Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 8 - Evidence - Meeting of February 13, 2008
OTTAWA, Wednesday, February 13, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:10 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: Good afternoon, ladies and gentlemen. I am David Angus, from Quebec. Senators present this afternoon are deputy chair, Senator Goldstein, also from Quebec; Senator Meighen from Ontario; Senator Tkachuk from Saskatoon, Saskatchewan; Senator Jaffer, our newest member, from British Columbia; and Senator Harb from Ontario.
We continue our study today on the new regime of bankruptcy and insolvency law. The bills have passed through the Senate and are awaiting implementation. We are conducting an ongoing review on framework legislation. The purpose of this study is to hear commentary from the stakeholders on the laws I referred to, and any other elements of our bankruptcy legislation.
We have already heard witnesses on this study, and today we have three sets of witnesses. I welcome everyone in the room. In addition to our witnesses, I see representatives of government and other organizations.
Our hearing is televised nationally on CPAC and is webcast on the Internet. Welcome to all viewers.
Our first witness is Ian Boyko, from the Canadian Federation of Students. Following Mr. Boyko, we will hear from The International Insolvency Institute and the Canadian Association of Insolvency and Restructuring Professionals.
Before Mr. Boyko makes his presentation, I ask Christiane Leclerc of Human Resources and Social Development Canada to note what I am about to say. Confusion exists among stakeholders, members of this committee and many other people as to when this complex legislation will come into force, what is currently in force, et cetera.
I asked the Library of Parliament and Industry Canada for an explanation of what legislation is currently in force and what is not. I will read into the record the information I received. At the same time, I do not think it answers clearly enough what the stakeholders need to know.
I recognize how complex the wording is in Chapter 47 and Bill C-12. We are advised that some of Bill C-12's transitional provisions came into force at Royal Assent, which occurred on December 14, 2007. We want to know which provisions came into force, and why only some provisions came into force then and not others.
Most of Chapter 47, which was the former Bill C-55, which the Senate amended and passed two years ago, will come into force on days to be fixed by the Governor-in-Council, which is fine, and which will likely occur within 6 to 12 months of the date of Royal Assent. That is 6 to 12 months from December 14, 2007, and I do not think that timeline is good enough. I am sure honourable senators agree. People are wondering whether the new bankruptcy law is in force. Are we under the old Bankruptcy and Insolvency Act, BIA, or the old Companies' Creditors Arrangement Act, CCAA? I know that lawyers would understand, but it is not clear.
I am told that the government will use these months to set up the wage earner protection program, WEPP, with a focus on such activities as program design, infrastructure development, staff training and preparation of the WEPP Act regulations.
I am curious as to why this work was not done before the bill came to us. The Office of the Superintendent of Bankruptcy, which is responsible for regulations under the BIA and the CCAA, will also use these months to complete consultations on regulations and to prepare forms and update computer systems to undertake the new role with respect to supervising the CCAA proceedings.
I want this information on the record. People consult our website, look at our transcripts and watch the proceedings on the webcast and on TV. The stakeholders deserve to know what parts of the act are in effect and what are not.
We need more clarity on this, Ms. Leclerc. You will be inundated with phone calls and emails in any event.
The deputy chair said he believes there is an internal governmental list of what is and is not in force. We need to know that information; we need clarity.
That list or something better will be supplied. I do not want anything cryptic.
Senator Harb: In fairness, Ms. Leclerc is not sitting here.
The Chair: That is why I am hesitant.
Senator Harb: If we want information, and I agree we should have it, I suggest that you write to the department on behalf of the committee and ask all those questions so we can have proper answers.
The Chair: The fact that it is on the record and in the transcript is probably sufficient. We have asked for the information already. I am not being critical of the department, but I am stating what I think is obvious. Because of the complexity of the legislation, we need more clarity.
Senator Goldstein: By way of clarification for members of the committee, the documentation that I distributed last week indicates beside each amendment whether the amendment is in force or not. At least, the members of the committee have that information available to them and can follow the discussions accordingly.
It would be useful if the information were tabled publicly. Senator Harb's suggestion is a good one.
The Chair: Senator Goldstein, I do not want to prolong this discussion, but you refer to a document that I understand you or someone on your behalf prepared.
Senator Goldstein: Yes, it was someone on my behalf.
The Chair: Therefore the document is unofficial.
Senator Goldstein: Yes, it is unofficial.
The Chair: However, the document is a useful consolidation of these new laws. Senators have this document, but I reiterate my request for something along those lines from official sources.
Mr. Boyko, please proceed with your presentation.
Ian Boyko, Government Relations Coordinator, Canadian Federation of Students: Good afternoon. Our federation unites more than 80 student unions from coast to coast. In addition to our current members, who will one day be graduates and repaying their loan, by virtue of our profile we take dozens of calls a month from student debtors who have nowhere to turn and have no idea what they should do in terms of bringing their loans back into good standing. We, de facto, are often a call centre for those people experiencing difficulty in repaying their loans.
I know this committee is familiar with the act. By way of background, senators probably recall that the current ten- and now seven-year bankruptcy prohibition was increased from 2 years to 10 years in 1998, with no consultation leading up to Budget 1998. While it is unfair to say there was no consultation in the change to seven years, we probably all agree that the process was a bit rushed.
The Chair: What specific time are you talking about?
Mr. Boyko: Prior to 1997, there was no explicit prohibition on student loan holders declaring bankruptcy on Canada student loans. In 1997, we participated in widespread consultations that were held, and in Budget 1997, a two- year prohibition on clarifying student loan bankruptcy was introduced.
A year later, with no notice and no consultations, that prohibition was increased five-fold from 2 years to 10 years. In the following months and years when we met with MPs and senators, few of even the government MPs knew that increased prohibition was contained within the enabling legislation for Budget 1998.
