Proceedings of the Standing Senate Committee on
Banking, Trade and
Issue 16 - Evidence
OTTAWA, Tuesday, December 10, 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.
The Chairman: Senators, we are back with officials from the Department of
Industry who are here to respond to the submissions which we have received on
Bill C-5 over the last several weeks.
You have in front of you, honourable senators, a memo entitled, "Topics for
Discussion". I asked our researchers, along with the officials, to go
through the various submissions that have been made to us. Because different
groups recommended the same set of amendments, I asked them to organize our
discussion and to list the topics.
Last Thursday, we discussed the clause 124 amendment, which everybody wants, and
with respect to which counsel to the department did their best to make a
defence of the position that is in the bill. However, as I pointed out last
week, all the other expert witnesses argued that it needs to be amended.
We also discussed questions of directors' liability, about which two things were
pointed out. First, it is possible when the CBCA amendments come forward next
year to include those amendments in one omnibus bill that would handle both the
CBCA amendments, covering directors' liability, and similar corresponding
amendments to the Bankruptcy Act. Second, it was pointed out that it is
probably desirable to do all the liability issues in one bill rather than to
attempt to do some of them now and some of them later.
That left us with this list of eight issues which is before you, honourable
senators. I suggest that the representatives from the department go through
their position on each of those issues because, as you know, we have had
considerable argument on the other side. These are the issues about which there
is disagreement among the major witnesses who have appeared before us and the
With that introduction, that is where we are in the process.
Would you proceed, please.
Mr. Jacques Hains, Director, Corporate Law Policy Directorate, Department of
Industry: Mr. Chairman, I understand Mr. Tobin is on his way and should be
I will start with the RRSP issue and then turn the floor over to our legal
counsel. The issue concerning RRSPs was a topic discussed by BIAC in its two
and one-half years of deliberation. It was discussed in Working Group No. 1,
which dealt with consumer issues in the BIAC. Owing to the complexity of the
issue and the fact that provinces were represented and had a keen interest in
this topic, that working group recommendation was inconclusive. They could not
reach a consensus. That was the starting point of the exercise not to propose
exempting RRSPs in Bill C-5.
The Chairman: The RRSP provision was not changed in this bill. It is a 1992
provision. Am I correct on that?
Mr. Hains: It was not a 1992 provision, Mr. Chairman. It is not in Bill C-5 at
all. The way Bill C-5 and the BIA deal with RRSPs is that they provide for
exemption provisions. Goods and assets that are exempted are not available to
trustees when an individual goes bankrupt.
The Chairman: That is under provincial statute.
Mr. Hains: The BIA says that the exemption rules and the goods that are exempted
are as decided by the provinces. This varies from one province to another. We
have examples of that.
With regard to the RRSP issue, employer-employee pension contributions are
exempt. As a federal civil servant, if I were to go bankrupt, those
contributions are not available to my trustee to distribute because that money
is locked in until I retire. This is truly my retirement investment.
In the RRSP area, as decided by the provinces, it is somewhat like that but not
exclusively. Insurance-type RRSPs which have an irrevocable beneficiary are
therefore locked in for that beneficiary. Therefore, provinces have said,
because it is locked in and not available it shall not be available to the
trustees either. It is for an irrevocable beneficiary eventually.
Other kinds of RRSPs are as much investment instruments as they are retirement
income. For example, the federal government now provides that RRSPs can be used
as cash payments to buy a house. Therefore, they are liquid and can be turned
into physical, tangible assets.
The Chairman: You referred to locked-in RRSPs with an irrevocable beneficiary.
If people take a severance package, one of the things they frequently get is an
RRSP contribution which is looked in until age 55 or 60. That has nothing to do
with an irrevocable beneficiary; it has to do with the locked-in nature of the
RRSP. It is really that rather than the beneficiary which is driving your
Mr. Hains: The concept is "locked in" versus being available to
transfer into other kinds of assets.
Our understanding of the situation now is that some are exempted while others
are not. It is left to the provinces to decide. That is something which was not
addressed in 1992; nor is it addressed in Bill C-5.
It was an issue discussed by a BIAC working group which was divided on it owing
to the complexity and the major policy implications of going one way or the
other. They could not come to a consensus. The BIAC working group said that
they will continue to discuss the issue. As I said, provinces were represented
on that working group.
The Chairman: Under provincial statutes, locked-in RRSPs issued by an insurance
company, because they are an insurance product, are exempt from seizure, while
no one else's RRSPs have been. An individual who happened to buy his or her
RRSP from an insurance company would have that asset not available for seizure.
If that individual happened to buy it from a bank, a mutual fund company or
whatever, it would be available for seizure. There have been representations
made to the committee that the playing field should be made level by either
including or excluding all of them.
Mr. Gordon Marantz, Legal Advisor to the Department of Industry: Mr. Chairman,
the exemption arises under the provisions of the insurance acts of each
province, which are more or less uniform. If you counsel a client as to what to
do with an RRSP, there are distinct disadvantages in being in an insured type
of product because they do not offer the flexibility that the other does. An
insurance policy pays less than, perhaps, a self-managed or mutual fund RRSP.
The issue, though, is a question of exemption. Traditionally, it has been left
to the provinces because the BIA recognizes that the provinces set the
exemptions. It is open to the provinces to provide for exemption of RRSP
There is also a significant difference from province to province as to what is
exempt. For example, in the western provinces, there is a homestead exemption.
There is nothing similar in the eastern provinces or in central Canada. Quebec
has specific exemptions, which include, quite seriously, two sheep and a cow
and both a winter and a summer vehicle. There is nothing comparable in the
Ontario statute. There is an uneven texture across the landscape in this area.
The government did not intervene in this particular area because
self-administered RRSPS are different creatures from insurance policy
beneficiary issues. There is no necessary comparison other than, at the end of
the day, if the RRSP stays where it is, it becomes a retirement pool. There is a
difference, and it is open to the provinces to legislate. The provinces had a
view on this, and BIAC was inconclusive. They could not decide what to do. The
matter stands as it is.
Senator Oliver: What do you recommend?
Mr. Marantz: We have recommended no change.
The Chairman: That means maintaining the current situation with the unlevel
playing field, with the provinces determining what can and cannot be seized.
Senator Austin: I hear a different argument as well, which is that it is a
distinction with a difference, and the difference justifies the different
treatment. Is that correct?
Mr. Marantz: In essence, that is what we were saying.
Senator Austin: I will not go through your argument again, but that is
essentially what you are saying. Therefore, the concept of a level playing
field is not in play from your point of view.
Mr. Marantz: That is correct. The two products are not identical. They may be
identical some day at the end of the road, but they are not identical going
down the road.
The Chairman: To pick up on Senator Austin's point, the difference is that if an
RRSP is not locked in, then it ought to be available because it could be cashed
at any time by the individual who is going bankrupt; whereas if it is locked
in, it could not be cashed in.
Mr. Marantz: That is one way of putting it, yes.
The Chairman: Under the current act, if there is a locked-in RRSP not held by an
insurance company, is it exempt or not?
Mr. Marantz: When you say a "locked-in RRSP", ultimately, the assets
are subject to seizure. The protection is from the Insurance Act which says
that proceeds of an insurance policy payable to a preferred beneficiary
irrevocably cannot be seized. A locked-in RRSP, if it is an ordinary investment
product with a term attached to it, is seizable when it matures. There is
nothing particular about the RRSP being locked in in terms of a private
Senator Stewart: I gather that it is an accepted principle that, in the case of
the insurance arrangement, that should not be susceptible. I will not challenge
that principle, although I think it is susceptible to challenge. However,
because I think it is susceptible to challenge, I would be uneasy about applying
it elsewhere. I think the witnesses are correct to leave the thing as it is. If
it is bad, do not make it worse.
The Chairman: Can you then move on to the second topic, which is the threshold
indebtedness for the CCAA?
