BIA.
We can rise to that challenge by a simple amendment that expands the phrase "assignments of book debts" to cover security interests generally. The reason for taking what seems to be a windfall over the interests of secured creditors who do not perfect their security interests is to preserve the integrity of the registration system. It is a fairly legalistic point. However, once again, it would bring a degree of uniformity where the provincial courts of appeal seem to be going off in a variety of different directions.
Those are my favourite amendments.
Senator Angus: I gather all of you represent the Insolvency Institute, although one gentleman is here both on behalf of his own firm and the institute; is that correct?
Mr. Richardson: That is right.
Senator Angus: I gather that you are all in agreement with the amendments we have been discussing. You are unanimous among yourselves.
Mr. Richardson: Yes.
Senator Angus: I notice all of you have been involved with these other gentlemen sitting behind you in the process that led to this bill. I see every name, that is, Mr. Richardson, Mr. Leonard and Mr. Baird, as well as our friend from the department sitting behind you. I am confused as to why these amendments are being suggested to us now. I am sure there is a good answer. Can you help us in that regard?
We are besought by many with their favourite amendments. Yet, when we look into it, the people seeking the amendments were involved in the original process, just as you were talking about the people from the Canadian Life and Health Insurance Association. They appeared before us last night and said, "When Bill C-5 was tabled, we did not know that the life insurance companies who lend on real estate would have this unlevel playing field with asset-based lenders."
Mr. Leonard: I think Mr. Richardson has answered the question from the Canadian Life and Health Insurance Association.
Senator Angus: He did, and I am confused by the answer.
Mr. Leonard: That provision, and the amendments on environmental property, have been there since January. I saw it in January; I saw it again in March. I do not know how one could have missed it.
Senator Angus: They did not miss it. They brought it up at the Industry Committee of the House of Commons. They mentioned it here. We will ask the government chaps.
The thrust of my question is simply to help me with the process so we can all understand why you three gentlemen, who were obviously involved at an earlier stage which led to the bill, are still coming here with proposed amendments. In other words, are we like a court of appeal?
Mr. Leonard: Yes, in a sense you are. The answer is "yes" and "no".
The real reason we are here is because of the amendment which we think will eviscerate and emasculate the CCAA. We will lose the CCAA as a vehicle to reorganize businesses in Canada. All the major businesses in Canada that have had to reorganize in the last dozen years have done so under the CCAA. We think this is a significant move backward in our reorganizational regime. None of us here were aware of this amendment until well after the Industry Committee concluded its hearings. No one told us about it.
Senator Angus: You are referring to clause 124. It came out of left field; in other words, it was not part of your original deliberations.
Mr. Richardson: No.
Senator Angus: Does the same apply to all these other 20 or 32 amendments in this booklet?
Mr. Richardson: No. I think the BIAC process over the last five years has been a very productive and useful process. First, it brought forward the BIA itself. Then it brought forward an extended study on certain areas and many ingredients of Bill C-5. The dialogue was extremely good and extremely constructive.
We were lulled by that continuing dialogue into thinking that the recommendations we had made and the fine-tuning recommendations that came forward in our brief to the standing committee of the House would also be acted upon in the same constructive manner. I say that because they were, in most cases, fine-tuning and technical interpretations which were advanced by very experienced and otherwise disinterested participants in the process in terms of insolvency lawyers, accountants and judges.
We were surprised that so many of the technical points brought forward in that brief in September were ignored. That provoked us to go through the list of some 50-odd points, identifying 32. We had no response that they were, from a policy point of view, unacceptable or inappropriate. They appeared to have fallen on deaf ears.
For about 25 years up to 1992, we have been working individually on bankruptcy reform. We are pleased to get to stage one. We have a chance to get it more right in stage two with Bill C-5. In coming back here on the CCAA issue we felt it necessary and appropriate to bring to your attention as well these priority items. We consider that about a dozen of the remaining 32 are worthy of your attention.
Mr. Baird: As a member of the BIAC process, it never saw Bill C-5. We made recommendations and reports. We discussed issues. However, we did not see the bill itself.
After we saw the bill and went through it with a fine-toothed comb, we produced a submission for the Industry Canada committee. This submission was presented in draft to the department in July. It was also presented in final form in August. We felt that most of our technical changes would be incorporated into the bill.
We attended before Industry Canada, supported our brief, but we were not consulted by the department as to what amendments would be proposed. They were proposed at the very end of the Industry Canada hearings. We were never consulted on the amendments presented to the committee. They were put through.
After the fact, we were provided with a list of the amendments that were made. This is the first time we have been able to discuss publicly the amendments which were omitted.
Senator Angus: I understand that Bill C-5 was originally introduced in the House of Commons under another number. I gather that there was some deal made in the legislative process to keep things going when the new session started. Is that what happened?
Mr. Baird: The same bill was presented with a new number. To my knowledge, there were no significant changes. Because it was a new session of Parliament, they changed the number. I believe it used to be Bill C-109. Ours is a volunteer organization. We have spent many hours working on these submissions. We are not here on behalf of any clients.
As a result of our efforts, we produced a consolidated submission which was presented to the department in July of 1996 and finalized in August of 1996.