Speculation exists that this legislation from the mid- and late 1990s was enacted at least in part at the behest of the big banks that were the lenders in the Canada Student Loans Program between 1995 and 2000. A couple of other pieces of arguably regressive legislation were introduced also during that time, supposedly to protect the banks' investment in our social program. The five-fold increase to the already controversial two-year prohibition was hidden in the 1998 budget. Since that time, the ten-year prohibition has been widely criticized by committees of both the House of Commons and the Senate, and widely panned by most insolvency experts. Even the most recent reduction to seven years was given a grade of D by a witness that the committee heard from earlier this month from Hoyes, Michalos & Associates Inc. In terms of the current landscape for student loans and post-secondary education, the Bankruptcy and Insolvency Act, or the big bank appeasement act of 1998, came during the 1990s when tuition increase in most provinces by double-digit percentages. That increase was mostly as a result of the federal funding cuts to the Canada Health and Social Transfer in the 1990s. Student debt has more than doubled in real dollars since 1990, and there is little reason to suspect that it will plateau any time soon because it is still on the increase. Further to that situation, the staggering interest rates that the Government of Canada charges on student loans exacerbated the sky- rocketing student debt.
For example, a student loan of $25,000 over an amortization of 10 years, will lead to interest payments of approximately $12,000 by the time the loan is paid back. The interest equates to about 49 per cent of the value of the original loan after graduation. If someone struggling with that loan negotiates an extension to their amortization period from 10 years to 15 years, that extension will result, at current interest rates, in interest payments of about $19,000, or about 77 per cent of the value of the initial loan.
Despite the staggering costs associated with financing post-secondary education, student loan bankruptcy has never been an epidemic in this country. In fact, the opposite is probably more accurate. Many students and their families have undergone significant misery to avoid default or bankruptcy. Leading up to the 1998 amendments to the law, only 2 per cent of all the value of consumer bankruptcies were attributed to student loans. Furthermore, student loan repayment rates are vastly superior to those given out to corporations on behalf of the federal government — in the area of 93 per cent on student loans versus a repayment rate of about 15 per cent on corporate loans from the federal government.
Government officials who testified before this committee in November referred the committee to programs called, Interest Relief and Debt Reduction in Repayment. Interest Relief is a federal program applied only to the federal portion of the federal-provincial student loan that relieves loan payments for six-month intervals renewable up to 54 months. Interest Relief is not automatic and is only dispersed to eligible borrowers who apply successfully. Interest Relief, perhaps not dissimilar from other programs, is attractive on paper but is not properly applied or promoted to populations in need. A study conducted by Gerry Situ at Statistics Canada in August 2006 revealed a 16 per cent utilization rate of Interest Relief, less than 45 per cent of eligible student debtors. Since 2000, over 86,000 applications for Interest Relief were rejected by the federal government.
The other program referenced by government officials at the November 29 meeting — Debt Reduction in Repayment, DRR — has an even worse uptake rate than Interest Relief. DRR forgives a portion of the Canada Student Loan after 54 months of Interest Relief has been exhausted but, like Interest Relief, Debt Reduction in Repayment is not automatic. It is dispersed only to eligible borrowers who apply successfully.
When DRR was first introduced in 1998, the government promised that 12,000 students would benefit from the program each year. The latest available data from annual reports of the Canada Student Loans Program shows that fewer than 2,000 students per year benefitted from Debt Reduction in Repayment in 2003.
Most experts in the bankruptcy and insolvency field peg a reasonable debt-to-earnings ratio in terms of repayment at about 12 per cent. To qualify for Interest Relief and Debt Reduction in Repayment, we estimate that the ratio must be closer to 30 per cent of net earnings that are dedicated to debt repayment.
This committee also heard in previous testimony that people who declare bankruptcy involving student loans tend to be younger, disproportionately female and have lower incomes than the average consumer bankruptcy applicant. If that picture is the landscape, I want to review with the committee what our organization views as the flaws in the current government's approach to student loan repayment and bankruptcy legislation.
The debt management programs — Interest Relief and Debt Reduction in Repayment — are for those people experiencing difficulty in making their monthly payments. Some of the data suggests that the program does not even do that. The fundamental misunderstanding is that those debt management measures are one thing but the Bankruptcy and Insolvency Act is supposed to be targeted at a much smaller and more desperate minority of students than simply those who are having difficulty making their monthly payment. This tiny and desperate minority of student debtors are those who have no reasonable expectation that they will ever be able to take control of their debt. Frankly, few people will be happy with the option of ruining their credit rating for several years to escape their student loan. This option is strictly a last resort.
At previous committee meetings, Senator Goldstein stated that, based on his extensive experience in the field, the court system is well-equipped to prevent student loan bankruptcy fraud. There is no utility in having the federal government trying to eliminate student loan bankruptcy fraud by implementing a prohibition that affects all students, not only those who intend to commit fraud. A clear alternative exists for the federal government, and that is our recommendation: Lift any ban on student loan bankruptcy. Senators will recall that we went 33 years in the Canada Student Loans Program without a student loan bankruptcy prohibition, from 1964 to 1977. Nothing is tangibly different about today's students except the debt they carry as a result of federal and provincial decision-making. They carry substantially more loans than their predecessors carried. The federal government must take more responsibility for creating thousands more honest and unfortunate debtors. Federal divestment from post-secondary education has made the current generation the most indebted young Canadians in our country's history.
As a compromise to the current legislation, we also support Senator Goldstein's private member's bill, which would reduce the prohibition to two years, with a hardship hearing available at any time before that. In addition to the witnesses you have already heard, there is widespread support for changes to the Canada Student Loan Bankruptcy prohibition. Senators may recall, in 2005 more than 100 members in Parliament voted in favour at second reading of a private member's bill that proposed to reduce the prohibition. Douglas Welbanks, former Director of Debtor Assistance and Debt Collection for the Government of British Columbia, has written on the issue. I have a couple of copies with me that can be circulated later. He supports the elimination of a prohibition, based on his experience. A coalition has crept up called the Coalition for Student Loan Fairness, which stands for eliminating the prohibition. Both those organizations and individuals would make great witnesses for this committee.