Let me remind senators of the issue. The bill proposes that $10 million be set
as the threshold limit in order to get into the CCAA. Two issues arose before
the committee, one of which was that the $10 million makes the act useless in a
number of provinces because there are not bankruptcies of that magnitude very
often and, therefore, this is a Toronto, Calgary, Vancouver clause to get into
The witnesses proposed several solutions to the problem. The first was that the
judge be given a discretion to lower the $10 million limit. The second option
proposed was that the $10 million threshold be lowered to $5 million. The third
option suggested by everyone was that, in any event, where it is a series of
related companies that go under, whatever the ceiling is, the ceiling ought to
apply not to each of the companies individually but to the group or the family.
Is that a fair summary of the issue?
Mr. Marantz: That is a fair summary of the issues. I was chairman of the task
force which dealt with the CCAA issues. The government policy on the matter is
that the Bankruptcy and Insolvency Act should be the preferred route for
reorganization for small- to medium-sized business. I guess where you live in
Canada determines what you see as small and what you see as medium.
As I indicated in previous testimony, Air Atlantic and Birks are both very
substantial organizations. Both were reorganized under the BIA. Our original
test was $25 million. The threshold was established to do away with the
previous qualifying test of having a trust deed outstanding which had no
meaning whatever. It was abused.
After hearing much comment from across the country, the threshold was dropped to
$10 million, saying that if anything is under $10 million, it should not be
that complex that it cannot be reorganized under BIA.
Having said that, if the committee wants to make the threshold $5 million, it
opens the CCAA to a greater range of companies. There is a question as to
whether it is really necessary. In the view of the group who worked on this, it
was not necessary. Again, there are regional differences in points of view.
The Chairman: I do not mean this to be quite as critical as it will sound.
However, I would be willing to bet that on the BIAC group there were not many
people from Atlantic Canada or Saskatchewan, for example. Therefore, their lack
of interest in things under $10 million is understandable. Is that a fair
Mr. Marantz: That is correct. We also had input from some people from Vancouver
who urged a lower threshold. It is not as if they were ignored.
The Chairman: Mr. Marantz, and then Mr. Tobin, do you want to deal with the
question of the group-of-companies issue?
Mr. Marantz: We believe that courts are now consolidating debtors when they come
before them on the notion of single-business enterprise. You can have a half
dozen companies and the court will treat them as a whole. We have no difficulty
in allowing a specific provision as to consolidation of indebtedness. It was
contemplated. We believed the statute is effective and the courts were doing it.
That brings us to the question of a discretionary threshold. We believe it is a
bad idea for the simple reason that there is no certainty.
The Chairman: I believe the bar association or the Insolvency Institute felt the
same way; is that right?
Mr. Marantz: It was one or the other. A debtor, in preparing its application,
needs to know that it either fits or does not fit within the statute. If they
are not sure and they spend a lot of time getting there, that leads to
The Chairman: Given how the $10-million figure was chosen and given your
statement that you would like it if all smaller companies went under the BIA
and not the CCAA, can I infer that you would not be troubled if, in order to
allow the CCAA to be used from coast to coast, that the number be lowered to $5
million, for example?
Mr. Marantz: Personally, I prefer the higher number; but that was only to keep a
whole lot of people out of the system because I thought the other act worked
well. As a matter of government policy, that would be fine as long as there is
an objective test.
Mr. David Tobin, Director General, Corporate Governance Branch, Department of
Industry: Senators should realize that there is a bit of a history with respect
to this issue. When the BIA was amended in 1992, there were some practitioners,
fairly learned ones, who came forward to suggest that we do not need two
statutes. They suggested that we abolish one and live with the second.
The Chairman: That suggestion has been made to this committee before.
Mr. Tobin: In 1992, it was decided that it was just too early to do that because
the BIA needed some time to work in order to show how issues would evolve. By
1995, the evidence suggested that the reorganization proposals under the 1992
amendments were working. Some fine-tuning was needed. It was asked, however,
should we look again at the notion of whether or not two statutes are required?
The answer which came back, not only from practitioners but also from some
judges who were consulted, was that two statutes are probably better than one;
however, we should start carving out the use of the second statute and try to
limit access to it in some way. The threshold was suggested as a way to do
If you took it from $10 million to $5 million now, it would be difficult to say
what the numerical implications would be. Would you go from "x" to
three times "x" or four times "x"? Who would have access to
it? We just do not have the numbers to do that. Clearly, more people would gain
access. If anything, it probably flows against the discussion that we are
having, saying, "Try to move people to the BIA." That was coming from
practitioners, even to the point that some suggested we eliminate the second
I am arguing that we are in a bit of an evolutionary state, albeit with only two
incidents since, one in 1992 and one in 1995.
Senator Stewart: You seem to be pointing toward a cut-off of $7 million or $8
million. You are saying that we must discover empirically the impact of a lower
threshold. You seem to be uneasy about going down to $5 million immediately;
but, at the same time, you are not throwing out the possibility of some
Mr. Tobin: In the thrust of our discussions, as Mr. Marantz suggested, people
should be pushed toward the BIA, even to the point that some have suggested
eliminating the CCAA. The lower the threshold -- and there is none now -- the
fewer people there will be funnelled off toward the BIA.
You are right; there is no empirical evidence to suggest that it would be "x"
or two times "x" or even three times "x". It would be some
number. The lower the threshold, the greater access there is to both statutes.
The Chairman: In fairness, Mr. Tobin, given that you have not decided to
eliminate the act but to keep both, does it not seem reasonable that one ought
to have a number to ensure some reasonable access to the CCAA for people who
want it, regardless of where in the country they live?
Mr. Tobin: Mr. Chairman, I think you are right. I must agree with you. This was
not done to disenfranchise any part of the country. That was not the purpose of
If you took this to the extreme, and no one is suggesting that you do, and set
the limit at $100, clearly, you would have no impact, or very little impact.
You are right that the regional one would have some implications. The issue
before the committee is how to address that. It may be through the
consolidation and/or the question of a threshold.
The Chairman: The third issue was the debtor's auditors should not be the
monitor. The same individual should not be both the veterinarian and the
Mr. Marantz: I do not think this is exactly the same issue as being both the
veterinarian and the taxidermist.
The Chairman: In this particular case, the Bankruptcy and Insolvency Act
provides that, upon filing a notice of intention, there must be a trustee named
who will then have responsibilities under the statute.
There was never any requirement for anyone to supervise or to report under the
CCAA. Over the years, the practice developed of having a monitor appointed.
This was purely a creature of lawyers' imagination, supported by the courts,
who, in order to instil some confidence in the creditors, would report to them
on what was going on. The practice developed to use the debtor's auditor, if
there was no objection, the reason being that, in most cases of large debtor
corporations, the auditors had the familiarity; they were up to speed; they
prepared all the information; and none of the major lenders questioned their
integrity. They were there to see the plan go through.
In the current crop of amendments, we institutionalized that particular
approach. It provides that where the creditors do not object, the auditor may
be the monitor. However, there is an obligation to appoint a monitor. In not
every case before us is the auditor acting as monitor because the debtor is
often sensitive to the fact that the creditors may not accept their auditor.
This allows for some flexibility.
If you had a company such as an Olympia & York, a Cadillac Fairview or a
Bramalea, major real estate companies, in other words, there was an advantage
in having big-name accounting firms review what was going on.
It is not a licence. It is something that is allowable if creditors do not
object. It is within the discretion of the court.
The Chairman: Why does the CCAA provision not mirror the BIA provision?
Mr. Marantz: Largely because this is carrying forward a practice. Bear in mind
that the CCAA is entirely discretionary. The Bankruptcy Act does not have the
same measure of flexibility that the courts can exercise. Therefore, there is a
cost saving. In complex situations, it takes a long time for an outsider to get
up to speed, particularly with a real estate company which has several hundred
properties. There was a certain convenience and flexibility that goes with the
larger debtor situation.