Senator Angus: You first saw the work of the legislature when Bill C-109 was introduced following the BIAC hearings where you gave your input based on your years of experience. That bill died on the Order Paper. However, at that time you made the committee aware of the fact that there were many flaws in the legislation which you would like to see corrected. Notwithstanding that, they chose to go ahead with the original wording, I suppose to save time, and that is why all these amendments suddenly came to light on the very last day of the House committee hearing.
Is that not really what happened? We are now being asked to do the work which should have been done before Bill C-5 was introduced in the House of Commons.
Mr. Baird: It is part of the process. My understanding is that, due to cabinet secrecy, until it is introduced in the House of Commons, it cannot be shown to the rest of the world. Therefore, we did not see the material before it was tabled in the House of Commons. We were only able to comment after it was tabled there. Our first opportunity was to prepare a brief and to appear before the Industry Committee.
Senator Angus: Which you did.
Mr. Baird: We did. Now we are perturbed that many of our comments were rejected.
Senator Stewart: Senator Angus seems to imply that all the work should have been done before the bill came here and that we should be a rubber-stamping body. It seems to me that what is happening here is quite realistic. The people who are sponsoring the bill said that the members of the committee in the House of Commons are busy with other things -- important things like getting re-elected -- and, in any case, they do not have the expertise of people like Senator Angus and Senator Meighen on the Standing Senate Committee on Banking, Trade and Commerce, so why try to perfect this in a forum which is incompetent to do so? They decided to move the bill forward to the Senate committee, which would take time to discover what ought to be done. If we report the bill with amendments, the House of Commons will probably rubber-stamp those amendments.
That is realistic. It is a different model from the notion that the government should perfect the bill before it puts it into Parliament, so that the House of Commons becomes the real legislature and the Senate can say, "Yes, they did a good job. We will rubber-stamp it." I think that my model is more in accord with parliamentary democracy than the one you slipped into. I do not think you did it deliberately.
Senator Angus: No, Senator Stewart. My comments were inspired by your own lessons to me during the last session and the one before on certain income tax legislation.
Senator Stewart: We will have to revisit those lessons.
Senator Angus: I will quote from Hansard where you agreed with me.
Senator Kenny: If we are to do the work of bureaucrats, we should be paid like bureaucrats, Mr. Chairman.
Senator Angus: My point is that we should not be a rubber stamp. In fact, you and I are ad idem on what the role of the Senate and its committee system is.
I believe that you and I are also ad idem that when a session ends and a bill dies on the Order Paper, a bill which is well known to be flawed, it is inappropriate to reintroduce the same piece of legislation. I believe that is what happened here. I think it was inappropriate to bring forward 83 amendments on the very last day of hearings in the other place. I would be happy to continue this study all through the holidays and into next year, but I am not happy to be told that we have to report this bill back to the Senate by next Friday, in these circumstances. I am sure that you are not either, because I have heard you speak on other occasions.
The Chairman: I have one question on a new subject. I realize that you people specialize in corporate bankruptcy as opposed to individual ones. We have heard several representations on the issue of unfair treatment of retirement savings incomes, usually described as RRSPs. Under the act, an RRSP with an insurance company cannot be seized because the act says that if there is an asset which cannot be seized under provincial law, the federal government will recognize that law. The situation is that if a consumer has an RRSP with an insurance company, it cannot be seized, but any other form of RRSP can be seized.
Have any of you had experience with that issue, or would you care to comment on it?
Mr. Baird: We are quite familiar with the problem. It is clearly unfair. It is a technicality that benefits people who are in the know. The person who is not familiar with the law loses out. There should be uniformity of regulation in that regard. In my view, RRSPs should be exempt from execution under the federal statute, and there should be uniformity of the rules.
As to whether it should be exempt for all purposes or only exempt to a maximum amount is a key policy issue. It is also unfair to have RRSPs subject to seizure when pensions are not.
The Chairman: Your argument would be to exempt all retirement income, conceivably by putting a ceiling on it, is that right?
Mr. Baird: That would be my recommendation.
The Chairman: The Association of Workers' Compensation Boards of Canada appeared before us last week and argued that they were being treated unfairly. They wanted to be treated with the same super-priority that goes to CPP, income tax and EI payments.
Have you any experience with that? Would you care to comment? Are you aware of the problem?
Mr. Leonard: Yes, we are. We concluded that the problem was fixed the last time by eliminating their super-priority, but they are back again.
The WCB people, through a couple of fortuitous cases, have persuaded the courts to recognize that they have some sort of priority status. They really should not have a priority status. They are no different than any other Crown agency or group. Subject to the comments of Mr. Baird and Mr. Richardson, they should not have priority.
Mr. Baird: We agree with that.
Senator Taylor: Do you gentlemen have an opinion on the priority of wages in the bankruptcy setup? As you know, back-salaries come in as an ordinary creditor. There has been some talk that, perhaps, they should be moved up to be the first draw on the tank or that, perhaps, they should be insured.
Mr. Baird: My strong preference is for an insurance fund to pay the wages. I know this issue has been debated for many years. It was before the Senate in 1975 and 1980. At that time, this committee made a recommendation for an insurance fund. I am still a strong believer that an insurance fund is the most effective way of benefiting wage-earners and ensuring they are paid promptly and with certainty. Super-priority will cause great difficulty with administration. It also does not create certainty of payment. The Ontario government introduced an insurance fund; it worked very smoothly without any significant difficulty.
The Chairman: Thank you for coming, gentlemen.
The committee adjourned.