In closing, I draw an analogy made in earlier correspondence with the committee. Responding to unmanageable student debt with a bankruptcy prohibition is akin to dealing with a health epidemic by closing emergency rooms. It penalizes the victims and ignores the real causes of how we arrived here. We can do better. Great work has been done by all parties in terms of examining the student loan bankruptcy prohibition. The time is now when ample evidence shows that this law causes misery among the most desperate and vulnerable members of the student loan debtor population. I look forward to questions.
The Chair: Thank you, Mr. Boyko, for the clear and concise presentation. You represent the Canadian Federation of Students. As I understand, the federation is an organization of students. Are you a student?
Mr. Boyko: Not anymore; I am a staff person in our national office.
The Chair: The federation has a permanent office here in Ottawa?
Mr. Boyko: That is right. It is not far from here. Our office is staffed by full-time people like me, and also a large representation of elected students who leave their studies for a temporary period of time to serve their members here in Ottawa.
The Chair: How are you financed?
Mr. Boyko: We are financed through membership fees akin to labour unions.
Senator Massicotte: Thank you for joining us, Mr. Boyko. We appreciate your coming because we are looking to be enlightened on this issue.
You referred to the extremely high interest amounts. You also mentioned quantums. Quantums are better expressed in my language — about an inch off straight — because if you take 50 years to pay off the loan, I am sure the quantum will be higher. What interest rate do they charge for student loans?
Mr. Boyko: At graduation, when students consolidate their loans, they are presented with two options. They can repay their student loan at a fixed rate of prime plus 5 per cent and maintain that same percentage for the entire length of their repayment. The other option is to choose a floating rate, which is prime plus 2 and a half per cent. That rate fluctuates with the market.
Senator Massicotte: Is that the prime rate for the Bank of Canada or the prime rate of a Canadian chartered bank?
Mr. Boyko: I am not sure, but I believe it is the prime rate of the Bank of Canada.
Senator Massicotte: That rate is probably close to a typical prime loan in Canada for a Canadian chartered bank. It is likely the cheapest rate any corporation could find anywhere in Canada.
Mr. Boyko: I apologize because I do not know the distinction between the two. I think the floating repayment rate right now is 8.25 per cent. That is the total. Prime plus 2 and a half per cent is 8.25 per cent or 8.5 per cent.
Senator Massicotte: You gave statistics that student loans are low risk and, therefore, there is no reason for a special bankruptcy clause. In other words, student loans should not be targeted or pointed at, and should not be deemed any different than other loans.
Therefore, do you agree that if the risk is low, perhaps we should go back to the way student loans were many years ago? In other words, perhaps the Government of Canada should not have any programs for student loans and students should go to Canadian chartered banks to seek a normal loan. Is there a role for government, given the risk is so low?
Mr. Boyko: I think the risk is high, comparatively speaking. That is the reason the federal government went into the loan business in the first place: Many students do not have any collateral or borrowing history to use to assign a private loan. I think that was the idea behind the federal government entering the business.
I agree with you: Students should not need to seek loans to finance their education. It might be financed best by a national system of needs-based grants.
Senator Massicotte: How to finance education best is obviously another large debate. Every province has much discretion in their approach to education. If you presume the existing system, whereby significant costs in education are borne by the individual, what action is fair? The government thinks its public policy role is to assist students by collateralizing their debt, so to speak, and if you accept that society essentially subsidizes that student's future, future income will benefit largely that individual, as well as the Canadian economy. You gave us stats, as did witnesses here many years ago, whereby the banks incurred significant losses in student loans before the legislation changed.
If you accept that the old system did not work and, for public policy reasons, the government thought it did not need to do more and absorb those costs, what action is fair? If a two-year bankruptcy prohibition did not work and 10 years is too high, what measure does work? I agree that we could change the entire public policy to subsidize student educations completely, but if remain with the current system, I ask again: What action is fair?
Two years and significant losses beyond what the government wanted to pay does not work. We acknowledge education is a good economic benefit for the student. What is fair? How do you manage that issue to ensure people are motivated and interests are aligned?
Mr. Boyko: The question is somewhat hypothetical. I think it is fundamentally unfair to ask someone to borrow $25,000 to $35,000 to finance a public education. The symptom is that students are pushed into massive loans.
This bankruptcy legislation is about a tiny group of desperate, honest and unfortunate debtors. They should receive the same right that other people receive who have a failing business, for whatever reason, and want to declare bankruptcy on larger amounts. I think students deserve to have that option available, as well.
I do not think we should forget that students benefit individually from their post-secondary education. If there is an earnings premium — if they earn more in the work force — they also pay higher income tax. I do not think we should inflate the investment made in the individual student when the student probably will be a great contributor to the tax base.
Senator Massicotte: Is your argument that they should not pay any costs for education at all, although they are the primary beneficiary? That cost should be a public function. You conclude there should be no special treatment for student loans. Is that correct?
Mr. Boyko: I apologize. I am not sure what the question is. I think public education is a right and we should not erect financial barriers to public education. A vast majority of students who pursue post-secondary education will contribute more to the tax base.
The number of student debtors that this legislation should be available to is small. There are debt management functions that, if working, can help students who need that extra bit of help. We are not talking about students who graduate from dentistry, walk away with $8,000 in debt and then try to claim bankruptcy. We are not looking at that target population. We are looking at those who have incurred a disability, gone through a divorce or, for whatever reason, have come upon rough times, and their $20,000, $30,000 or $40,000 student debt is too much to expect them to pay. They should be able to go before a judge and make their case.