Certainly, members of the institute who are major accounting firms were in
favour of being on that side of the fence when the thing was put forward. It is
a flexibility provision. That is a different issue from the one of monitor who
does the look-see on an insolvency being the trustee of the receiver.
The Chairman: With regard to this issue, is it your recommendation that we leave
the provision in the bill the way it is?
Mr. Marantz: Yes, sir.
The Chairman: The fourth item is super-priority for environmental clean-up. Some
will remember that it has been suggested that, under the proposals in the act,
super-priority is incurred by the owners or the mortgagees of the land, but
vehicles, equipment, chattels, et cetera are not subject to the same
The Canadian Life and Health Insurance Association argued that the
super-priority for environmental clean-up should apply to vehicles, equipment,
et cetera. Basically, their argument was that since they only do mortgages,
they would like to see other people swept into the tent.
On the other side, the argument was two-fold, the first aspect being that the
environmental clean-up is really on the land and not on the equipment,
therefore, the issue ought to remain limited strictly to the land. The second
aspect was that it is much more difficult to deal with vehicles and equipment,
since they can be moved to other locations.
Senator Meighen: There was a third aspect of the argument regarding
proportionality, that is, who is responsible for how much.
Mr. Marantz: Bear in mind that the present legislation does not take anything
away from anyone. It provides a measure of certainty whereby every lender,
insurance companies and all the others, have an opportunity to get in and
discover how bad it is.
The question of apportioning the loss is not only difficult but nearly
impossible. This exercise has been engaged in since 1975, from the time they
tried to talk about super-priority and another issue. It is impossible to come
up with a rational, easily ascertainable formula because of the varieties.
Right now, under the scheme being proposed, if you have a piece of land on which
there is a $100,000 mortgage and the clean-up cost is $1 million, the lender
can walk away from the property with no further exposure to it. The logical
conclusion to what is being proposed by the life and health companies is that
if there is a million dollar clean-up cost, not only can the lender walk away
and not have further exposure, but the assets which would be subject to the
charge of the operating lender, such as the inventory, the receivables,
machinery and equipment, could also be subject to a charge in favour of the
It would create losses in the financing community when none would now be
contemplated. That is neither fair nor right. We suggest that the provision
which was carefully worked out should be left to stand as it is.
The Chairman: The fifth issue number is with regard to the unpaid suppliers
provision. This was first discussed at some length before the committee by
Professor Ziegel and company; however, it has been raised two or three other
Mr. Max Mendelsohn, Legal Advisor to the Department of Industry: Mr. Chairman,
there are two aspects to the unpaid supplier provision. One is a policy issue
and the other is a technical issue. When the provision was enacted in 1992, it
was in recognition of the fact that suppliers who recently supplied should be
protected. There was a perception that they got drawn in at the last moment and
should be able to get their goods out.
There was a countervailing policy consideration that if reorganizations are to
be encouraged you cannot allow the recently delivered goods to be taken away
from the reorganizing debtor, therefore impairing the chances of the
reorganization being done successfully.
As a policy matter, the reorganization aspect was preferred over the supplier
protection aspect. Therefore, when the reorganization provisions are invoked
under the BIA, they take preference over the claw-back provisions for
suppliers. That is the policy issue.
The Chairman: You said a judgment was made in considering who would receive more
protection. Do you want to explain the rationale for not picking suppliers?
Mr. Mendelsohn: The rationale revolves around the bias in favour of reorganizing
companies. If the 30-day suppliers are able to remove their merchandise, that
reduces the assets available to fund reorganization efforts. It was felt that
the chances of a corporation successfully reorganizing itself would diminish if
the recently delivered merchandise were removed from the debtor's premises.
Senator Austin: The argument works in my mind just as well in the opposite
direction. If a creditor has some apprehension of a bankruptcy, or a liquidity,
that supplier might be reluctant to supply the goods which would hasten the
bankruptcy or the illiquidity. Therefore, to encourage the supplier to continue
to support the debtor, if you like, by the supply of goods, you provide the
supplier with some additional protection, that being the 30-day protection. How
do you react to that argument?
Mr. Mendelsohn: I am not certain of the degree to which suppliers who believe
their customers to be insolvent or approaching insolvency are soothed and
encouraged to supply solely as a result of the existence of the claw-back
provisions. There are enough other ways that their rights can be frustrated in
the process that I do not think they will supply in reliance upon the claw-back
For example, in order to get the goods back, it stands to reason that the goods
must still be there. They cannot have been resold. They cannot have been
transformed into another form.
I doubt many suppliers will consciously say, "I know this guy is on the
brink of insolvency; however, I do not mind supplying him because I know the
law will protect me with my 30-day goods." I do not think it plays out
that way psychologically.
Mr. Hains: Mr. Chairman, there are some particular provisions which are
relevant. On the cash flow statement, for example, the issue is financing
during reorganization. The reorganizing debtor has to have the means to
generate cash so that he can continue to operate while he is developing his or
The best source of getting that revenue flow is by completing inventory and
having access to accounts receivable. We are speaking here about the inventory.
In 1992, under the BIA, there was a requirement that in filing a notice of
intention to reorganize, a debtor would have to file this cash flow over a
reasonable period of time, along with expectations of depletion of inventory,
use of accounts receivable and the revenue streams that would be generated. In
this way, unpaid suppliers would have a sense of by how much their inventory
would be depleted.
This is a relevant provision. This same provision is being proposed for the CCAA
in Bill C-5.
Mr. Mendelsohn: It is my understanding that some technical issues have arisen,
especially in light of the Consumers Distributing insolvency where the
suppliers were not protected. That is a case where the reorganization process
failed. One might normally have thought that the 30-day goods suppliers would
be able to get back their 30-day goods.
In that case, there was a decision of the Ontario superior court which is
presently in appeal before the Ontario Court of Appeal. The facts of the case
were such that the goods, rather than being physically in the possession of
Consumers Distributing, were in the possession of a warehousing distribution
organization. The courts held that that constituted the goods not being in
possession of the debtor. As such, the suppliers were denied the protection of
the 30-day goods claw-back provision.
That judgment may give pause. I certainly question such a judgment. That is not
the intention of the section. The debtor was in juridical possession of the
goods, if not physical possession of the goods. However, the case is being
If it should turn out that the statute is interpreted in the way that it was
interpreted in the court of first instance, then it should be looked at again
to see whether there is an appropriate amendment to set aside that unintended
Mr. Tobin: To add to the discussion that we had on this issue, this was debated
at some time in 1992. Some people actually objected to the inclusion of this
sort of provision in the BIA. The trick was to get a balance between creditors
and debtors, particularly on the point to which Mr. Mendelsohn referred during
the period of a proposal.
Financial institutions were also concerned about what impact it would have on
lending at the time, particularly for those companies which borrow in large
part against inventory.
During the 1995 deliberations at BIAC, this section was discussed at some
length. There were suggestions by a variety of people that it be changed or
modified. The consensus of BIAC at the time -- keeping in mind that we were
dealing with a three-year review, which encompassed only two to
two-and-one-half years of operation -- was that it would be premature to make
any changes. There was not enough evidence to shift it one way or the other.
Therefore, the consensus at BIAC was to leave it alone and perhaps revisit it
next time around.
Mr. Marantz: Senators should bear in mind that just about every bank financing
commitment letter now excludes, as part of the margining formula whereby you
determine what the base value of goods are for advances by a lender, apart from
employee withholding and other preferred claims, value of inventory received in
30 days. The 30-day goods provision has resulted, therefore, in an actual
reduction in the amount of credit available to borrowers.
The Chairman: The sixth item is the three technical amendments suggested by the
Insolvency Institute. I would like you to comment on those. You might want to
comment more generally on the 32 amendments suggested by the Insolvency
Institute and the extent to which they have or have not been included in the
Mr. Hains: I will make general comments, Mr. Chairman. If senators have any
specific questions, we will try to answer them.
