Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 7 - Evidence - Meeting of February 6, 2008
OTTAWA, Wednesday, February 6, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to examine and report upon the present state of the domestic and international financial system. Subject: Bankruptcy and Insolvency.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: I will call the meeting to order. Ladies and gentlemen, as you know, this is the Standing Senate Committee on Banking, Trade and Commerce. I expect more senators to arrive shortly. Let me introduce the members of the committee. I am Senator Angus, from Montreal, Quebec, and I am the chair. We also have the deputy chair, Senator Goldstein, also from Montreal; the distinguished Senator Ringuette, from New Brunswick; Senator Harb, from Ottawa; Senator Moore, from Halifax, Nova Scotia; and Senator Massicotte, from Quebec.
We are continuing our study of the framework legislation on bankruptcy and insolvency. I believe the witnesses are all experts in the field. Therefore, I do not plan to go into detail about the convoluted lead-up to these particular hearings. However, because these hearings are being covered — on television by the CPAC network and online via the webcast — it behooves me to go into some background.
[Translation]
On December 13 last, we adopted Bill C-12, an Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada Act (2005). Bill C-12 was a re-print of Bill C-62, which was introduced during the First Session of the 39th Parliament and adopted on third reading by the House of Commons on June 14 last.
[English]
Here are a few facts to give you a bit of history about the background of this committee: In November, 2003, upon concluding a detailed study on the bankruptcy and insolvency regime in Canada, which had also been studied in depth by the stakeholders, we issued a report entitled Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. We made some 53 recommendations related to consumer insolvency, commercial insolvency and administrative and procedural issues.
The convoluted part that I alluded to is the following: On November 12, 2005, we had before us a bill entitled Bill C- 55, which was the government of the day's legislation incorporating recommendations from the stakeholders after their lengthy study and incorporating recommendations from this committee. Unfortunately, it came to us at 4 p.m. one afternoon with a request that we deal with it and refer it back to the Senate the next day. That is not our style. We are here to provide sober second thought and to review the legislation. In this case, it was clear to us, not only from our own knowledge but from indications from officials, that many amendments were required.
The dilemma was that the government was asking for the bill immediately. The compromise worked out was that we would give them the bill on the condition that it would not be proclaimed into law until such time as this committee could give it a full and fair review and study. The bill passed but was not proclaimed.
There was much confusion about how to rectify it. When attempts were made to refer the bill back to this committee for study, it could not be done because it had already been passed. Bill C-62 that I mentioned was introduced during the previous session but died on the Order Paper. This session, the government introduced Bill C-12, which is a long series of amendments to the original Bill C-55 enshrined as Chapter 47 in the Revised Statutes of Canada 2005.
The bottom line is that just before Christmas, we were faced once again with the dilemma: Will Parliament still be sitting in February and, if so, will Bill C-12 die on the Order Paper? It largely contained all the amendments that we knew were needed to make Bill C-55 user-friendly. Therefore, this committee, in its wisdom, decided to report it back with a long series of observations so that it could be passed and receive Royal Assent along with the old Bill C-55.
However, the condition was that this committee would still do its study of Bill C-12. The ministries of industry and labour and human resources have indicated that they are working on ongoing maintenance amendments to keep this framework legislation up to speed. These hearings are designed to obtain stakeholders' input on Bill C-12. This is, in effect, a post-passing review of Bill C-12.
Without further ado, I introduce our witnesses today from the Insolvency Institute of Canada: Pat McCarthy, of Borden Ladner Gervais; Philippe Bélanger, of McCarthy Tétrault, Montreal; Susan Grundy, of Blake, Cassels & Graydon; and Andrew Kent, of McMillan Binch Mendelsohn, Toronto.
Welcome. I know you appreciate what has been happening and you probably share the frustration that we senators have. As well, I am sure you understand the work of this committee to develop a good set of laws for this most important area of law in Canada, which is designed to protect individuals who fall into financial difficulties and to assist businesses that might be saved with a little restructuring.
Mr. McCarthy, please proceed.
Senator Goldstein: Before we proceed, I have two declarations to make for the record. First, I am a founding director, member emeritus and fellow of the Insolvency Institute of Canada. I do not believe that that in any way affects my judgment with respect to what we will hear.
Second, Mr. Andrew Kent is managing partner of the firm with which I am associated — not actively at the moment but associated nonetheless. Although he is also a very good personal friend, as are the other three, I do not believe that will affect my ability to be objective about what I will hear. I want all of that on the record.
The Chair: You will file the usual form to confirm that with the clerk?
Senator Goldstein: Yes, I will.
Patrick McCarthy, President, IIC and Lawyer at Borden Ladner Gervais LLP, Insolvency Institute of Canada: Senators, thank you very much for the opportunity to be here. As you say, in a way this is a review of Bill C-12 as well as the beginning of the process for the next round. From both perspectives, we appreciate the opportunity to speak to you.
I do not need to tell Senator Goldstein much about the Insolvency Institute of Canada, IIC, but for those of you who do not know, the Insolvency Institute of Canada is a limited membership organization composed of 125 insolvency professionals. The members tend to be the leaders in their practices in both the law firms and accounting firms in which they are involved, as well as in the communities in which they practice. Although you have four lawyers before you today, our membership is about 40 per cent comprised of trustees in bankruptcy. We also have representatives of regulatory institutions and the four major Canadian banks.
The Chair: Do you have any judges in the membership?
Mr. McCarthy: Judges are often in attendance at our conferences, but they are not official members.
The Chair: Judge Farley and Judge Winkler are not honorary members. I believe that he is no longer a judge.
Mr. McCarthy: It is a bit outside of our usual process, so we extended him an invitation to join us as soon as he was able to after leaving the bench. He was at our most recent congress.
The Chair: Did he accept?
Mr. McCarthy: Yes, and it is always a pleasure to have him there.
The Chair: Senator Biron, from Quebec, has arrived.
Mr. McCarthy: The primary focus, not exclusive focus, of the Insolvency Institute of Canada is on corporate and commercial restructuring. We are the people who, when you read about Air Canada and the former Canadian Airlines, primarily lead those restructurings in one capacity or another. The people before you today, myself included, practice exclusively in the corporate insolvency and restructuring. Therefore, we are not in a position to respond to questions today that relate to personal bankruptcy. We four do not have that expertise, although some members of the IIC practice in that area.
The Chair: There are many trustees.
Mr. McCarthy: The practice of many of those trustees consists of corporate restructuring in the role of monitor.
The Chair: They act as the monitor.
Mr. McCarthy: Yes. They are often the receivers in high profile cases across the country. That is their role. They are active participants in the area in which we work.
Our mandate began in 2000 with an internal review of what we thought were the important issues that needed to be addressed in insolvency law. That was taken to our membership in 2001 with a democratic process in which we voted on those issues that we felt needed to be addressed. We carried on whittling that number down to submissions that were made to Industry Canada to form some of the information that was before you in the excellent 2003 Senate report that was prepared. Members of this institute also appeared as witnesses at the time of that process.
I need to stress, about the Insolvency Institute of Canada, that we have no political agenda. We are here only in the sense of whatever system you create, we will work with and deal with on a day-to-day basis. Our mandate, on behalf of our members today, is to try to assist you in making a system that will work in the best way possible for all concerned.
We were gratified by the intervention of the Senate on Bill C-55 from the perspective of the IIC. It was a great example of exactly the way that the Senate can benefit Canadians with sober second thought on proposed legislation that was rushed and needed corrections. It gave us the opportunity to work with Industry Canada. We are appreciative of the opportunity to make submissions to them on matters that we felt needed to be fixed in Bill C-55. As a result, we feel that the intervention of the Senate in that proposed legislation has produced a remarkably good result, starting from something that we felt we could support but that we had a lot of difficulty with the problems that could have fallen out of that particular proposed legislation had it not been fixed.
The Chair: Are you aware of one or two of the shortcomings of Bill C-55?
Mr. McCarthy: Yes, I am aware of those.