Bankruptcy is never automatic. Those who appear before a judge and seek bankruptcy still need to make their case. They can be denied access to bankruptcy. However, currently, this legislation prohibits them from going before a judge and making their case.
Senator Harb: It strikes me from your presentation that, in essence, you say students should be treated like everyone else in society. Someone borrows from a bank and their economic situation changes. As a result, they apply for bankruptcy. Students should be treated the same way. If that is the case, have you considered appealing to the Human Rights Commission based on the fact that you have been discriminated against as a citizen because of your age?
Mr. Boyko: It is funny you ask that. My organization launched a Charter challenge to the act on similar grounds and we were unsuccessful in suggesting that age or status as a student was analogous to discrimination on age.
The Superior Court of Ontario disagrees with us, but I think there are probably other grounds under which we would amend this law.
Senator Harb: To make your case, have you conducted any studies in terms of the percentage of students who have availed themselves of bankruptcy at some point? If so, how many students have used the bankruptcy provision?
Second, has a cost analysis been performed, in terms of the cost of the bureaucracy to administer student loans, such as the cost of lawyers that go to the court to defend the government's position or represent banks or financial institutions? In the end, you may find surprisingly positive outcomes that might bolster your case to push for free post- secondary education, as is provided in many advanced and developed countries around the world.
Have any studies of that kind been undertaken?
Mr. Boyko: That sort of information warrants study. Most of the information we have comes from a time before the prohibition was introduced. Essentially, when the prohibition was introduced, most student loan bankruptcies stopped all together. It is worrisome that we are now, this calendar year, 10 years from 1998. Students incurred that massive debt in the 1990s when tuition fees were doubling. Only now are most students coming up to the end of the prohibition. I think that data might come to light.
I know some of your earlier witnesses who deal more directly with bankruptcy applications have more data. Unfortunately, most of our data predates this legislation.
Senator Harb: If I were allowed to read your mind —
The Chair: Did you feel you received an answer as to whether they completed studies?
Senator Harb: He answered ``no.''
If I could read your mind, what you want to say is: Your preference is to repeal this clause altogether; it should not be part of the legislation at all. Education should be free for everyone since, as you told Senator Massicotte, students will be taxed in the end. In other words, there will be net benefit in any event. Is it your preference for this clause not to be in this bill at all and that we go back to the whole idea that education is free?
Mr. Boyko: Our position is there should be no student loan bankruptcy prohibition. Also, the federal and provincial governments should take every step necessary to reduce financial barriers for students. If that includes eliminating fees, I think that step is probably a good one.
The Chair: Can the federal government do that?
Mr. Boyko: The federal government can support the provinces in doing that.
Senator Meighen: Following from Senator Harb's line of questioning, suppose the worst occurs and the situation of bankruptcy prohibition you are faced with now continues — whether it continues two years or more — can you comment on the Interest Relief and Debt Reduction in Repayment programs?
In your presentation, you indicated the take-up is low. Assuming that there is a bankruptcy prohibition period, is there anything, in your view, that can be done to alter the criteria so the take-up is higher, if you believe those programs would be useful in relieving hardship in those circumstances?
Mr. Boyko: I do not want to give the impression that our organization thinks that programs like Interest Relief and Debt Reduction in Repayment are not valuable or serve no purpose. If you talk to some of the people who call our office, and do the math on what they earn and pay, and still do not qualify, the thresholds are clearly still too high. I do not think it would be difficult to undertake a study and investigate the implications of reducing the threshold, making the threshold more generous and then, subsequently, reducing thresholds so students can avail themselves of interest relief.
There is talk that we can make the system more responsive to the size of a student loan versus the income of a student debtor so the program is more graduated. Right now, the program is all or nothing. You either qualify for Interest Relief and you escape your payment for a six-month period or you do not and you are still saddled with $350 or $450 a month in a loan payment.
A step in the right direction currently under discussion is something that is more graduated. Again, that change still does not go to the heart of the problem that students are graduating with $25,000 in a Canada Student Loan, not to mention credit card and other debts.
In answer to your question, I think we can do to a lot to make the existing programs more generous. Hopefully, we will reach a point where nobody will ever need to avail themselves of bankruptcy legislation. For those who, for one reason or another, do not qualify for the debt management program that the federal government representatives were so proud to tout at the committee — people simply slip through the cracks — these people should be able to avail themselves of a hearing before a judge.
Senator Meighen: You mentioned the point that Senator Goldstein raised: You must be in good standing in to apply for those programs. It seems to me it would not be too difficult to miss a payment if a person's situation becomes much worse than anticipated. They miss a payment or two and they are not eligible to apply. They must apply before they run into trouble, which is a challenge. If I were the king of the world, I would eliminate that issue first and foremost. Do you agree?
Mr. Boyko: I agree that once they are in default they are no longer eligible for the programs to ameliorate their payments.
The definition of default is 270 days without a payment, which is nine months. That amount of time sounds reasonable to many of us. As I say, people slip through the cracks. People apply and, due to the threshold, simply do not make it. Therefore, I agree that bankruptcy legislation might be for those who, for one reason or another, are in default and are no longer eligible for the programs we talked about.
Senator Jaffer: I wanted to ask the question Senator Meighen asked, but I have another one with respect to understanding the finances. Do you have ``first step'' programs to manage money for students coming to the campus for the first time?
Mr. Boyko: We do not, as an organization, but most universities and colleges have financial aid departments that attempt to run those programs.
Senator Jaffer: My follow-up question is: I hear from students that banks give them credit easily, a minimum of $5,000 to $6,000, when they go to university. Do you think we, as a committee, should encourage banks to have some kind of loan management program or something regarding responsible borrowing?
Mr. Boyko: I think the federal and provincial governments can play a role in reducing the need for students and their families to turn to private lines of credit. For example, they can make the system more responsive to demonstrated financial need, replacing as much loan as possible with grants on the front end. At the same time, a lot of the problem is a cold calculation regarding what your paycheques and loan statements say. No amount of literacy on the subject will get them over the hump if they cannot pay their rent and student loan at the same time.