We can categorize the 32 amendments suggested by the Insolvency Institute. One
category is not so much technical but policy issues. An example is extending
liability protection to officers. We have it for directors; they propose to
extend that protection to officers. I do not think that is technical, with all
The Chairman: I agree with that.
Mr. Hains: A fair number of their recommendations fall into that category. Those
recommendations were discussed by the relevant BIAC task force or working group
with the institute playing a key role, and that did not result in a consensus.
We suggest that those should all be included in the round of amendments to come
in five years for the Bankruptcy Act. Again, they should be discussed with all
the stakeholders around the table.
Of the 32 recommendations, there are about 15 technical ones. When we looked at
those carefully with our counsel, we found that a number of them did not
represent any improvement. We questioned whether the change materially improved
the product. That is the second category.
In the third category are those technical amendments which we believe are not
necessary because case law already provides for these matters. We have one or
two examples. If your committee wants to confirm these case law situations,
that is fine, but we thought they were not necessary.
The Chairman: In which category would you put the three amendments that David
Richardson raised when he was before the committee? Mr. Richardson, who I
believe chaired that BIAC task force, said they were a set of amendments to
which the task force had agreed. They were very technical and he was surprised
that they were not included automatically.
Mr. Hains: I will address amendments 9 and 10 and then I will ask Mr. Marantz or
Mr. Buchanan to address number 8.
The way I read amendment 9 is that it would clarify that a suspension granted
includes a temporary suspension. This falls into the category which does not
represent an improvement because a suspension can be temporary and of any
length. We did not see a great value in that.
Amendments 9 and 9(b) extend the protection to fraud and theft. That falls into
the first category of policy considerations. We think it goes beyond the
jurisdiction of the BIA to cover instances of fraud or theft. Allusions of
fraud or theft should not be a reason for petitioning an entity, even a
securities firm, into bankruptcy. This is way beyond the jurisdictions of the
Mr. Marantz: With respect to amendment 8, Mr. Chairman, we were of the view that
investments in subsidiaries of security firms would fall into the customer pool
in any event because a security is a security.
The Chairman: So you would put this in Mr. Hains' third category, which is
clarification of an existing situation?
Mr. Marantz: Yes, which we believe was adequately handled.
The Chairman: Mr. Hains broke the 32 proposals from the institute into three
categories. One was policy areas, for which he used the officers' liability as
an example. The second category was areas where you thought the proposed
changes were not necessary because they did not clarify anything, but, equally,
they were harmless from your point of view. The third was areas where you
thought case law had already established a precedent sufficient that the
amendment was not required.
As Mr. Hains said, you could live with those changes to clarify the law without
necessarily having to have it clarified indirectly via case law.
It would be helpful if you could sit down in the next 24 hours with our staff so
that when we meet on Thursday we will know into which category each of those 32
recommendations falls. I hear you to be saying that your category two and three
changes are not a problem for you. You may think they are marginally
unnecessary, but they do not cause you difficulty because they are consistent
with the BIA consensus and with the direction. On the other hand, items in your
first category do cause you a problem because they are policy driven.
Is that a fair statement?
Mr. Hains: Yes.
The Chairman: It is very important that when this committee meets on Thursday we
know absolutely where you stand on those suggested amendments as well as on the
11 suggestions by the Canadian Bar Association. Some of the suggestions from
the CBA do not require amendments. They were suggestions for study, monitoring,
et cetera. However, we should like you to categorize those that actually
Mr. Tobin: We would be happy to do that.
The Chairman: I will ask you to meet with the staff to do that. I assume that
will require a meeting with your outside counsel as well.
Let us move on to the consumer bankruptcy comments. You may want to comment on
the approach in general. Three specific issues arose; the mediation issue, the
collusion issue -- which we have called spousal support, for which the
spokesperson for the Canadian Bar Association argued -- and the criteria for
You may want to take us through that. I think we should also put on the record
that there was a discussion -- I think Senator Stewart summarized it very well
-- on the first day we had hearings that showed there is a bit of a lack of
understanding of the real causes of the significant increase in consumer
bankruptcies over the last several years. I think there was a general admission
that we know roughly what the causes are but we do not know which causes are
more important or less important. Some of the data that the department has are
quite counter-intuitive in the sense that, for example, they show that the rate
of consumer bankruptcies in Atlantic Canada is one-half the rate of consumer
bankruptcies in Alberta. That is sort of counter-intuitive although those
figures can be explained.
Senator Stewart: I would have guessed that.
Senator Kenny: It tells you where the entrepreneurs are.
The Chairman: Or where people are prepared to lend money.
I think the department had agreed -- and Mr. Tobin may want to comment -- that
they would be undertaking a detailed survey-type study to understand the causes
of bankruptcy in various regions of the country and among various groups,
including students. Conceivably, the committee could come back and look in some
detail at the consumer issue once the results of that study are made available
Mr. Tobin: There is a study being undertaken. It has not quite started. They are
at the initial stage of letting a contract for the necessary research. Mark
Mayrand may be able to give you more precise details on its progress. It is
being done in conjunction with his office and the consumer bureau.
Mr. Marc Mayrand, Superintendent of Bankruptcy, Department of Industry: Mr.
Chairman, there is an extensive study that will be done into the causes of
bankruptcy, especially consumer bankruptcy. The contract has been issued for an
outside firm to design a survey and poll debtors, trustees and creditors as to
what they see as the causes of bankruptcy as well as the profiles of debtors who
go through the process of insolvency.
We hope to have the preliminary results of that survey by early summer. We will
be happy to share the results of the study with the committee.
The Chairman: Your target is to get that sometime around the end of June, or the
beginning of next summer, is it?
Mr. Mayrand: Yes.
The Chairman: Presumably out of that we could then have a detailed look at the
consumer bankruptcy provisions of the BIA as opposed to the corporate
Mr. Mayrand: Yes.
Senator Stewart: I am very interested in the fact that this study is being set
There is a good deal of literature on what is happening in the economies. There
is an article in, I believe, the July issue of Foreign Affairs on this matter.
You are probably familiar with it. Unemployment is growing. It is very high in
Europe now. It is politically troublesome, given the history of Europe in the
The two standard explanations are the effects of globalized trade and
technological change. Apparently, what is happening is that, first, unskilled
labourers have come to be unemployed. Gradually, the tide of unemployment is
moving up the economic ladder so that middle management is now suddenly
becoming susceptible to "adjustment", which I think is the phrase
economists like to use. That is one side of the situation. It is what I call
the increasingly rough sea.
On the other side, look at what we were told here about credit cards. We were
told that, one way or another, people get a pocketful of credit cards. They use
one card to compensate for the unhealthy state of another card, and so on, and
it goes on to the point where suddenly everything collapses and the creditors
have no way of anticipating the collapse.
I do not know that this department will be able to do anything about the
increasingly rough sea, the unpredictable economic circumstances in which
people live. However, perhaps there is something that could be done with regard
to the availability of the cards. It is not really as if people are being
licensed to print their own money but it is pretty near that. If these creditors
want to give out all these cards, I just wonder why the public, through the
state, should have any great responsibility for assuring that those creditors
are made whole. Surely, this whole question of plastic credit ought to be
examined by those who are making this study.
Mr. Mayrand: There is no doubt that ease of access to credit is one of the major
causes of insolvency. There is no single cause. It is generally a combination
of many factors, such as ease of access to credit; interruption in income,
perhaps caused by unemployment or other circumstances for which the debtor may
or may not be responsible; and lack of financial management skills. They may not
know exactly how to handle credit, or the costs associated with it. There are a
number of factors at play.