The Chair: As originally drawn, they were apparently rectified in the budget bill last year — Bill C-57, I believe. There were problems in respect of structured products and derivatives that inhibited banks from extending the necessary financing, because they could not get legal opinions with that type of a lacuna. Are you aware that that shortcoming was fixed in another place?
Mr. McCarthy: I was not aware of that. Mr. Kent practices actively in that area.
Andrew Kent, Member, IIC and Lawyer at McMillan Binch Mendelsohn LLP, Insolvency Institute of Canada: We are aware of the budgetary changes that were made to the legislation. Unfortunately, they were not particularly well- informed from an insolvency perspective, and there are concerns about the detail by which those reforms were implemented.
One of the issues that Mr. McCarthy would be happy to speak to is the interaction between those amendments and their impact on the ability of companies to restructure. We believe there will be problems because the reforms were not informed by an insolvency perspective. They did address the concerns of the derivative suppliers, people who enter into derivative transactions, but they did not fully work out the implications for companies trying to restructure.
Mr. McCarthy: There is a submission before you, which is rather short deliberately, identifying what we saw at the time as the principle issues that we would like to see addressed in Bill C-12. One of those — the hobby horse of mine — is what is called the eligible financial contract issue as mentioned in there.
Just to complete our introduction, Mr. Bélanger will make a few comments.
[Translation]
Philippe Bélanger, Member, IIC and Lawyer at McCarthy Tétrault LLP, Insolvency Institute of Canada: Mr. Chairman, generally speaking, the Insolvency Institute of Canada is very pleased to support the proposed amendments to Bill C-55. Our concerns did in fact mirror those of the Senate, when you consider the scope of the recommended changes to Bill C-55 and compare them to the ones proposed in the case of Bill C-12.
A significant number of concerns were addressed in the time that elapsed between Bill C-55 and Bill C-12. As drafted, Bill C-12 is more than acceptable and represents a major improvement to a system that had become outdated and that was in need of immediate reform.
You may have heard that the Americans sometimes tend to laugh at our system, referring to Bill C-36, or the CCAA, as ``Chapter 11 without rules.'' Until these reform measures were introduced, companies like Air Canada were restructuring under legislation containing a mere 22 provisions. Therefore, comprehensive reform has long been awaited. The proposed amendments to Bill C-12 are extremely important.
Firstly, the IIC favours the implementation of these reforms as soon as possible. We support the measures taken by the Senate to ensure that the prevailing political situation does not prevent the quick implementation of the legislation's provisions. Weaknesses in the Canadian economy are already being felt and quite frankly, insolvency professionals are anxious to have access to codified restructuring tools identified much more clearly in this legislation than in a context managed by the courts.
Secondly, we recommend that this legislation be reviewed as soon as possible after it takes effect. Historically, this type of legislation is reviewed every five years. You will note that in our submission, we recommend a review after three years. Since the last real reforms came into effect in 1997, we feel that a review should be undertaken as soon as possible after this legislation comes into effect to address and quickly deal with any shortcomings identified. We know that we can count on the Senate, since it has always been very interested in this legislation. So then, many of our concerns are reflected in the 2003 report.
And, if I might also say, Quebec strongly supports this legislation for two reasons. First, it is important to understand that the CCAA, the Companies' Creditors Arrangements Act, is designed for businesses with at least $5 million in debt. That means that a certain number of small and mid-sized companies, or SMEs, are not eligible to use the CCAA restructuring provisions. However, in Quebec, the vast majority of business restructuring operations proceed not under the CCAA, but under the Bankruptcy and Insolvency Act, which sets out a much simpler process, namely the requirement to file a notice of intention and a proposal within six months. Until codification, a vast array of restructuring tools was not available under the Bankruptcy and Insolvency Act. Some of the tools available under the CCAA are traditionally not available to businesses under the BIA. These include DIP financing and the ability to terminate contracts. As I said, these tools were, or are available under the BIA and there is no reason why a large company should have access to these measures, while an SME does not. In some respects, the legislation democratizes the restructuring tools available to businesses.
In Quebec, between 60 per cent and 65 per cent of company restructurings that take place historically proceed under a notice of intention. From where I stand, it is as if someone has just bought me a new tool box containing tools usually available under the CCAA.
Secondly, also from a Quebec perspective, to the extent that we operate under a civil law system, our judges have historically interpreted their inherent jurisdiction less broadly. Senator Angus alluded to Judge Farley, one of the great proponents of the notion of inherent jurisdiction, a notion that is far less popular, I would have to say, in a civil law system like ours.
In terms of codifying a certain number of jurisprudence practices, DIP financing practices have been codified in the United States for over 30 years. In Canada, however, DIP financing is associated with a judicial practice stemming from ``inherent jurisdiction.'' This is a problem, not only because taxpayers unable to read legislation codifying the practice are not at all reassured, but also because in Quebec, judges are not convinced that they can invoke their inherent jurisdiction or wave their magic wand, so to speak, to authorize important DIP financing.
In this respect, the legislation levels the playing field across the country. Not only are tools available to everyone, but there is less room for discretion and less emphasis placed on courts' inherent jurisdiction. The legislation codifies practices that are now that much clearer to everyone. For these two reasons, I have to say that the bill and the comprehensive reform proposals have been very well received in Quebec.
[English]
The Chair: It is always nice when Quebec is pleased with a federal law.
[Translation]
I may have been mistaken earlier. The clerk has just informed me that Bill C-12 and Chapter 47 have not yet come into effect. This will need to be verified.
[English]
Senator Goldstein: Yes, but there is a reason for that.
The Chair: I said a moment ago that they had been proclaimed. Are they not?
Senator Goldstein: They are proclaimed, but they are not in force. There are a number of forums and regulations that have to be drafted. I understand that the department is working on those furiously, and, hopefully, we will have them available by late spring.
The Chair: For those officials that may be in the room — I know there are some — this is very pressing, very important and very urgent. You have this strong exhortation. Now that we have completed what we did on December 19, let us get these into force.
Another one of my colleagues has arrived, Senator Tkachuk from Saskatchewan, who is very interested in our proceedings and a long-time member of our committee.
The introductions are over and Quebec is happy. Who is the next speaker?
Mr. McCarthy: We can, if you wish, walk briefly through the points that we had identified; they are principally technical points. We are happy to do that or respond to questions, whichever you prefer.
Senator Goldstein: We have read it, so we should go to questions.
The Chair: Senator Goldstein is saying that we all have copies of your submission, and it is highly technical. Therefore, we could go straight to questions.
[Translation]
Senator Massicotte: I want to thank our expert witnesses for helping us with this process. Collective agreements are a controversial subject. Take, for example, a company experiencing financial problems. There is some debate as to whether a collective agreement may threaten that company's very survival. This question was debated several years ago, and the debate continues to this day.
Is it reasonable to think that a mechanism should be put in place to compel union representatives as well as the judge to work out an agreement, one where the judge could, providing certain conditions are met, have the right to call into question the application of an existing collective agreement?
As you know, the Americans allow for this possibility. However, in this instance, the rules do not or may not necessarily apply because of jurisprudence. How do you feel about this?
Mr. Bélanger: In jurisprudence, this has been a very controversial subject. In a case involving Jeffrey mines, the Quebec Court of Appeal ruled that a collective agreement could not be terminated. You will note that we touch on this issue very briefly in our submissions. Generally speaking, however, the Insolvency Institute of Canada is not in favour of the proposed new scheme for dealing with collective bargaining agreements.
Let me elaborate on that statement. You are correct to say that the American system allows a company, under certain circumstances, to terminate a collective bargaining agreement, once it has negotiated in good faith with the union an alternative agreement that the courts deem to be reasonable.
In 2003, the Senate and the Insolvency Institute of Canada expressed support for a system that would be fairly similar to the one in the United States. A collective bargaining agreement cannot be treated like just any contract. I think we all agree on that. However, in our view, the reform measures already initiated fall short in two respects.