I agree there is a role early on to ensure students understand exactly what they are getting themselves into. A system of needs-based grants would also help reduce the amount of loans students are forced to take on.
Senator Moore: I apologize for arriving late. The chair asked you about your organization. I apologize if you covered this at the outset, but how many universities and students do you represent?
Mr. Boyko: We represent about 87 student unions, and those unions include colleges, universities, graduates and undergraduates. The total number adds up to approximately half a million students.
Senator Moore: How big is the staff at your organization?
Mr. Boyko: I think there are four people in my office today.
Senator Moore: Does that include you?
Mr. Boyko: Yes, it includes me.
Senator Moore: The chair asked you how you are funded and you said membership fees akin to labour unions. I do not know what that means. Does each school pay X amount? Is it based on their enrolment? What is the average fee?
Mr. Boyko: At the beginning of the year, students are required to pay their tuition fees. At the same time, they pay a membership fee to the local student union and a fee to our provincial and national union. The individual fee is levied on our members.
Senator Moore: It is levied on the student members and not on the universities.
Mr. Boyko: Yes.
Senator Moore: What is the average fee?
Mr. Boyko: Our membership fee is $3.82 per term.
The Chair: Does that include GST?
Senator Goldstein: It is $3.78 because of the 2 per cent reduction in the GST.
Mr. Boyko: It was pegged in 1992 or 1993 at $3 and it has increased by Consumer Price Index, CPI, since then.
Senator Moore: The fee is per term. Either Senator Massicotte or Senator Harb asked you about the debt load, and you mentioned student loans and credit cards. Has your organization undertaken an analysis of what composes the average student debt load in terms of tuition, living costs, social costs, et cetera?
Mr. Boyko: We have not undertaken that task and it might be impossible. When one applies for a Canada Student Loan, which includes application to provincial student financial assistance, one provides information on what one expects to pay in fees and accommodations, minus what one expects to earn over the summer. Tuition fees and living expenses are included within the student loan calculation, which differs from province to province.
Senator Moore: I meant that during the year, a student might borrow another $4,000 or $5,000 for whatever purposes, over and above the tuition fees and books. You have not looked at that analysis. Students graduate with an average debt. What is the amount?
Mr. Boyko: It is between $22,000 and $28,000.
Senator Moore: Do you have a schedule of those figures for the committee?
Mr. Boyko: No.
Senator Massicotte: The figure is average debt per student that graduates or average debt per student that has debts?
Mr. Boyko: We only count those who have debts. It indicates the average student loan for university students after the completion of a four-year program.
Senator Massicotte: It is only for those students who have a debt?
Mr. Boyko: Yes.
Senator Massicotte: How many students have a debt?
Mr. Boyko: Roughly half.
Senator Massicotte: The average is half of that, one could argue.
Mr. Boyko: Yes, but I would argue that we should not include those students who do not take on debt.
The Chair: Senator Moore has the floor.
Senator Massicotte: This question is a supplementary one. Do you have information on the socio-economic background of the students who have debt?
Mr. Boyko: We do not have that information, although it would be valuable. At the end of the day, those who apply for loans on the front end do so presumably because they do not have the resources at the time. I do not think I have ever seen anything definitive in terms of the composition of student-loan holders. However, a reasonable assertion is that they are from those families who have the fewest resources.
Senator Moore: Are these graduate and undergraduate students?
Mr. Boyko: No, they are graduates after the completion of a four-year program. The figure does not include graduate students.
Senator Moore: Do you know whether any of your members upon graduation with debt have incurred debt at payday loan institutions?
Mr. Boyko: I do not know but I would be happy to do my best to find the information for the committee. I know the committee has studied criminal rates of interest, which may be useful to some indebted students.
Senator Moore: What makes up the $22,000 to $28,000? How are those amounts broken down? How much is for books?
Your fee is almost $4 per head so your budget is about $4 million. What part of your budget do you spend on this kind of research?
Mr. Boyko: We spend about half.
Senator Moore: I am interested because you could contribute important work not only to this committee but to the nation as a whole.
Mr. Boyko: I would say that one half is spent on advocacy work.
Senator Moore: The debt elimination is one of your core missions.
Mr. Boyko: Yes.
Senator Moore: However, you have not looked at what that debt is comprised of. Let me suggest that you should do that. That is all I have for now.
The Chair: We have exactly five minutes left with this witness. Senator Goldstein, you have a particular interest in this subject because of your private bill.
Senator Goldstein: I have a number of disparate remarks and questions. I have statistics on collection costs, which I will make available to the committee. They come from the Department of Finance budget and statements, which are public, and the committee should be aware of that. The figures rank in the millions per year.
In terms of which students are prone to borrow, there is anecdotal evidence. There is a learned article on the subject by Professor Saul Schwartz of Carleton University. I will make the article available to you, Senator Moore.
There are three kinds of student loans: first is for colleges; second is for schools of a more general nature, such as trade schools and the like; and the third is for university studies. Is it fair to say that the loans granted for university studies, as opposed to the loans granted for the other studies, are much more prone to be reimbursed without problem than the other loans?
Mr. Boyko: Can you repeat that?
Senator Goldstein: I am trying to compare the students and their loans but I asked the question in a complicated way, and I apologize.
University students have student loans and trade school students have student loans. The statistics we have indicate a general default rate and general recovery rates. I understand you have statistics, or others in your organization have statistics, as to what the losses are with respect to university loans, as opposed to the other kinds of loans. It is important that the information be made available to the committee. Will you undertake to do so?
Mr. Boyko: I believe that data on rates of repayment are available in the annual report of the Canada Student Loans Program.
Senator Goldstein: You can subdivide it as well. I have seen it so you have it. Can you make it available to us, please?