Under the BIA presently, the only way you have of dealing with those causes is
through counselling, which comes after the bankruptcy. There is a requirement
for each individual debtor to attend counselling sessions to learn more about
financial skills, budgeting and the use of credit. Should that information be
handed over before bankruptcy? I think we would probably all agree that it
should be. There is a need to be more proactive, to instil those skills in the
general population well before the problem of insolvency occurs. That is one of
the things that was discussed at BIAC but was not addressed in detail because
of the lack of time and the scope of the issue.
Senator Stewart: Did you discuss the fact that people can accumulate a pocketful
Mr. Mayrand: Yes. There are two concerns. Should there be restrictions on
credit; or should individuals be educated as to how to best use this access to
credit? These are very fundamental issues that were well beyond the role and
the mandate of BIAC in that respect. They raise the issue of access to credit
and controlling credit or the costs of credit.
Senator Stewart: My position, Mr. Chairman -- I just hinted at it today -- is
that if banks and other lending agencies are going to give out cards in
circumstances where they admit they do not know whether the statements on which
they are relying are valid, I cannot see why government departments should be
agitating themselves to ensure that these lenders are protected.
Mr. Mayrand: Again, the return to creditors in a consumer insolvency is less
than 4 per cent of their actual claim. They are bearing most of the losses
right now. What we have to be concerned with is how they recover those losses.
It is through the other consumers who are using the cards and paying all sorts
of fees. That issue is there and needs to be addressed. Again, it was well
beyond the mandate of BIAC.
The Chairman: Is part of the problem that we do not have any real data to
understand how frequently consumer bankruptcies are caused, for example, by the
loose granting of credit cards and a variety of other things? We do not
understand the problem with respect to students, which is a particular subset
of consumer bankruptcies.
Am I right that you do not have any hard data which would enable us to say that
the problems Senator Stewart raised are the source of 25 per cent or 75 per
cent of consumer bankruptcies?
Mr. Mayrand: There is very limited data. On a very small sample, we found out,
for example, that debtors who go bankrupt on average have three credit cards in
hand. They are used to the extent, on average, of $5,000 to $6,000.
The Chairman: Will the study you are about to do get you that data?
Mr. Mayrand: Definitely. Those are the things we want to get from the study so
that we have a better understanding of what needs to be done to address
consumer insolvency issues.
Senator Kenny: I do not think Senator Stewart hinted at where he was going. I
think he wrote it in bold letters that no one could miss. I think if he missed
anything at all, he wanted you to see if there is a way that other credit card
users do not have to pick up these extra costs. Instead, could they be
transferred to the shareholders of the careless company?
I am on the same chapter, if not on the same page, as Senator Stewart. I was
very concerned with the panel of witnesses who talked about how they dealt with
banks and the difficulties they had in terms of accessing the system. I hope
the mandate of this study is a broad one and that it examines something broader
than just how to deal with the act itself. The act itself is essentially
cleaning up the mess after the accidents happen. The committee is interested in
figuring out ways to avoid the accident in the first place. If you have a study
under way and you can make the terms of reference address avoiding accidents
rather than sweeping up the pieces, that would be interesting.
Mr. Mayrand: Hopefully, that is one of the results that will come out of the
study. As we learn more about the profiles of individuals facing financial
difficulties, and as we find the causes, we will be able to better assess what
steps should be taken to avoid the occurrence of the problem.
Senator Kenny: There is a gut feeling among some members of the committee that a
significant portion of the problem is due to a deficiency in how people are
educated. That may not be true. That is the instinctive, initial reaction. If
people understood how to manage their affairs better, they might do better. It
would be interesting to know if there is any truth in that. If there is,
obviously, it is worth pursuing that area diligently. If there is no
relationship between educating people in terms of how to use credit and the
accidents, then that would be a worthwhile piece of evidence as well.
Instinctively, one thinks, goodness, if only these people at some point had some
education in the basics of how to budget, how to manage a bank account, how to
deal with a credit card, what reasonable levels are to start off with if you
are purchasing something on credit, how much should you pay down, and so on,
perhaps there would be fewer consumer problems. These are all just guesses. I
am hoping your study will make them less than guesses.
Mr. Mayrand: I hope it will shed some light on these issues.
Senator Kenny: Are you telling me it will shed some light on these issues?
Mr. Mayrand: Through the profile of debtors, yes, we will know more about the
level of education, the number of dependents, the type of employment and the
socio-economic profile of those debtors.
Senator Kenny: Not so much did they get through grade eight or do they have a
post-graduate degree in economics, but did they have five hours on how to use a
credit card, or did someone ever say to them, "No, you do not buy a house
with 5 per cent down and a CMHC gift. If you want to get through buying a house
in uncertain seas," as Senator Stewart was talking about, "you better
have 35 or 40 per cent to put down and proceed that way." Will it ask that
type of question, or will it just say check one, "primary school or high
Mr. Mayrand: There will be interviews with some of the debtors to get a more
in-depth appreciation of their circumstances and the level of familiarity with
credit costs and the use of credit and personal financial skills.
Senator Kenny: I am having trouble finding school boards that have this on their
Mr. Mayrand: Some do, but you are right, not all do.
The Chairman: When your survey instrument is developed, it would be helpful
before it is put into the field if there were a discussion informally with some
members of the committee. There ought to be a discussion before they do the
first draft of the survey instrument so they can understand what it is we would
like out of it. I do not mean in a formal hearing sense, but just in an informal
Senator Austin: Picking up on Senator Stewart's global view of what is taking
place in the shift of wealth within societies, coming from that general
statement to a very specific one, some of the most aggravating situations are
not with people who do not understand in a general way the management of
credit. What they find is that their personal circumstances come under
increasing stress in the number of layoffs that are taking place in our
society. Then they are put in the personal dilemma of whether to downsize or
continue to maintain their lifestyle, their public stature and position while
they try successfully to go through a transitional period from one place to
another. Often, the losers in this situation are people who do not make that
transition successfully. They have extended themselves and their credit
position to the limit trying to stay where they were, and then suddenly they
are off the cliff. No amount of education will deal with a problem of that kind.
That is something I would like to encourage you to take a look at in your
From the point of view of lenders who specialize in high-volume product lending,
you will find in your studies that the cost of due diligence compared with the
cost of quantum lending favours quantum lending per unit lent.
The Chairman: By "quantum lending" are you referring to Senator
Stewart's point about people sending out credit cards without really knowing if
the applicants are creditworthy?
Senator Austin: Essentially, in the industry, they do their own analysis of what
comparative cost each system entails. They buy into the lowest cost system for
themselves and their credit card lenders. I think your study will find quickly
that quantum lending is cheaper per unit lent than due diligence. Due diligence
is the most expensive form of activity possible in any economic enterprise.
The Chairman: That completes our introduction to the three points under consumer
issues. Do you want to turn to the three previous issues? You will recall the
mediation issue. You included a step about mediation, which everyone says
should be voluntary and not mandatory. The spousal support issue involves the
collusion issue. I presume that the representative of the Canadian Bar
Association argued that it needed to be cleared up. The last issue concerns how
to deal with the issue of people who have chosen a proposal over bankruptcy and
still seem to find themselves in trouble.
Do you want to deal with each sequentially rather than collectively and then we
will ask you questions on each one?
Mr. Mayrand: Mediation was extensively discussed at BIAC, especially within
Working Group No. 1, which dealt with consumer insolvency issues. Mediation was
found to be the best approach to deal with certain concerns from all
stakeholders in respect to consumer insolvency.
Mediation was found to be a simpler way to handle some of the disputes that may
occur from time to time among creditors, trustees and debtors as to the amount
paid into the estate. That mechanism was much cheaper than actually having to
refer to the court, which is the present situation under the BIA. It was also
much faster. For example, in order to go before the court in Toronto to deal
with a matter of surplus income for a discharge, you must wait nine months
before a hearing can be held. In Montreal, the wait is up to five months. It
varies across the country. In fact, there is a tendency across the country for
the provinces to move away from supporting the function of the registrar, who is
the judicial officer responsible for those matters. The consequence is that a
dispute about whether the debtor should be paying $50 or $100 into the estate
must be heard by a judge in many cases. Again, there is the issue of costs, the
issue of length of time and the issue of whether it is the right type of matter
to bring before a judge.