As you probably know, the proposed reform does not, under any circumstances, allow for a collective bargaining agreement be terminated. The authority of the court is limited to allowing a notice to bargain to be served. The first problem with this arrangement is the test imposed to force the parties to negotiate. In our view, this test is too onerous, under the circumstances. It must be demonstrated that negotiations have taken place in good faith, that the absence of collective bargaining would make reaching a settlement impossible and that the company would suffer irreparable damage.
This is the test recommended by the Senate for allowing a collective bargaining agreement to be terminated.
Serving notice to bargain is all that is permitted in this instance and practically speaking, the parties are under no obligation to reach a settlement.
This brings me to the second problem, the fact that the system in place does not guarantee a final outcome. Once the court has authorized the serving of the notice to bargain, if, after several months have passed, the parties fail to reach an agreement, they cannot go back to court and inform the judge that he must arbitrate a settlement between management and employees.
This is not what the Insolvency Institute of Canada would like to see in place as a political position. What we would prefer to see, first and foremost, is a guarantee of some closure to this process. Ultimately, there needs to be a way to bring the parties to reach a settlement. When a financial restructuring occurs, timelines are critical. If negotiations are protracted and no clear framework for negotiating is in place, as we saw with the informal negotiations in the case of Air Canada, there is a danger that the process will be drawn out and restructuring will be impossible.
One of the practical suggestions made by the Insolvency Institute of Canada calls for a final arbitration process where, after a certain amount of time has passed and a satisfactory agreement has yet to be reached, the parties would go back to court, or go before an arbitrator who would impose on them a reasonable collective agreement.
Employees are participants in the restructuring process. They should not have to bear the full brunt of the restructuring. However, if they are being asked to make a compromise, then the parameters of that compromise should be framed.
Summing up, the two problems noted with this process are the overly onerous test for serving a notice to bargain and the lack of a guaranteed final outcome to the process.
Perhaps my colleagues may want to add something more.
Senator Massicotte: Do you agree with that position?
[English]
Mr. Kent: Speaking personally, when we tried to develop our issue list in 2000-01 within our institute, I advocated leaving this issue alone because there have been efforts to reform in the 1980s and 1990s. The ship of reform had wrecked on this issue. We were very keen to have other reforms. However, when we had our electronic voting — I was chairing the meeting at that time in 2001 — there was a motion from the floor that we should insist that the reform you are speaking of be considered. That carried overwhelmingly.
When we came back to Industry Canada in 2002, we said we needed to adopt something similar to the U.S. model. We were very pleased to see the Senate in 2003 make that recommendation.
It would be a worthy matter of further consideration. I have read with interest the transcripts of our friends from the labour movement who testified. This is not out of any hostility toward the labour movement, but from our experience the assessment is that the large companies that are unionized will probably survive anyway. However, many small- and mid-sized companies are still unionized in this country. Most people feel that those companies are much less likely to reorganize if they get into trouble now. Reform will mean that they will be liquidated rather than reorganized.
[Translation]
Senator Massicotte: The representatives of the major unions were here last week. The first point raised after this argument was made was that despite the legislation — or the legislation's lack of clarity — their interests are mutual: obviously, employees want to work and earn a salary to put food on the table. They have a practical interest in wanting to find a solution. Clearly, however, the quest for a solution is closely tied to the interests and motivation of both parties.
The old legislation was not clear and it is perhaps this lack of clarity that motivated the union to come up with a solution. Does the new legislation lessen the chances of an amicable settlement between the union and the employer, or the trustee?
[English]
Mr. McCarthy: In Alberta, there are relatively few unions with which we deal. However, having said that, we do come across them.
The key element in the Companies' Creditors Arrangement Act and in the Bankruptcy and Insolvency Act is that you do have stakeholder groups and the objective always is to create enough dynamic tension where each has enough to win and enough to lose that they are able to resolve their issues by negotiation with a minimum of direct intervention by the court.
I always imagine it as the court turning up the heat a little here and there to ensure that everybody is uncomfortable enough but not too uncomfortable to stop an agreement being reached.
As Mr. Bélanger has clearly pointed out, the difficulty is that there is now no alternative that could be worse than a negotiated arrangement for the unions. Therefore, there is less incentive. There is an incentive, obviously, from a business perspective. However, there is a risk that without some downside that something worse could happen; it is much more difficult to be confident that there will be a resolution. Ultimately, in some cases, there will not be a resolution that people negotiate, and there has to be something imposed in order that everything else can go forward.
[Translation]
Senator Massicotte: Mr. Chairman, I may have some additional questions later, if there is any time remaining.
[English]
The Chair: There will be a second round.
Senator Harb: In your submission, you mentioned the collective bargaining agreement. You said that you continue to have reservations about whether the proposed new scheme for dealing with collective bargaining agreements is workable.
Could you elaborate on that?
Susan Grundy, Member, IIC and Lawyer at Blake, Cassels & Graydon LLP, Insolvency Institute of Canada: Perhaps I can take a stab at answering that.
My reservation is that it is really important to get to a solution as quickly as possible with regard to restructuring. Being in a formal insolvency process is bad for business. Customers do not want to buy from a company if they are not sure if it will be around. Suppliers do not really want to supply to a business if they are not sure that they will be able to have an ongoing customer. Therefore, it is important to try to get the process completed as quickly as possible because that is what will make the business most valuable. That is good for the employees, creditors and, hopefully, it is good for everybody.
However, the process that is outlined in Bill C-12 means there could be a problem getting negotiations going with the union — and sometimes part of the problem a business has is that the owners have been more generous than they can afford to be in what they have promised to pay the employees.
Therefore, in order to sell the business or restructure it, there needs to be a negotiation. If the list of conditions that Mr. Bélanger mentioned all have to be satisfied before someone can even get the negotiations started, that puts a huge delay on the process. We believe it is important to try to have the type of tension that Mr. McCarthy mentioned to get the process going, so there can be that type of negotiation.
Our organization is not hostile toward labour. In fact, most of us have had extensive experience in dealing with unions. We have a much better understanding through our experiences over the last few years of the issues they face and the concerns of their members. In fairness, they are much more familiar with the dynamics of the insolvency process, but we do feel this could be improved.
Senator Harb: Have you come forward with some sort of recommendation of how you would improve it? What sort of a change to the amendment would have to be made that, in your view, would resolve the matter?
You do not have to tell me now, but if you do not have the answer, I would suggest you go back, think it through and bring it back to the department; perhaps with a copy to us, explaining how it can be done.
Mr. Bélanger: The suggestion being made is to have an end game. From a practical perspective, it would be a clause under which the parties could readdress the court and submit the collective bargaining agreement issue to a binding arbitration process.
Practically speaking, instead of limiting the powers of the court to the issuance of a mere notice to bargain, you could also go back to court and tell the court that you have not been successful in negotiating a satisfactory collective agreement with the union, and you now need to enter into a process governed either by a judge or by an arbitrator who will provide finality to this.
If I may just use this as an example, you may recall that in the case of Air Canada, Justice Farley at the time told the parties involved that if they did not sit down and negotiate a deal, he would render a judgment as to whether they could or could not terminate a collective bargaining agreement.
That goes back to the point made by Mr. McCarthy. If people feel there is an end game that will be imposed by either an arbitrator or a judge, they will probably be more motivated to work out a reasonable and agreeable solution than if there is no end game. In this context, after the issuance of a notice to bargain, nothing can really happen, practically speaking.
Oddly, we are indirectly suggesting that basically the law be drafted as Justice Farley used to present, ``Either you sit down and agree, and I will have you referred to Justice Winkler; or I will determine for you whether or not, legally, a collective agreement is something subject to termination.''
Obviously, here the agreement is not subject to termination. It is clear, but there should be finality to the process.
Senator Harb: We need to look at an ideal system — my colleague brought up the American system. Obviously, there would be other systems existing around the globe. The Europeans have quite a bit of experience in the field, as well as the Japanese and elsewhere.
Is there a system, in your view, which, in essence, responds to the needs of both the shareholders of a corporation as well as the workers, that you feel we should explore? Have you done any research on that? Are you aware of a system that you feel is very good, the type of system we should be introducing here?