Mr. Boyko: I will do so.
Senator Goldstein: A more general question is in response to observations made by some of my colleagues in the Senate in connection with the private members bill I am sponsoring. I wonder whether the loan period — the non- discharge period — whether it be two years, five years, seven years or ten years, is as important as another alternative, which is to permit a judge on the application of a student where there is severe hardship in reimbursement. I do not much care when that happens after the studies have been completed. When it is clear that reimbursement would be a severe or substantial or significant hardship, then a judge should have the freedom to relieve the student in whole or in part from the obligation to repay the loan and the interest, and to postpone payment of the interest in whole or in part. Is that something you would consider appropriate for the relief you seek for students?
Mr. Boyko: You know better than I the importance of hardship clauses in bankruptcy legislation. Those provisions are absolutely critical. I do not think any prohibition — be it two years, five years, seven years, ten years or one hundred years — would be at all appropriate without a hardship clause. We feel strongly about that issue.
That item does not address the heart of the fact that we went 33 years of the Canada Student Loan Program's 43- year history without a prohibition at all, and we did not go into economic crisis. I appreciate your comments. The hardship hearing is probably the most critical part of that legislation that must be changed.
The Chair: Mr. Boyko, thank you very much, not only for appearing today but for your letter in both official languages, dated November 29, which will form part of our record. You have made your case clearly and we appreciate your coming.
Carrying on with this afternoon's session, we have now the International Insolvency Institute, represented by Bruce Leonard, Chair, and by David Ward, Counsel. Welcome, gentlemen. How will you proceed?
Bruce Leonard, Chair, International Insolvency Institute: Carefully, was the suggestion.
The Chair: I am advised by the clerk that you have half an hour.
Mr. Leonard: I will go first to introduce the topic.
Senator Goldstein: Let me briefly declare my interest. I am a member of The International Insolvency Institute, which was god-fathered and fathered by Bruce Leonard, who was also the god-father and father of the international model law on which he will speak. He has done Canada proud with his tremendous effort and work in this area.
The Chair: Thank you, Senator Goldstein. Your comments have been noted. Sir, it is nice to have you with us.
Mr. Leonard: It is nice to be here. Thank you for having us again, and thank you, Senator Goldstein, for those kind words. They are not deserved; it is only a question of being in the right place at the right time.
Today, I will introduce my remarks in three parts: One, the international provisions of the legislation which I submit are a national embarrassment; two, I will concentrate on creditor participation, or lack of participation, in the Canadian bankruptcy system and the ways in which it can be improved; and three, I will address transparency and integrity in the Canadian insolvency system, which could also be improved. This committee is probably the best vehicle for this discussion to happen.
I will give a brief background on the International Insolvency Institute. It is a Canadian non-profit, non-commercial corporation. At last count, it has members in 61 or 62 countries around the world. Our revenues are raised from membership dues and the occasional conference. As an organization, we participate in insolvency reform around the world, but we do not cross-ruff. Some of our American members have participated in the American reform process. Our English members have done the same in England. Our Japanese members have participated in the Japanese process. There is no cross-ruffing in that the English members do not participate in the U.S. system, et cetera. My remarks will be Canada-originated and dedicated.
The international insolvency provisions of the legislation have been expanded from what they were in the earlier legislation. I will talk about the UNCITRAL Model Law on Cross-Border Insolvency. UNCITRAL is the United Nations Commission on International Trade Law. This organization is the United Nations commercial agency. They work in the international arbitration area, and a number of other areas. They have promulgated treaties, model laws, adopted around the world. They are regarded as the international gold standard for legislation.
In 1994, the work began on what has come to be the Model Law on Cross-Border Insolvency. The object of that law was to assist stakeholders in making international procedures more transparent and flexible, and to foster greater cooperation between countries.
Canada played a significant role in the development of the model law. A lawyer from the Department of Justice in Ottawa was the chair of the working group at UNCITRAL that devised the model law. The working group consisted of 70 to 80 non-government organizations and member states. Canada was a full member of the UNCITRAL process that developed the model law, and a Canadian lawyer was the chair of the working group.
The Chair: Do you want to name that individual?
Senator Goldstein: She is named in the brief.
Mr. Leonard: Kathryn Sabo is her name. She did a fine job of chairing the working group. She deserves credit for herding a number of disparate cats into a productive process.
Canada was represented throughout the piece in an official delegation by the Department of Justice as well. They attended every session. In the fullness of time, UNCITRAL, in the collegial and non-confrontational way it works, developed the Model Law on Cross-Border Insolvency. It was passed by the General Assembly of the United Nations and became a United Nations product in late 1997.
The Model Law on Cross-Border Insolvency is not complicated; it is only 32 sections long and has provisions that encourage international cooperation. It has become the gold standard for international cooperation in insolvency cases. Twelve countries at this point have adopted the model law, more or less as written. It is under consideration by eight more countries, which would bring the total to 20 countries. The U.K., the U.S., Mexico and Japan are among our major trading partners that have adopted it, and Australia and New Zealand are poised to adopt it. It will be in place and in force basically around the world.
It is interesting that most of those countries have adopted the model law as it is written. The U.S. has 32 sections and the English have a slightly different number but the law is essentially the same. When it came to the Canadian legislation, the wheels fell off the model law. I am not sure why that happened, and nobody has been able to tell me why that happened. Of the 32 sections in the articles and the model law, Canada adopted 20. For some reason, there was a problem with the other 12 sections.
I have distributed a paper, and the technical detail on the point I am addressing is at pages 16 and 17. It is a list of the provisions of the model law. In the left-hand column is Canada's treatment of those provisions, and the contrast is invidious. You can see the number of provisions that have been deleted. None of those provisions are in the current legislation.
By contrast, the United States and England have accepted all of those provisions, as have most other countries. Canada is badly out of step in adopting the model law. We are noncompliant.