The Chairman: So that we are clear, I do not think you answered the concern
people had. The concern was that you had made mediation mandatory rather than
voluntary. That is the way it was presented to the committee. I do not know
that anyone would have objection to mediation being an option, but why should
it be compulsory?
Mr. Mayrand: It is compulsory only if there is a dispute among the parties. They
must first exhaust the mediation route before going to the court.
The Chairman: I understand what the law says. My question to you is: Why do you
require, mandatorily, that they must exhaust the mediation process before they
go into the court process? We have a problem because Mr. Marantz is saying that
is not what the acts says. Is that right?
Mr. Marantz: I am concerned that there is confusion between the counselling
issue, which was mandatory, and mediation, which sets out a process whereby you
first try to resolve the matter with the trustee and then you go to mediation.
If that does not work, then you go to the courts. That is just the normal
progress for disputes. As you go through each step, you have fewer and fewer
bodies to deal with because they fall away. That is different from counselling.
The Chairman: Using your words, it is a normal process. Tell me why all the
experts said that it should not be.
Mr. Marantz: I think the disagreement is with counselling.
Senator Oliver: Some people said that if someone had good credit for 20 years
and lost his job because of downsizing and did not have any income for a year
and then went back to work, this person knows how to manage his affairs, so why
force some kind of counselling on him? That is what one of the witnesses told
Mr. Marantz: They are two different issues.
The Chairman: We had the mandatory counselling issue, which was discussed. We
also pointed out that mandatory counselling was added in 1992. That is not a
Mr. Marantz: That is right.
The Chairman: Do you want to deal with the spousal support question?
Mr. Mayrand: The issue of spousal support raises some significant policy issues.
Obviously, there is a conflict here with family law policy which encourages and
promotes due diligent payment of support claims. At times, that may run
contrary to the insolvency policy, which is to ensure equal treatment of all
Again, that issue was discussed extensively at BIAC. BIAC fell on the side of
greater fairness to spouses and children in this process in the sense that they
wanted to ensure that spouses today are not entitled to any dividend in a
bankruptcy. They wanted to ensure that spouses and children could have access
to that dividend and be provided a priority for the amount payable as support
There are some preconditions set out in the act. The spouses must live apart and
the agreement or the order must precede bankruptcy.
There was an issue of the anti-abuse mechanism, which was the concern raised
here. The general sense we have is that the provisions that already exist in
the insolvency legislation, combined with the general scheme that exists under
provincial legislation which allows a review of certain transactions that were
conducted fraudulently or in fraud of the rights of other creditors, can be
The view of BIAC was that those anti-abuse provisions which exist already in the
BIA and in provincial legislation would be sufficient to deal with the abuses
that may arise out of these new provisions.
Mr. Tobin: To add to what Mr. Marantz has said, under the BIA, not affected by
Bill C-5, spousal support payments were non-dischargeable to begin with. That
has been the case for some time. That provision is not being changed. We have
said that those non-dischargeable debts were moved over as well and given a
preferred status. The question of dischargeability has been dealt with before.
It already was contained in the law. This has not been added as a result of
The Chairman: Therefore, you would reject the argument of the Canadian Bar
Association, which wanted to eliminate the skew in favour of spouses and
children and level the playing field somewhat with respect to all debtors. You
disagree with the balance that the representatives of the CBA called for; is
Mr. Tobin: Yes. We discussed this during the BIAC process. The BIAC process came
out with the conclusion: Let us have some movement here. It was discussed after
The Chairman: The act reflects the BIAC consensus, does it?
Mr. Tobin: Yes.
Senator Angus: The witness from the CBA went into great detail on the collusive
aspects of the convergence of matrimonial breakdown and personal bankruptcy. He
felt there should be some anti-collusion safety devices within the legislation.
I have been wracking my brains as to how that might be done. He gave some
guidelines. How do you folks feel about that?
Mr. Mendelsohn: Of course, there is an opportunity for abuse. There is always an
opportunity for abuse when a preference is given to one category of party.
Debtors have to be pretty good in order to organize their affairs in such a way
as to separate collusively, to live apart, all for the purpose of trying to
re-jiggle their assets before a bankruptcy. That is not to say that it has never
happened or never could happen. However, when someone sees the degree to which
they have to reorganize their lives in order to achieve that end, I think in
most cases they just would not do it.
There could be anti-abuse provisions. Someone once said that guidelines are a
trap for the righteous and a road map for the crooked. Built into the act
already -- and I think someone has alluded to it already -- there are a number
of anti-abuse mechanisms. It is our belief that those would apply to this kind
of situation. If an abusive settlement were entered into with, for example, a
bizarre lump sum payment that was thought to be treated as a preferred
creditor, then the judicial mechanisms already exist in the BIA to attack such
a thing, as well as under provincial statutes.
Senator Angus: For the record at this stage of the proceeding, could you refer
to the mechanisms that are already in the act and which were alluded to at
Mr. Mendelsohn: For example, the reviewable transaction provisions of the BIA
would be applicable. After the submission of the Canadian Bar Association, I
took a look at it again and concluded -- and we will not know until it is
before a court -- that there is no reason those provisions would not apply to
this kind of situation.
In addition, the respective provinces have fraudulent transaction-type avoidance
rules. In Quebec, for example, it is what is called the Paulian action. In
Ontario, there is the Fraudulent Conveyances Act. The other provinces have
similar legislation. These types of measures attack transactions entered into
for the purposes of defeating the rights of creditors. I believe that those
would be applicable to an abusive arrangement in an appropriate case.
Senator Angus: I want to read a statement which you may have seen. It was sent
to us by the CBA after their appearance here. I would like you to comment on
it. I must admit that it was quite powerful testimony at the time.
This is a letter addressed to our chairman on November 27. It states:
We believe our initial proposal of limited provability for support arrears (i.e.
equal sharing) is well balanced. Bill C-5, as first introduced, included
limited provability plus limited priority. It has now been amended further to
provide for unlimited provability plus limited priority.
As originally drafted, the Bill C-5 provision would not adequately address the
problem of collusion. A provability amendment similar to the Bill C-5 provision
was introduced in Australia in 1980. As a result of numerous instances of fraud
and collusion, it required further amendment seven years later. Despite the
Australian example and our strongly held concerns, Bill C-5 was amended in a
form which exacerbates the anticipated collusion problem by strengthening the
new remedy (namely by making provability unlimited), and still providing no
Personally, I do not feel that we have addressed that point.
Mr. Mendelsohn: First, I must confess, senator, I am not sufficiently
knowledgeable with the Australian situation to comment as to whether the
situation is the same or whether there are differences.
I am of the belief that there are appropriate remedies to address collusion. I
suppose it is a policy matter as to whether there should be some dollar limit
attached to the priority or not. There are a number of competing forces within
society that would take differing points of view on the issue. It becomes a
policy consideration as to where the appropriate line should be on that --
indeed, if there should even be a line.
Senator Angus: What you are proposing is rather indirect. You are saying there
is enough already there to cover the issue. I am wondering if there are any
specific policy reasons why we could not add a specific anti-collusion clause
at that point in the bill. Would that bother you?
Mr. Mendelsohn: It is not a question of bothering, no.
Senator Oliver: Have you given it much thought?
The Chairman: Since both the witnesses and the senators seem to be in the same
position with respect to intent, and since the witnesses will be going through
with our staff the breaking down of Mr. Hains' three categories, could our
staff and your staff not see if there is a way to deal with Senator Angus'
point explicitly? His point is that some element of a provision should be
included to insure what you say is there indirectly. You can then let us know
Mr. Tobin: We can look at that, Mr. Chairman. You have to keep in mind that this
particular provision was put in as a result of the government's view that if
you moved over certain parts of society, then they would be non-dischargeable
and they would be given some sort of preferred status. Any crafting that places
a limitation has to be there to do it with abuse provisions and not in an
attempt to try to curtail what that broader policy objective was.