Mr. Kent: The institute's position has been that the U.S. model, as it evolved, is a good model. Initially, it was too broad, and there was a concern that it was subject to abuse. It did not fairly protect the rights of workers. There were movements to strengthen the position of the unions and to narrow the powers of the debtor.
When we say we believe it is a good model, we are not suggesting Canada should adopt it as is. In 2003, I believe this committee recommended a modified approach. That approach was well-received within the institute. If this committee was to recommend again what it recommended in 2003, it would be very well-received as a modification of the proposal south of the border.
There are practical advantages in Canada to have a business insolvency system that is not unnecessarily incompatible with the U.S. system because we have so many enterprises that operate on both sides of the border. Where there is a reason to be different, let us be different. However, there is some advantage in having systems that have some commonality.
The Chair: Basically, all of the questioning has been around whether or not we open up the collective agreement as we do with all other contracts in the case of insolvency. We made recommendations in our 2003 report, and they were not adopted by the government in Bill C-55 or Bill C-12.
The unions were here last week. You say that you have read their transcripts, and they are not too hot on this subject.
If I understand you correctly, do you feel there is some halfway measure, which is set forth in your document?
Mr. Bélanger: The document here is quite brief on that topic. The recommendations made by the committee on Bill C-55 are much more elaborate with respect to the proposed solution, which I answered in response to Senator Harb's question.
Senator Ringuette: With respect to your example of Air Canada and Judge Farley's almost position on the issue, Air Canada was a particularly unique situation because it was insolvency after a takeover. Therefore, they had two different sets of collective agreements to cover pilots, maintenance crew, managers, officials, et cetera.
That was a very particular and unique situation that we would not normally see in the everyday insolvency situation. I am not as aware as you may be of other insolvency situations that have occurred after a major takeover. Could you provide other examples so that I could agree with you?
With regard to your example of Air Canada, the issue of the collective agreements was that there were two different sets of collective agreements, one that had been attached to Canadian Airlines and the other one to Air Canada. From that arose the comments from the judge in this situation.
Mr. Kent: The senator is right. Air Canada was a unique situation. It was complicated by the merger of Canadian Airlines and Air Canada and the separate bargaining units that existed. All those complications made the employee situations difficult to deal with.
Air Canada was also unique because it was such a large case. Much of our concern about the proposals is not so much that Air Canada's that are exceptional, but the many other businesses that are not as large or will not receive as much profile.
In Ontario, which still has some unionized manufacturing companies, we saw situations in the press very recently of unionized companies that liquidate. The allegation is made, rightly or wrongly, that there is a lack of opportunity to negotiate, and, as a result of that, this process failed.
I have certainly been involved in situations. There is one case old enough now that I can talk about it in a way that is not controversial. It was a company called Alloy Wheels, which was the largest private employer in Barrie. It made wheels for the automotive industry. It had been a Volkswagen plant.
It was privatized, bought by South African interests. They ran it for a number of years and encountered some difficulties. They asked the employees for concessions. I believe the union thought that management was overstating the situation. As the labour representatives testified last week, from time to time management exaggerates when negotiating with the union. There was suspicion and the employees refused the concessions. The company filed for bankruptcy, did not try to reorganize and the company was liquidated. There were sad stories in the press because this was the largest employer in Barrie; there were no other jobs at the time. There were many quotes from employees saying that if they had known this would happen, they would have negotiated. There was a failure in the bargaining process. Part of this is the dynamics of the unions. For union locals, someone who will be aggressive in dealing with management is elected. There are efficient political organizations that are built to negotiate well with management.
The problem with insolvency is multi-party negotiation. The time zones and rhythms of the negotiations are quite different. Many unions are bad at those negotiations, just as many creditors used to be, and some still are bad today. It is a different process. The concern we have is that without a framework, the bargaining will simply not happen.
I was involved in a case for a company last year that people thought would be liquidated. The union quickly agreed to convert the pension plan from a defined contribution plan to a defined benefit plan. That business was reorganized, but some investors refused to invest in the reorganization thinking that it would never happen. If the union had been one or two weeks slower, the business would have been shut down.
Senator Ringuette: In that respect, we have to look at historic issues. We also have to look at what is happening to human resources globally. All of you, I feel, will agree with me that the global pressure brought about by production from China and India is putting a great deal of pressure on our businesses to reduce costs in order to remain competitive, and so they cut wages. That is the only way that they will be competitive. It is my view that that is a bad move for the future of insolvency. We could discuss that all night.
My other question is about the current work being done by the department to draft the regulations and the various forms with which you will have to work. Are you being consulted on that? We believe that, at times, the regulations are as important as the legislation.
Ms. Grundy: Yes, we are being consulted. They have been most helpful.
Senator Moore: A short while ago, the chair asked whether the issues outstanding from Bill C-55 had been tidied up in last year's budget. Mr. Kent, you said that some changes were made, but they were not informed changes and not quite appropriate because they did not do what you had hoped or what should have been done. Can you give us some of those details along with some examples?
The Chair: To be clear, it is one narrow area. It was not all the issues from Bill C-55, which are dealt with in Bill C- 12. One issue was that the government felt they had to move ahead quickly on it. It is a great question.
Mr. Kent: There was an effort in the budget to modernize the insolvency laws around credit derivatives and other types of derivative transaction swaps to align Canada more with the way the world had moved on in other jurisdictions. This was a result of pressure from the people who deal in that type of product — and important from a financial perspective. We are not being critical of the need to address the change. There was a need to reform and, fundamentally, the objectives of the reform were appropriate.
The difficulty is that every time a problem is fixed in the insolvency world, another one can be created. The people who were fixing one problem were not paying close attention to the new problems they were creating. Mr. McCarthy has a particular interest in some of the new problems they have created. Our concern was that in fixing one problem, they did not fully appreciate the new problems they were creating.
The Chair: Do they remain extant in Bill C-12?
Mr. McCarthy: Yes. One of the submissions that we made, and one of the pet hobby horses of mine, because I work primarily in Western Canada, is that we see many forward contracts — derivatives for various types of things — and many commodity contracts, such as one that might run for 20 years for natural gas, oil or electricity.
The Chair: Are they hedging?
Mr. McCarthy: Some are hedging and some are direct contracts. There are both types. They are caught within this web of the derivative laws and are categorized in insolvency legislation as ``eligible financial contracts.'' The logic is that those contracts are a type of insurance against price changes. If you find yourself in a transaction with someone who has guaranteed that you will get a certain price over a period of time or protection against a change in price and if that person suddenly is insolvent and can no longer give you that protection, it is only fair that you should be able to escape instantly from that contract and go somewhere else to find the type of protection you need in order for your forward costs and business to be stable, knowledgeable and manageable.
That has been done with great efficacy in Bill C-12. It is an improvement over Bill C-55. I have a particular problem, though, in that among the categories of contracts that cannot be terminated now in Bill C-12, in both the Bankruptcy and Insolvency Act, BIA, and in the Companies' Creditors Arrangement Act, CCAA, have been included in eligible financial contracts. I have seen this case a number of times in my own experience. For example, a debtor who commits to sell something at a certain price and cannot because it is not available to him at that price finds himself buying something at $12 and selling it at $6. That often drives a filing and a restructuring.
If you have a contract that you cannot manage, you can terminate it, and you will deal with the damages that result from that as well as the other things for which you owe money. The difficulty with this legislation, as it stands, is that eligible financial contracts cannot be terminated by the debtor. If the other side chooses to terminate them, that is fine, but if they are not terminated, then the debtor has this continuously building amount of obligation that he cannot turn off and add to the list of creditors. As well, those obligations are post-filing obligations and might not be capable of being compromised. Those are obligations that the debtor should be paying, just as he or she pays the rent for his or her office or water cooler. From my perspective, that is a material flaw, although in a narrow area.
Senator Moore: Using your example of insurance on a price for a certain commodity, the debtor claims he will pay $12 per unit but runs into financial difficulty; the market changes, and he can pay only $6.