The Chair: The great irony is that Kathryn Szabo and her colleagues at Justice Canada completed this great work, and the other powers-that-be rejected it.
Mr. Leonard: Exactly; I have never understood it or been given an explanation for it. My submission to this committee is to recommend that Canada adopt the model law the way it was written, and the way the Canadian delegation voted for it and led its development so we can be consistent with our major trading partners. There does not seem to be a reason not to adopt the model law the way we approved it in Vienna.
Senator Eyton: You must have some idea as to why it was not adopted. It simply was not a clerical error or typo. There must be some reason for dropping 12 sections.
Mr. Leonard: Not that I have ever heard. The snippet I heard is that Canada is a bijural country, and I guess that is correct. In some fashion, that was treated as a reason for not having provisions like the availability of additional assistance to foreign representatives. It made no sense.
In talking about civil law countries, when Japan adopted it, Japan completely flipped. Japan had been a territorial state and they adopted the model law. They changed their entire system to a universal system from a territorial system so they could adopt the model law. It would not have caused us any great concern at all to adopt it.
Senator Massicotte: Four or five years ago we studied this issue. We had government officials as witnesses. My recollection is that they liked the model law. In fact, the comments were positive. I remember asking questions on that law. Does my memory serve me right?
Senator Moore: That is right.
The Chair: I am not sure: Let us assume they liked it.
Mr. Leonard: The people who represented Canada in Vienna at the UNCITRAL sessions liked the model law and they voted for it. Something happened in the political process when it came back to Ottawa. Thus, we are left with something that does not resemble the model law at all, and is inconsistent with what the United States, the U.K., and Japan are doing.
Senator Massicotte: It is not coincidental with the election of the Conservative government, is it?
The Chair: It sounds like the opposite.
Mr. Leonard: I respectfully decline to answer the question.
Those are my thoughts on the model law. My recommendation and that of the organization is that Canada should proceed to adopt the model law, as it is written. There would be no great harm.
The Chair: That is only the model law part of your presentation. Please continue, sir.
Senator Meighen: Did you say that Japan is a civil law country?
Mr. Leonard: Yes.
Senator Meighen: Have other civil law countries adopted the model law?
Mr. Leonard: Yes, they are Mexico, Poland, Romania and Spain.
Senator Meighen: The problem is not around civil law or common law?
Mr. Leonard: No.
My second submission is on creditor participation in insolvency matters. The international contrast in this case is also unfavourable to Canada. We do not have a system, and we certainly do not encourage a system, by which ordinary creditors can participate in the bankruptcy process. They are not allowed to organize into committees. They can if they want to but they are not informed and the process is not transparent. They are not able to represent themselves effectively in major reorganizations in the way that the major secured creditors and lenders are able to do. This lack of participation puts Canadian creditors at a disadvantage.
By contrast, in a major Chapter 11 case in the United States, the ordinary, unsecured creditors almost always receive a return on their claims. In a major case in Canada, ordinary creditors almost never receive a return on their claims. These creditors are normally wiped out in the process.
The Chair: Are you referring to corporate restructurings?
Mr. Leonard: Yes.
The Chair: There could be a correlation on the issue, which Senator Massicotte will pursue, no doubt, on the collective agreements and the difference between Canada and the U.S.
Mr. Leonard: I think so. In the U.K, the legislation was changed to provide a carve-out for unsecured creditors from floating charge securities. When they have a realization in the U.K., 20 per cent up to a maximum of the proceeds of a realization from a floating charge security is set aside and made available to unsecured creditors. In the U.K., unsecured creditors always receive something by statute, and in the U.S, they receive something by virtue of their position. They are organized and are part of the process. The reorganizing debtor must deal with them to obtain their approval for the plan. That requirement always results in a return on an unsecured creditor's investment in the United States.
In Canada, they can be, and generally are, ignored. There is nothing for them. They are not encouraged to organize and they cannot form creditors' committees. My recommendation for this committee is to allow the unsecured creditors at least to organize themselves so they have an official voice representing the unsecured creditors in the negotiations that happen in every major reorganization.
The Chair: Do you mean a formalized process? It is my experience that unsecured creditors have always had committees. Perhaps the committees have been informal.
Mr. Leonard: There have been informal committees but they do not have status. The difference between the U.S. system, which has formal status for committees, and our system, which does not, is that the U.S. unsecured creditors are treated better than our unsecured creditors for no good reason. I suggest that this committee might consider the issue. There are different views and ways of doing these things.
I will move on to transparency and integrity. I will call this my ``one-hat'' theory, which is to say, ``in an insolvency reorganization, could everyone please wear only one hat?''
The Chair: Do you mean, all creditors will be equal?
Mr. Leonard: No, but I will segue to that point. A number of countries have abolished the priority for governmental claims. I do not hear any enthusiasm from the department when I raise that issue with them.
The Chair: You might hear it from this committee.
Mr. Leonard: That is right. It is a trend, and we have documented it in a published article.
The Chair: Is it in your brief?
Mr. Leonard: It is not in the brief.
The Chair: It is good to have on the record.
Mr. Leonard: It is a published work and I can send that to the committee.
Transparency and fairness, in the one hat, refers to insolvency administrations and representatives, trustees, receivers, liquidators, sequestrators and lawyers. Canada seems to have a tendency to allow insolvency representatives to act in more than one capacity and, occasionally, in more than one conflicting capacity. There is no bright line test in the act to say, ``If you have one responsibility, your responsibility is to that group. Stick to it and do your job for them and do not change hats, or do not wear too many hats.'' That summary is as simply as I can state it.
A good example was in the change between Bill C-49 and Bill C-12. Originally, there was a prohibition against a trustee acting for a secured creditor unless the trustee had an opinion from an independent counsel that the secured creditor's security was okay. In the provision that was in Bill C-49 and has now been changed, the solicitor who gave the opinion on the secured creditor's security was required to have no prior involvement with the secured creditor for two years prior to giving the opinion. The same sort of test exists for an auditor not being a trustee: Two years of independence.