The Chairman: I understood Senator Angus' point to be exactly that. He is not
disputing the policy. Rather, he is saying that the policy should prevent
flagrant abuse and collusion. He is not arguing the fact that this gives
spouses and children some element of preferred priority over other creditors. I
do not think that is the issue. The issue is how to avoid the abuse problem.
Senator Angus: It is like the anti-avoidance provision in the Income Tax Act,
except it could be specific to this measure. We were given some numbers in this
regard. I talked to our insolvency department in Montreal to see if it is true
that so many of these bankruptcies in these circumstances are not fully kosher.
I had confirmed what the witness said. It is very troubling. It is destabilizing
to social order.
Senator Stewart: The witnesses have referred to a study that will be made with
regard to consumer bankruptcy. I suppose that there are some cases -- and I do
not suggest how many -- in which the spouse is really the cause, perhaps, if
that is not too strong a word, of the economic circumstances which led to the
bankruptcy. If that is the case, then it seems to me that the spouse is having
his bread or her bread buttered on both sides. They have the benefits of the
high consumption on the one hand and then they are being given special support
on the other hand after the bankruptcy.
That is an exaggerated statement, Mr. Chairman. Perhaps the witnesses in their
study ought to look to see what the pattern is. I know it would be hard to be
precise on it. However, it may well be that some people are assuming financial
responsibilities under spousal pressure, responsibilities beyond their
financial competence, in my uncertain seas.
Senator Meighen: In the absence of anything specific, Senator Angus has wracked
his considerable brain, as has Mr. Mendelsohn, and I doubt that in 24 hours we
will come up with anything better than "thou shalt not collude." Am I
not correct that we are still contemplating, if not a sunset provision, then a
statement of three or five years?
The Chairman: There is a five-year statement in the act.
Senator Meighen: It is down from seven, and we have not debated whether it
should be down from five, have we?
The Chairman: I think the practical issue with other legislation has been that a
two or three year run is needed before a review can be done. A review can then
be done, but it has consumed five years. That has been our experience with
financial institution legislation, which we got from 10 to 5, but we did not go
below that on financial institution legislation.
Senator Meighen: I suspect we will probably end up relying on the provisions of
The Chairman: Would you deal the conditions for discharge?
Mr. Mayrand: Yes. First, I should like to highlight that there was an amendment
in the House on this provision which requires now that the debtor must have
considered the possibility of making a viable proposal. It is not any proposal;
it must be a viable proposal. That is an important point for consideration by
Senator Meighen: Would you repeat that again?
Mr. Mayrand: We are dealing with section 173. The grounds for a position of
discharge when Bill C-5 was introduced were whether the debtor had attempted to
file a proposal. That was amended in the House to reflect that not only was it
a proposal but a viable one, one which had a chance of success with creditors
and which would have been agreed to by the creditors.
Senator Meighen: The court would have to decide what is viable.
Mr. Mayrand: The court will decide that, yes.
Mr. Mendelsohn: It is if the bankrupt could have filed a viable proposal and
failed to do it, so it is quite benign.
Senator Meighen: It is very benign.
Mr. Mayrand: That requirement flows from the discussion we had at BIAC to ensure
that those who have an ability to pay funds into the estate should make their
best efforts. Where there is an ability to make a viable or reasonable proposal
to creditors, that option should be seriously considered by the debtor before
entering into bankruptcy. If it is not properly considered, then the court will
consider that circumstance as grounds for issuing a conditional order of
discharge or simply suspending the discharge of the debtor.
Senator Meighen: Will you go on to deal with that troubling question? While we
would prefer a viable proposal, there has been some testimony that it does not
really make any difference in terms of credit rating whether the debtor has
made a proposal or declared bankruptcy.
Mr. Mayrand: There are many factors. With respect to credit rating, there have
been some changes. The jury is still out determining whether they are
The key change in credit reporting by credit bureaus across the country is that
the time for which you will be reported as a bad risk, if you file a proposal,
will run from the time the proposal is filed. Until that change was made, the
time ran from the time the proposal was completed. If the proposal runs for
three years, you remain with a bad note on your credit record for another seven
years, after full performance of your proposal. That has been changed to six
years from the time the proposal is filed. That makes it comparable to
bankruptcy. It is not better, but it is certainly comparable.
Senator Meighen: Before, it was worse. Now we have done the wonderful thing of
making it comparable. That is real progress.
Mr. Mayrand: That was done only through persuasion with creditors, but creditors
are of the view that someone who files a proposal is still a bad risk. It is a
better risk than a bankruptcy, but it is still a bad risk.
Senator Meighen: However, we do not give that any recognition.
Mr. Mayrand: I cannot disagree with you.
Senator Meighen: That is very troubling. You mention the credit rating and that
it has changed. How is this change effected? Who governs it?
Mr. Mayrand: It is through the credit bureaus and the major creditors reporting
through the credit bureau.
Senator Meighen: Is that a voluntary change?
Mr. Mayrand: Yes. It is an administrative change done by credit bureaus and
major credit granters across the country.
Senator Meighen: There is nothing in this act, or is there, that could be done
to effect that?
Mr. Mayrand: It depends on whether we have full jurisdiction to deal with credit
ratings. Normally, these fall under provincial legislation. Much room is left
to each creditor to decide how they want to assess a risk and report to the
Senator Meighen: If the committee felt we should go farther, then the best we
could do would be with the credit bureaus in the provinces.
The Chairman: Correct, because it is beyond our jurisdiction.
The last item I had on consumers was the issue raised with respect to the
requirement for mandatory as opposed to voluntary counselling of bankrupts. As
you know, that is a 1992 provision; it is not a provision now. Have you had any
further reflection on the question of the principle of making counselling
mandatory? There was a view expressed before the committee by two or three
witnesses that making counselling mandatory was offensive just in principle. I
think the committee would be in favour of counselling, but the question is
whether it should be forced on individuals. You were going to reflect on
whether or not "mandatory" is not a little excessive. Have you done
any further thinking on that point?
Mr. Mayrand: Only to say that that issue was considered by BIAC in terms of
whether it should be mandatory or be assessed and how it should be addressed.
Again, when BIAC looked at it, it felt there was not enough data. It was
premature to revisit the issue of counselling. In fact, I think you will see in
the brief from the CIPA that they also recognize that it was a bit early to
review the rules regarding counselling.
We are planning to do a study to assess the benefit of counselling, how it is
being provided to the debtor, and whether it has a long-term impact.
Counselling was introduced as an alternative to achieve a more effective
rehabilitation of debtors. That study will help us assess after four years
whether counselling is really meeting the purpose.
Mandatory counselling right now is provided pursuant to a directive of the
Office of the Superintendent. That directive leaves plenty of room for trustees
or counsellors to tailor the counselling to the need of the individual who is
going through the bankruptcy process. Many are saying that to make it
discretionary would cause a loss of much of the benefit of counselling and that
it will create all sorts of discussion as to who should get counselling and who
should not. Again, that is something we would like to review in the assessment
of the service to see whether there is a benefit in considering that.
The Chairman: The last item on the list has two components to it. One is the
plea from the Ontario Credit Union Central with respect to future wages which
have been pledged as security against loans. Senators will recall, however,
that this is the only place in the country where this is allowed. In no other
province do they allow you to take as security a future income stream. The
Ontario Credit Union Central was essentially asking for an element of
super-priority on that issue. When it was discussed, I did not notice a huge
degree of sympathy around the table from my colleagues for the notion of even
allowing security to be taken on future income stream, recognizing it is a
provincial responsibility. Have the witnesses from the government reflected on
the issue, and do you wish to make any comments on it?