Mr. McCarthy: I will give a simpler example. I have committed to sell electricity to you at $2 per gigajoule. All of a sudden, I cannot buy it for that price and have to buy it at $6 per gigajoule. Now, I have a contract that might run for 20 years, but I just cannot deliver. I am already in difficulty and know I cannot deliver, so I need to be able to terminate that.
Senator Moore: Under the existing law, you cannot terminate that.
Mr. McCarthy: I cannot terminate as part of a restructuring.
Senator Moore: I am receiving this electricity at $2, and then you tell me about the change. There is no point in me insisting that you give it to me at $2 because you cannot do that when you have to buy it at this increased price of $6. Where does that go?
Mr. McCarthy: The amount just gets larger. That is the problem.
Senator Moore: Yes.
Mr. McCarthy: We have to figure out a way where a debtor can say, ``Enough.''
Senator Moore: The debtor or the person who is supposed to receive this electricity is probably aware of the market conditions as well.
Is there no meeting of minds there, or is it just a hard luck? The customer says, ``You will give me two dollars and that is it. I will sit and ride this out for 20 years; I do not care what will happen to you or your employees.'' Is that the attitude or is there some back and forth and recognition of the tough financial circumstances?
Mr. McCarthy: There are two answers to that.
When you are dealing with someone you are dealing with all the time, all those dynamics are at play. The counter- party you are dealing with wants you to survive, wants to have a workable solution and wants to have a go-forward supply of whatever it is you produce. However, this particular area of derivatives and forward contracts and so on is also rife with people who are purely financial players. Their only interest is profit. Something that gives them leverage is of a tremendous advantage to them, and they will take that advantage where they have the opportunity. That is the way they work.
Senator Moore: Is there no way now, under the law, for the debtors' suppliers to get out of that? Should they be able to? I understand why they would want to. That is obvious.
Mr. McCarthy: They end up saying, ``I have six people I cannot pay. I should have a seventh, which is this person to whom I have an obligation on which I cannot deliver. I should terminate that, figure out how much damage that causes that person and put that amount in with the amount I am giving to all the others.'' Therefore, everyone gets treated fairly.
The strange thing about insolvency is that, although it is the essence of Darwinism and capitalism, it is an intensely collective process. It is all about everyone being treated fairly and equally. The objective is to say that everyone who has an unsecured claim should receive exactly the same treatment. In a sense, what you do by creating this situation is you get someone who has leverage. You talked before about balancing. You have created someone who has leverage that no other unsecured creditor has.
The Chair: It is a very important area. How do we fix it? Is there specific language in your submission?
Mr. McCarthy: There is not, but there is a simple fix. I can give you the section numbers.
The Chair: Please give us a note on it. We are hearing about 28 witnesses on this. However, we will make a report.
Senator Tkachuk: If the supplier cannot deliver, what is the end-game? What happens?
Mr. McCarthy: Let me give you a simple example: I have promised to sell you a car, and to sell it to you for $1,000. I tell you that I cannot deliver, and you tell me that it will cost $5,000 to buy a comparable car. When you buy your $5,000 car, you then have a claim against me for the difference that you had to pay because I could not deliver. That claim, that $4,000 delta, becomes part of the claims against me that I have to deal with in my restructuring.
Senator Tkachuk: That is what you would like it to be.
Mr. McCarthy: That is what it is.
Senator Tkachuk: Is that the way it is now?
Mr. McCarthy: That is the way it works now. The idea is that all the people who do not get what they bargained for — whether it be payment for the goods they delivered last week or any other thing — should be treated in the same way and have the same recovery.
Senator Massicotte: Generally speaking, people who draft the legislation are acting in Canadians' best interests. We have good bureaucrats; government officials are honest, hard-working people. I appreciate your point, but they must have a good reason why they did not do it your way. It seems so obvious the way you say it that my earlier comments would be incorrect as to their incompetence. However, I am sure they are not incompetent. Why is it they did this in this way?
Mr. McCarthy: It looks like an oversight to me. I know there is some policy behind it from the people who deal in these financial instruments who just would simply like to have matters their own way. There is some pressure brought to bear from that perspective. However, I believe this is a simple lack of appreciation of the issue.
Senator Massicotte: When we raise this issue, as a betting man, you would say they would gladly correct it immediately.
Mr. McCarthy: There will be some complaints, but I hope that will be the case.
Mr. Kent: It is a good question because it raises a fundamental issue about insolvency. We live in a world of specialists, people who become experts in derivatives, et cetera. With insolvency, one has to cut across everything; it requires generalist knowledge. You are seeing the tensions between the specialists and generalists.
I was taught the phrase ``subject matter experts'' by AT&T in its hay day. They had hundreds, even thousands, of subject matter experts within their organizations. Their leaders would talk about the problem of being overwhelmed by the subject matter experts, SMEs, as they called them, because they could not do anything without getting everyone to sign off. Each of these people had ownership of their own area, and all they cared about was that their area be right. They did not care about the whole.
The trouble with insolvency is that we have to care about the whole. We face, in many areas, subject matter experts that look after their own problems but solve them in a way that does not work for the whole. This is an example of that.
[Translation]
Senator Massicotte: Last week, we discussed at length the question of bankruptcy and abuse with union representatives. Often, the public has the impression that existing or future legislation opens the door to abuses by business owners or by manipulative or ruthless company CEOs and that consequently, the act exists for their sole benefit.
Is that in fact the case? Proponents of this argument claim that judges are not allowed any discretion, that they are not familiar with the business and that abuses are possible. Are many cases of fraud observed? Does something need to be done to combat fraud? Is fraud a major problem in our society?
[English]
Ms. Grundy: I do not believe so. In most cases, insolvency proceedings, bankruptcy is done as a last resort. Certainly, in my experience, the company works very hard to solve its problems by any other device before it goes into insolvency. Fraud is a reality of life. Sometimes it happens, but I do not believe it is very common.
[Translation]
Senator Massicotte: Why do we often get the impression that when a company falls on hard times, there are many losers, such as small creditors, bankers and employees? Many people think that the owner is the one who actually benefits, who continues to live the good life in his big house with all of his assets intact, despite the fact that many people have lost the money they invested. Is this perception false?
[English]
Ms. Grundy: The perception and experience is that employees lose their jobs. They often do not get paid money owed to them for severance or termination, and they are unhappy. When people are unhappy, they become suspicious about what might have been happening beforehand. However, I do not believe fraud is a common problem.
[Translation]
Senator Massicotte: These days, pension funds are often in a deficit situation because, among other things, of the stock market situation. Should specific measures be in place to offset the losses incurred by future pensioners because a business has suffered a funding shortfall? In your opinion, in circumstances like these, should pension fund contributions be given super-priority status?
Mr. Bélanger: The provisions of Bill C-12 are drastically different from those in the former Bill-281 which called for a super-priority status for unfunded liabilities in pension funds. The Insolvency Institute of Canada felt that this approach was not viable and would have had serious implications for the Canadian economy. For example, at one point, Stelco's pension fund was in the red to the tune of $1.2 billion. If super-priority status had been given to the company's $1.2 billion in unfunded liabilities in its pension fund, other financial opportunities in our country would have been seriously undermined. The solution proposed in Bill C-12 is far more realistic. It calls for the non-remittal of pension fund contributions. Creating a super priority in this area does not fully resolve the problem. Some South Americans countries have failed miserably in their attempts to give super-priority status to unfunded liabilities in pension funds.
Obviously, the far more realistic option that was retained was to water down the previous bill. From a technical standpoint, the problem with super priority rights, as you will note from our representations, is that unfortunately, these would extend to all of a company's assets and no ceiling would be imposed. This creates some uncertainty for creditors and to some extent, restricts access to credit. We are not recommending that the notion of super priority status be scrapped entirely. However, it would be preferable to limit this status to, in particularly, short-term assets such as inventory and accounts receivable, bank deposits and cash reserves. Furthermore, for greater certainty, consideration should also be given to putting a cap on super-priority funding.
