Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

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 department.

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 arriving soon.

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 comment.

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 products.

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 contract.

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 CCAA.

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 statement?

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 uncertainty.

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 that.

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 one.

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 reduction.

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 it, clearly.

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 taxidermist.

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 super-priority rules.

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 government.

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 times.

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 provisions.

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 her proposal.

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 appealed.

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 result.

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 revised bill.

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 due respect.

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 BIA.

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 require amendments.

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 discharge.

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 to us.

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 provisions.

Mr. Mayrand: Yes.

Senator Stewart: I am very interested in the fact that this study is being set up.

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 20th century.

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 of cards?

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 school"?

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 curriculum.

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 sense.

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 study.

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 us.

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 new change.

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 creditors.

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 claims.

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 reviewed.

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 Bill C-5.

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 that correct?

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 BIAC.

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 another point?

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 anti-collusion protection.

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 on Thursday.

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 act.

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 the court.

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 sufficient.

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 credit bureau.

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 pre-existing law.

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 priority.

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 anyone.

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 the game.

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 July.


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 after.


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.

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