Mr. Marantz: Our view has not changed. Ontario is the only jurisdiction in which
this is the case. It was a significant matter of policy that we dealt with this
because it did work a hardship.
The Chairman: Finally, we have the issue of whether workers' compensation boards
ought to be treated the same as CPP, employment insurance and taxes. Should
they receive that super-priority or should they be at the lower level of
priority with the GST and other government sources of taxation?
Mr. Tobin: We had a long discussion about that in BIAC to the point of inviting
workers' compensation bodies to make presentations to one of the BIAC working
groups. The consensus following the presentation was that Bill C-5 should
simply reinforce what was decided in 1992.
Mr. Marantz: Mr. Chairman, because it is historically a difficult and complex
technical issue, I have provided to the research staff copies of a memorandum
outlining the history of the provision.
The workers' compensation boards did not express entirely the current
legislative scheme requirements. They are entitled to obtain security. They
said they could not negotiate with an employer in order to get a security
arrangement. They do not need to negotiate with an employer. The statute
provides that if they have a registration scheme within the province or
territory that is of general application, then the provincial statute can
provide for their security against the employer and that must be registered.
The whole idea is that any lender looking to make an advance to the borrower
can determine immediately whether there are workers' compensation arrears in
place. They would protect themselves that way.
They have asked for more than they ever had under the pre-existing law. What has
been offered under the statute gives them a better position then they had under
I could go through the memo. It is five or six pages long. It is quite
technical. It explains that they have a $24-million problem -- by their own
admission -- and that they may transfer that problem into the general business
community which would have a much more severe dollar impact. It would
immediately impact, for example, on borrowing base and margining.
Senator Angus: You covered this earlier on, but let us return to super-priority.
I was distracted earlier when you were dealing with the environmental issue. I
gathered you were saying that, in terms of addressing the level playing field
of the different types of lenders, either on the property or on machinery and
equipment, that it was too complicated, that it was awkward and difficult, and
that you had to make a value judgment as between the two.
How would you feel about removing the super-priority? Could you elaborate on the
extent of unanimity or consensus at BIAC on this issue?
Mr. Tobin: I would like to have Mr. Hains deal with that. Of all the issues,
senator, it is difficult to say which one was the subject of most or least
discussion. This one clearly was in the former camp.
It is a well-worn topic, to say the least, in terms of arriving at this degree
of super-priority over a certain class of assets and a certain type of assets.
At this point, we would be very reluctant to enter into discussions that would
change them. I can only give you the facts from where we sit. Because it was so
well thought out and discussed, certain people felt the priorities should be
broader than that. Some of the regulators went so far as to say that we should
be giving them more.
Senator Angus: That is understandable. That is an interested position. I thought
the trend was to take away some of this special rights of government in the
bankruptcy legislation. Here, you are taking away one and adding a new one.
I am not an anti-environmentalist by any stretch. I find this clause creates a
substantial hardship or inequity for the life insurance companies who lend more
particularly on real property. You are giving the authorities a special
Mr. Tobin: The whole area of environmental issues was one which merited, after
some reflection, some special consideration not only from the viewpoint of
priority but from the viewpoint of how the trustee can deal with it. They can
go in, examine the site without being deemed to have taken possession of it but
deemed to have actually walked in. They can evaluate it.
All those things were in recognition of the concerns that people have about
environmental damage in this day and age, as well as the concerns people have
about taking responsibility for those sites. Not only was the notion of
priority examined, but it was done in the context of how to handle, in this day
and age, sites which are either contaminated or potentially contaminated.
If you go back to pre-1992, the situation was that many were orphaned. Here we
are asking how to ensure that fewer sites are orphaned, but also how to have
some recognition that a minimum level of the assets must go to cleaning up.
Senator Oliver: Spread the risk.
Mr. Tobin: We cited reasons, senators, why that would be difficult to do.
Mr. Marantz: The super-priority is not a "super" priority. It is not
what you think it is. The super-priority has no practical economic effect.
Let me explain that. You have a piece of land that has contamination. An
industrial plant has been leaking oil into the ground.
Senator Angus: The evidence I heard latterly was to the effect that this is
really aimed not at contamination or at accidents which occur during the course
of an owner's occupation of land but, rather, long-term, earlier contamination
which may have occurred 25 years ago.
Mr. Marantz: Either way, it does not matter, because once the contamination is
there, whether it happened yesterday or 50 years ago, you have a piece of land
and a mortgage lender which has placed a mortgage without doing any due
diligence. Perhaps the mortgage has been there for a long time and the borrower
is in default. The lender wants to take possession of the property and sell it
under the power of sale terms in the mortgage. The lender will not take
possession of the property because the lender has a risk picked up relative to
the environmental contamination.
Let us assume that he negotiates an occupancy agreement with the provincial
ministry responsible and then goes to sell the property. The property may have
a mortgage of $1 million. Any buyer who will buy the property will discount
from the sale price the value of the environmental contamination. That is
clear. If it will cost $2 million to clean up the property, and it is only worth
$1 million in a cleaned-up state, no one will buy it. If it only costs $500,000
to clean-up, your selling price is reduced by that $500,000. That is an
immutable fact of life.
Also, the cost of clean-up extends back to previous owners under provincial law.
The super-priority then comes into effect.
Senator Angus: The super-priority which is not a super priority.
Mr. Marantz: It is not a super-priority because you already have this as an
economic reality. What happens if the property costs more to clean up than it
is worth? The lender abandons the property. What will happen? The province will
go in. If there is leaching into the ground water, it must take steps to
contain the leaching. The province has now put money into the property. The
owner has abandoned it. The mortgage lender has abandoned it. That is where the
super-priority comes in.
When everybody has walked away from it, the province has spent who knows how
much to clean it up; now they want to do something with it. They do not own it.
We have provided in the super-priority provision for the province, the
regulatory authority at that time, to have a charge on the property. That
enables it to go through a power of sale and enforce that charge in accordance
with ordinary provincial security law. The statute takes nothing away from
Senator Angus: It provides a mechanism for clean-up.
Mr. Marantz: It provides not only that, but a mechanism for the province at the
end of the day to recover from the abandoned property what money it has put in
or to get some measure of recovery.
My submission is that this is a totally benign provision. You have a problem
because the life insurance industry, I suggest, has exaggerated the problem.
They have asked why they should be the only ones to share the loss; others
should share the cost, too. First, no one else today shares the cost.
Senator Angus: They are just getting even for section 124. They know how to play
Senator Meighen: There was some suggestion made to me that life and health
companies may lend up to 30 per cent on office buildings and the like where it
is less likely that this problem will arise.
Mr. Marantz: The practical ramifications, I submit, are de minimus.
Mr. Mendelsohn: May I add that while nothing dramatic has been done, as has been
explained by Mr. Marantz, if there were provisions that extended priority to
all categories of assets, that would be a dramatic change in the law. That
would be a very significant dramatic, and I would suggest impractical, change
in the law.
Senator Hervieux-Payette: I want to know when your study about credit cards will
be ready. Do you have a date?
Mr. Mayrand: It is a study on the causes of bankruptcy.
Mr. Maynard: This study which will deal with the causes of bankruptcy should be
completed at the beginning of summer. We should get the interim reports at the
beginning of summer, in other words around the end of June of the beginning of
Senator Hervieux-Payette: I wonder why the study was not made before we were
given the bill. It would have been useful to have it before as opposed to
Mr. Maynard: Obviously, this study serves a purpose. It will help us a great
deal at the next roound of amendments to the legislation. The principle of a 5
year review will be adopted, and the period will begin immediately after the
adoption of the Bill. The results of that study will be helpful to those who
will review the provisions of the law in the future. We didn't have it in 1993
when we started the discussions which lead to Bill C-5.
The Chairman: I should like to thank those from the department for all the time
they have spent with us in the last month or so.
The committee adjourned.