Obviously, financial institutions will amend their lending rules accordingly. They will not stop lending money. They will simply adjust their rules accordingly. Creating a super priority over some assets, whereas super priority status in the case of employees applies only to short-term assets, will prompt several different types of lenders to manage their risk accordingly, whereas it would be more effective if a single group of creditors were to assume that risk. Long-term lenders would not have to take into consideration the risk associated with super-priority status for pension funds.
Generally speaking, we favour this approach, but improvements could be made to the way in which super-priority status is given to pension funds.
[English]
Senator Goldstein: The review recommendation in the statute is five years, and you are recommending a three-year review. Can I elicit from you as well the opinion that that review should include the Farm Debt Mediation Act and the Winding-up and Restructuring Act?
Mr. Kent: As you know, there has been a view that the Winding-up and Restructuring Act should be dealt with in some fashion or other. A number of submissions from the institute seem to be very supportive of that. There should be a review of the insolvency legislation at large, as you are suggesting. That would be helpful.
The Chair: Are they interrelated?
Senator Goldstein: They deal with bankruptcy.
The institute did in fact do a study on the Winding-up and Restructuring Act — a rather good one, as I recall. Some recommendations came forward from it. Could you supply those recommendations to us?
Mr. Kent: We did not bring that with us, but we certainly can at a later date.
The Chair: Thank you very much for appearing.
We are pleased to have as our next witness, Mr. Mahesh Uttamchandani. Please proceed.
Mahesh Uttamchandani, Senior Counsel and Task Team Leader for World Bank Global Insolvency Initiative, as an individual: Thank you, Mr. Chairman. First, let me say to all the members of the committee what an honour it is to be here today.
Senator Goldstein: Mr. Chair, I have another declaration to make before we proceed. It just occurred to me that in the past I have participated in various studies by the World Bank, and I have been published by the World Bank. I am in the midst of doing that again with a partner in my office, except that it is pro bono work. I do not believe that would effect in any way my evaluation of the evidence we will hear.
I thought that the declaration should be made.
The Chair: Thank you, senator. We have noted the declaration. You will decide whether to file a form.
Senator Goldstein: Yes, sir.
Mr. Uttamchandani: I should say that although I currently serve as leader of the World Bank Global Insolvency Initiative, which provides advice to national governments on insolvency systems and on issues relating to insolvency and creditor rights, I appear before the committee today solely in my personal capacity as a Canadian insolvency lawyer, who practiced in Canada for a number of years, and as an insolvency specialist who has had quite a bit of experience dealing with insolvency systems from around the world.
As a result, my remarks before the committee today do not necessarily reflect the views of the World Bank or of its executive directors or shareholder nations.
The Chair: I have always understood that the World Bank was based in Washington, and you are a Canadian bankruptcy lawyer. Are you now based in Washington?
Mr. Uttamchandani: Yes, I am, Mr. Chair. I practiced at a law firm in Toronto for a number of years and served as a law clerk to the Commercial List in Toronto when I was a student. After that, I led the insolvency practice at the European Bank for Reconstruction and Development in London and then moved to Washington a couple of years ago to take over this position at the World Bank.
As an expatriate Canadian, it is a pleasure to return home and have an opportunity to speak to this committee. I should also thank the senator for getting my name right the first time. I am grateful for that.
My hope is to be able to offer the committee some insight on global developments in insolvency law to the extent that they inform the issues that the committee is considering. I have provided to the committee a copy of the World Bank Principles for Effective Insolvency and Creditor Rights Systems, in both official languages. This document, along with the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment, has been recognized as one of the two leading normative instruments on the development of domestic insolvency legislation.
Since the last major overhaul to the BIA and the CCAA in 1997, the international community has joined in an effort to develop broad-based principles for designing insolvency systems. This effort, which began in 1999, arose out of the Asian financial crises that were experienced during that decade. It led to the development of the Financial Stability Forum and the International Financial Architecture program, which were ad hoc initiatives of the G8 countries, which, of course, includes Canada.
These initiatives reflected a belief that sound insolvency systems not only promote investment and growth but also serve as a safety valve for corporate distress and help avert wide-spread systemic crises. The World Bank principles were developed as part of a collaborative effort with partner organizations that included the Asian Development Bank, the European Bank for Reconstruction and Development, the International Monetary Fund and the Organisation for Economic Co-operation and Development, all of which have significant Canadian representation.
Although the principles, as you will note, speak to more than just the letter of law and look to many practical issues of the law's implementation, I am pleased to note that, in my view, Chapter 47 in the R.S.C. 2005 is broadly consistent with international standards and best practice. Having said that, a number of aspects of the law bear further discussion, as has been noted by previous speakers.
The Chair: Excuse me, sir, for interrupting. To put the perspective in accord with our understanding and going back to Chapter 47 or Bill C-55 — which came to us being approved in principle and being the government's first attempt to get it right — are you saying that the general framework and principles of the bill were fine and that the problems that we have subsequently identified and are outlined in Bill C-12 are technical as opposed to substantial? Is that what you are trying to say? When I heard you say that they got it right in Bill C-55, my ears perked up immediately.
Mr. Uttamchandani: My sense is that Chapter 47, as amended by Bill C-12, where we stand today, is broadly consistent with best practice. When I say ``broadly consistent with best practice,'' I mean that we have tried in the World Bank principles to identify what functions the law should achieve, not how it should aim to achieve them. Within those functions, the federal government is faced with innumerable policy choices — whether to tip the scales more this way or more that way. As to the matter of providing advice in my official capacity, we take the view that as long as the insolvency system can achieve these broad goals, the law can be described as being consistent with best practice, although there are important issues to be resolved, and we will speak to that.
The Chair: That notwithstanding, under the existing law, one cannot open up collective agreements during a restructuring. Is Canada's direction consistent with best practice, even though it is different from the U.S. system?
Mr. Uttamchandani: On that specific issue, it is my view that the particular policy choice, the wisdom of which can be debated and discussed, is not as dramatic as taking this bill to the point where one would say it is inconsistent with international standards.
The government has made that policy choice, and the wisdom of it is worth discussion and debate. I do not for a minute mean to suggest that we should close the door on that discussion. I am simply saying that, within a larger framework, it is consistent with best practice. In the earlier submission, Mr. McCarthy made reference to the next round or the ongoing round. It is worthwhile to consider some issues.
Although this is domestic legislation for application in Canada, the global landscape has changed so dramatically since the last major amendments to the BIA and the CCAA that domestic laws are scrutinized by a variety of international organizations and actors including investors, rating agencies and benchmarking organizations. Many of these groups take a binary and simplistic approach to classifying insolvency systems, in particular with regard to issues such as whether secured creditors are paid first in an insolvency situation or whether there is something less than an absolute priority in bankruptcy, and the treatment of collective agreements and the ability of the court overseeing a restructuring to terminate agreements.
Actors in the international sphere look at what we are doing in Canada. I say that not to suggest that Parliament should necessarily be influenced by the presence of those actors, but simply to impart that we need to understand that the policy choices we make are being watched by other people, and that holds potential reactions and ramifications. Certainly, people will look at our policy choices and make their judgments. Often these judgments can be based on what we might feel are rather simplistic criteria.
When I look at the legislation as a dispassionate observer, two broad themes seem to emerge. First, the legislation attempts to deal with the difficult issue of balancing the risks and burdens of insolvency, which has been discussed at great length and emerges clearly from the aspects of the law that deal with employee claims, the assignment of contracts and all manner of other claims. Second, the codification and clarification of some 10 years of case law and practice, during which time the landscape of insolvency in Canada has changed rather significantly, emerges clearly from the sections that deal with interim receivers, Debtor-In-Possession financing — DIP financing — and even the power of the court to remove directors during a restructuring proceeding.
As an articling student in Canada's largest commercial court and working for Justices Farley and Blair principally, I had the good fortune to experience the high quality of our judicial process in Canada. The view I garnered during my early years as a lawyer has only been bolstered as I have had the opportunity to work in many countries in which there is a struggle to rely on the judicial branch of government as an equal pillar to the executive and legislative branches.
Despite this, however, the fact that these clarifications have been provided separate and apart from a discussion about their substance is, in my view, a welcome improvement to the legislative framework in Canada.
Much has been said about the substance of the two themes that I have identified, both before this committee and in the broader public domain. I do not want to take the committee's time to revisit those views, but I would note to the committee that even in the short time between Bill C-55's original passage and where we stand today, a number of other key issues have emerged on the world stage in the context of insolvency and the design of insolvency systems. It is my view that it is important for Canada to continue to remain at the forefront of these issues. I raise these trends as part of the ongoing consideration.
The first trend is the explosive growth in the use of credit derivatives. We have all unfortunately had to become familiar with the concepts of collateralized debt obligations and the potential systemic effect that they might have as part of the larger subprime crisis that is beginning to emerge in the United States. The widespread use of credit default swaps, however, could pose an equal or even greater problem.
Today, investors accumulate positions in a company by targeting layers of debt or multiple layers of debt. Where their interests lie is less predictable, especially if they also hold credit default swaps. Their financial interests may be best served by actually forcing a default if they are on the right side of a credit default position. This problem was compounded by creditors not having to disclose derivative positions, which makes it much harder to discern their true intentions.
A recent study, which I would be happy to provide to the committee, published by Professors Henry Hu and Bernard Black at the University of Texas concludes that decoupling contractual and bankruptcy rights from economic ownership poses a rather large systemic crisis, both for individual debtors and creditors and for the financial system as a whole.
Some apparent creditors may now gain if a company fails and in workout negotiations, whether in or out of bankruptcy. Creditors cannot be confident that they understand the interests and motivations of other creditors, and the bankruptcy judge is in a similar situation, not understanding where everyone's interests lie.
Most, if not all, legal systems at present continue to operate on the assumption that creditors have incentive to exercise their rights in insolvency in a way to reduce the costs of financial distress. From a policy perspective, it becomes critical to better understand when and how the decoupling of economic interest and legal rights occurs so that the necessary policy prescriptions can be crafted. These may include some sort of disclosure obligations during the context of restructuring. It may be too early to suggest something concrete such as that, but this is certainly an issue that sooner rather than later will become critical.
A second trend is the treatment of corporate groups. By far in Canada and around the world, the dominant form of business organization for medium- to large-sized businesses is a web of two or more legal entities organized in a group. There can be many reasons for doing this, whether for tax reasons or reasons related to cross-border trade issues.
Despite this, most national insolvency systems are drafted from the perspective of a single, stand-alone corporate debtor and fail to address the unique situations that arise when a corporate group is involved in an insolvency proceeding.
The United Nations Commission on International Trade Law, UNCITRAL, of which Canada is a member, has recently begun to examine this issue to develop recommendations on how national laws should address the problem of when to consolidate insolvent estates from a procedural standpoint and when to consolidate them substantively; in other words, when to pool the assets and liabilities of insolvent estates that are related.
In the meantime, the Government of Australia has tabled legislation that, in effect, purports to deal with this issue in the narrow context of bankruptcies and liquidations and sets out a guideline for judges hearing these cases as to when they should consolidate such estates.
Again, this is an issue with which the courts in Canada have dealt, I believe the practitioners will tell you, to many people's satisfaction. Nevertheless, it is an area in which legislative guidance will become important, just as many of the issues raised in the current laws are trying to reconcile case law that has developed over the last 10 years.
A third trend is the rise of Islamic finance products. Islamic finance is one of the fastest growing segments of the financial sector in the world. With the price of oil in the $100 range, there is a proliferation of investment funds from oil-rich countries, many of which seek out investments that are compliant with Islamic law.
The Chair: These are not what they call the sovereign funds, are they? Is that different?
Mr. Uttamchandani: They may be sovereign funds, but they are certainly not exclusive to those funds. Oftentimes, they are private investors that invest by way of private equity funds and, in some cases, hedge funds.
The Chair: Are they subject to this law?
Mr. Uttamchandani: It is a supply and demand issue. Many suppliers of liquidity are seeking out these products, and, at present, the demand is growing exponentially.
Commercial banks in the United Kingdom and the United States have begun to offer Islamic-compliant financing products both to individual customers and to small- to medium-sized businesses.
In 2006, there was a $165 million Islamic bond issue, or what is called a Sukuk under Islamic law, completed in the United States. The floodgate has begun to open. We are seeing an exponential growth in these types of products.
Increasingly in Canada, there is a demand for these products, and most of Canada's large commercial banks have taken a look at this issue. In the last six months, there have been quite a number of developments on a smaller scale within Canada of funds that are starting up and that will invest in ways that are considered compliant with Islamic finance.
It is unclear at this point what types of issues will arise when Western insolvency law interacts with an Islamic finance product, particularly because these products tend to blur the traditional lines that we understand between debt and equity. They may involve the ``lender'' taking a management role in directing the actions of the borrower. Our law at present certainly takes a hard look at those situations from the standpoint of equitable subordination and the standpoint of prejudicing other creditors.
One could argue, for example, that if you at the bank take a management role in this company, and you have driven it into the ground to the detriment of other creditors, you should face some liability for that.
Again, the suggestion is not necessarily that our laws should deal with these very specific types of products, but there needs to be recognition that they are growing by the day, and, at some point, there will be an interaction between these products and our insolvency system.
Finally, the last trend, if I can call it that, is international cooperation. Of course, this was addressed in Bill C-55. In fact, I do not believe those elements have been changed in the context of the adoption of some form of the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment. Canada joins 13 other countries, which includes the United Kingdom and the United States, as well as Japan, in adopting some form of this model law.
Quite a bit has been written about the distinctions between the model law as promulgated by UNCITRAL and the version as adopted by Canada. I will not repeat those here. My own view is that probably too much has been made of those distinctions. It is important to look at what has happened in the sphere of international cooperation since Bill C- 55 was first tabled.
We have quite a few examples to look at, both because of the other 13 countries that have adopted some form of the model law, and also because within the 27 member states of the European Union, there is a European Union directive dealing with cross-border insolvency, which in critical ways very much mirrors the proposals in Bill C-55 and Chapter 47.
Our law here, as it stands, as well as the U.S. Chapter 15 and the EU and UNCITRAL laws, all deal with the concept called ``centre of main interests,'' or COMI as it has come to be known. During an insolvency proceeding, it requires the court to determine where the centre of the main interests of the business in question lies. The determination of that will drive much of the choice of law issues, as to whether the choice of law is American or Canadian law, in dealing with specific aspects of the restructuring.
The EU regulation was adopted with the purpose of actually reducing form shopping and allowing one to go to a court in a convenient jurisdiction knowing the courts in other jurisdictions would show some level of deference or comity toward the decision of that court.
We have seen, instead, quite the opposite in the sense that there have been a number of irreconcilable decisions coming from various courts within Europe. One simple example is the Dutch court holding that the presumption that the COMI is where the registered head office is can only be rebutted if one has no business dealings whatsoever within that jurisdiction. In other words, it is a very strong presumption that is very difficult to rebut. The English courts, on the other hand, have said that it is just one of many factors and will be treated equally with other factors, such as where banking is done, where invoices are issued from, and so on.
The long history of cross-border cases between the United States and Canada is probably the most prolific cross- border experience in the world. It has largely been a successful experience. The U.S. adoption of Chapter 15 and Canada's amendments to the BIA and CCAA do not necessarily change or threaten this. However, as in Europe, it promises to highlight the underlying differences between the insolvency regimes in our two countries. In the sense that the choice of law or the choice of COMI will determine the jurisdiction whose law applies, the stakes for that decision will become increasingly higher as the distinction between our two laws grows.
I will stop my submissions there. I would be happy to answer any questions from the committee. However, I leave those issues before the committee either for consideration in the near future or as part of the longer-term project to look at this legislation.
The Chair: Let me thank you very much for those erudite submissions and commentaries on the bankruptcy and insolvency law, generally.
I get the impression that you are involved in an organization that is interested in striving for international uniformity, to the best extent possible, amongst these different nations with insolvency and bankruptcy laws. You have raised key issues that are, at the present time, internationally evolving issues.
If I am right, you are not here specifically to ask for changes in Bill C-12 and the mundane legislation review that we are doing, but rather to take us to another level. Am I right on that, or am I missing something?
Mr. Uttamchandani: There are a couple of points in there I would like to address, senator.
Certainly, on the issue of uniformity, I — and the institution I work for — take quite the opposite view in the sense that each country designing its own insolvency system has to find a system that works and achieves certain goals, such as facilitating and restructuring or providing transparency during a liquidation, but that also works within the legal culture of that country. Those solutions are as varied as one's imagination.
As I am very quick to point out to my American colleagues, restructuring and Chapter 11 are not synonymous with one another. There are many countries that do it many different ways, and look to Canada's way for some guidance. Therefore, uniformity is not what we are striving for.
The Chair: Perhaps a better way to phrase it would be: A series of best practices that enshrine certain principles.
Mr. Uttamchandani: Absolutely.
On a personal level, I believe I share many of the concerns articulated by the previous witnesses. As you have pointed out, my submission is directed toward where the committee or government might go from here.
Some of the critical, emerging issues, particularly treatment of corporate groups and dealing with the use of derivatives, are near-term issues rather than medium-term issues, if I may put it that way. If there were a process by which we could have all of the benefits of the legislation as it is now but continue to immediately look at potential reforms, I would be advocating for that.
I suspect that is not realistic, but I would certainly say that they are near-term issues.
Senator Massicotte: I know you are dealing with broad concepts, but you are an expert on this matter and have obviously been exposed to this type of concept in other countries. I am sure the process or the objective is always the same: A company that has insufficient funds to meet its responsibilities tries to determine the fairest allocation of those remaining funds among the interested parties who may suffer the consequence of having inadequate funds or being bankrupt.
If that is the equitable objective, tell me how other countries have dealt with this issue of collective agreements? We know how the Americans have dealt with it, but deal with it conceptually for me. Clearly, they should not be treated as normal creditors. Their financial livelihood is dependent upon the success of the company; therefore, they are not diversified in their risks. However, talk to me about that and how we should do it differently and why, if you could.
Mr. Uttamchandani: One has to understand that the primary driver for addressing this area legislatively in most countries around the world overwhelming is the issue of access to finance. Access to finance is the end-game for many countries that look at insolvency. They look at the insolvency system either to, in a small way, facilitate that or, at a minimum, to not impede access to financing.
In many countries, that tends to translate to placing the rights of secured creditors above all else. It may be a fiction, but the theory is that everyone gets into the bargaining situation knowing their rights. As long as everyone knows their rights, then the outcomes are fair. Again, I suspect that we all know that there is no equality of bargaining power in all commercial relationships. However, in many of countries, that is the driver.
The American example is, of course, unique; Chapter 11 is a unique animal. It likely most closely approximates our experience. The draft legislation that is being promulgated in Australia, very much on that issue, mirrors the American experience.
In terms of so-called advanced countries or advanced economies that most mirror ours, there is a sense that as much flexibility as possible that can be given to the court is a good thing. As I said earlier, we have the advantage of having a judiciary that has shown itself to be exemplary. I have observed that is the exception rather than the rule, globally. Therefore, the feeling is that if these tools are put in the hands of capable players, the outcomes will generally be the right outcomes.
I do share the view of the previous witnesses, namely that simply to say that collective agreements can be terminated is not a solution; rather, to have some method of finality to the process brings balance into the process.
Senator Massicotte: You said earlier the principle driver in a bankruptcy law is to seek financing. You mean originally, correct? In other words, at the time the company sought it.
Mr. Uttamchandani: Yes, that is correct.
Senator Massicotte: The significant concern in the United States and Canada is to have an objective to try to make sure the company survives when they run into troubles; therefore, increase jobs, create growth and so on.
You said the criteria for the first objective of gutting finance is to make sure the rules are very clear; everybody knows what the risks are and where they line up if their situation goes wrong. However, let me go through that.
One could get there and satisfy that objective by saying, ``Do not interfere with current agreements.'' In fact, our current law says that. One can make the argument that that is pretty clear. Will that prejudice the right to financing? Obviously, secured creditors will not like it because it basically prejudices the amount they can collect, but it is obviously very clear. Is it in their economic interests? Will countries suffer because of it? It seems to contradict what you said about Australia.
Mr. Uttamchandani: Access to finance has two components: clarity and the absolute element of what the rules say or do not say. The view taken in many countries is that the more the funds of the secured lender are put at risk, the harder it will be for businesses to get financed. Lenders are in the business of pricing risk and will price it in a way that makes it unattainable for many smaller businesses.
Senator Massicotte: Canada and the United States are advanced with respect to financing. I appreciate that in many developing countries, it is difficult to get financing. Therefore, they must give protection or incentives to get financing in the first place. Obviously, land titles and registration security are not clear.
Do you feel the way the law has been proposed in Canada will prejudice financing for start-ups and new companies?
Mr. Uttamchandani: It is my view that its largest affect might be on the choice of Canada as a jurisdiction in which to invest. If the experience dealing with the collective agreement under this law becomes overwhelmingly the largest driver in the restructuring, then Canada might seem a less attractive place to invest. I want to be clear that I do not believe an undue burden in the course of this process must be borne by the employees. Certainly, it is already borne by the employees. I see this as an issue of process rather than substance in the sense that if there is no way to put an end to the process, other than a nuclear option, if you will, then we will have a failure of process, as Mr. Kent said. The policy choice that has been made is perfectly legitimate, but perhaps there needs to be more development of the process.
Senator Massicotte: We need a stronger incentive to negotiate a final deal somehow.
Mr. Uttamchandani: Yes, you are correct.
Senator Goldstein: The Royal Bank of Canada's publication about doing business, in which I participated in the past, continues to emphasize the relative or the absolute impunity of secured creditors and the importance of the unfettered ability of secured creditors to realize on their security.
No one has raised this issue, but we have started to diminish somewhat that by providing a super-priority to a relatively nominal extent on some current assets, which would necessarily impinge, not in all cases but in many cases, on a bank or another financial institution. In your experience, will that in any way adversely affect the granting of credit or investment in Canada by third parties or foreign parties?
Mr. Uttamchandani: I do not believe so. My experience in private practice acting for banks is such that in my view Canadian banks are exceptionally good at monitoring their borrowers. Perhaps it will result in some increased cost to the banks in terms of monitoring to ensure that their borrower is current in all its obligations. We have seen that already with GST and other super-priority obligations. That is most likely the result.
The binary emphasis on secured credit having an absolute priority, yes or no, is more consistent with a very underdeveloped economy that is trying to increase access to finance rather than economies such as ours, which deals with a variety of complex issues.
Senator Goldstein: As a matter of information, you are aware that we will hear from Bruce Leonard of the International Insolvency Institute on the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment, which effectively we have adopted except for two variations. He will talk to the committee about those, undoubtedly.
I want to check with you before we hear from him as to whether you are concerned about the fact that Canada has varied the model law and does not correspond to Chapter 15 in the United States by insisting on reciprocity and by insisting on protection in a variety of cases of domestic creditors.
Mr. Uttamchandani: I am not concerned about those two issues. However, I am concerned about looks like an omission with respect to Article 28 of the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment that deals with whether there can be two main proceedings. There might be some cause for confusion as a result of that.
Senator Goldstein: That was not an inadvertent omission, but we will go to that during the course of Mr. Leonard's testimony.
The Chair: Will you enlighten us on that subject?
Senator Goldstein: I am not a witness.
The Chair: It is in the record now that we have this omission. You are saying it was obviously not inadvertent.
Senator Goldstein: It was not inadvertent.
The Chair: I thank the witnesses for appearing this afternoon.
The committee adjourned.