That was changed in Bill C-12. Now, the requirement is only to be independent. That wording will be interpreted as being independent of the secured creditor today, in terms of timeframe. I do not know where that amendment came from, but it is a retrograde step in terms of transparency and fairness in our system.
Those submissions are my main ones. If the committee will permit me one more reference, the conclusions in our submissions are on pages 32 and 33. Then I have an appendix with some technical things that people or the department can go into later. That said, page 32 and 33 are our main conclusions.
David Ward, Counsel, International Insolvency Institute: In the interests of time, I will not make a formal submission. It might be productive to refer to the written submission that was filed.
In addition to the points that Mr. Leonard made, a section of this paper deals with the adoption of the model law in countries around the world. Significantly, the paper goes on to do two other things that I commend to you, if there is an opportunity to go through the paper.
The first is a section of the paper beginning at page 19 where we compare and contrast the United States insolvency system — which is a highly-developed insolvency system — to Canada's. There are seven particular areas where we think that the Canadian system can borrow from the U.S. system; that we might take some of the items in their system that work and consider them for adoption within our own system. That section begins on page 19.
Then skipping to the end, Mr. Leonard mentioned that the summary of the conclusions are on the final two pages, pages 32 and 33. Of interest about the conclusions on page 32 is our indication that they would be neutral to the interests of reorganizing businesses and their creditors.
The point we are trying to make is that these changes should not be particularly controversial because they do not deal with large-priority issues and should not affect priorities or realizations. These changes are important but, to some extent, they are procedural; they are things we would make the system work better but are not particularly contentious.
The Chair: I will ask Senator Eyton if he has a point to make that he discussed with me earlier today.
Senator Eyton: I must have a bad memory. I do not recall.
Senator Goldstein: Maybe the chair has a bad memory.
The Chair: The chair has an excellent memory.
Senator Eyton: I wanted to ask you about your membership. I believe you said there are 61 members?
Mr. Leonard: There are 61 countries.
Senator Eyton: What kinds of skills and professions make up that membership?
Mr. Leonard: Lawyers, accountants, academics, judges and a few regulators would cover the area.
Senator Eyton: Therefore, you have a good perspective of international practice and standards?
Mr. Leonard: We hope so.
Senator Eyton: How long has the organization been around?
Mr. Leonard: Eight years; it is relatively new.
Senator Eyton: A perpetual question for me is: Who does it best? Who do you look at and say, ``There is someone I would like to emulate?'' Who does it best, in your experience, given that exposure?
Mr. Leonard: I am always reluctant to answer this question.
Senator Eyton: I am asking you.
Mr. Leonard: I have no alternative, then. For a variety of reasons, I think the Americans do it best. Perhaps that is the result of the resources they have available for studying legislation. They undertake an enormous amount of background work. That is why their bankruptcy act is six times as long as ours; they want to make it fair. In making it fair, they have made it complicated. It may be too debtor-friendly — there should be a balance — but I think the best system is the U.S. one.
Senator Eyton: Is it consistent across the U.S. or are there variations within the states?
Mr. Leonard: It is federal.
Senator Eyton: Are there no intervening provisions of the states themselves?
Mr. Leonard: There is a federal pre-emption theory.
Senator Eyton: You have talked, and very nicely, about the three issues you wanted to table today: the international features, creditor participation and transparency.
I have seen corporate restructuring on both ends — the good side and bad side — and it seems to me the conclusion coming out of almost any experience I know of in Canada is that one of the singular problems to the proceedings under bankruptcy or insolvency legislation is the time delay and the administrative cost. I know this subject was not on your agenda, but please answer if you can.
Do we have good numbers on our experience here in Canada relative to, for example, the U.S., who you say may do it better? You mention that ordinary creditors often receive not a dime. Much of that disappears due to the costs of the court system, the lawyers involved and the accounting firms involved, particularly when they go into possession and try to manage a business they are not experts in, or familiar with. The result is overall disaster and high economic cost. Do you have any kind of numbers about our performance overall relative to other jurisdictions?
Mr. Leonard: There is nothing empirical that is really comprehensive. I have anecdotal experience. I do not think there is any question that the American system takes longer and is more expensive. The flip side of that is: If you want transparency, fairness and an even hand with an impartial court, these things will happen. If you expose more issues to the court, there will be more litigation and more things will be argued in court.
Senator Eyton: To be precise then: On average, what percentage of the total estate or value would be taken up with administrative costs of one kind or another?
Mr. Leonard: There is information. I do not have it at my fingertips. The number that I normally look to is what unsecured creditors in a Chapter 11 bankruptcy receive. They have only their negotiating position, therefore what do they receive? Senator Goldstein will have his own views. My guess is somewhere between 10 cents and 15 cents, which does not sound like a lot, but if they are receive zero in another system —
Senator Eyton: I wanted to move up the scale and find out what the administrative costs were. Then, those costs results in the number you are talking about. I think the number would be interesting.
Mr. Leonard: It would be interesting. One of our members in Los Angeles has a interesting website where he tracks large Chapter 11 bankruptcies and how long they have been in the process, when they came out, how they came out and whether they re-file. If anyone is interested, I can direct them to it. That source is the best empirical one out there.
Senator Eyton: Are there other jurisdictions where bankruptcies take place outside a formal or legal court system?
Mr. Leonard: Yes, the American system is probably the most court intensive in the world. To improve ours, we should not go all the way to the Americans system. The European countries make a lot of their arrangements outside their court, but I am not sure why. It is only an observation.
Senator Massicotte: I will talk about the big picture. Obviously, we proceed under the Companies' Creditors Arrangement Act, CCAA, and the reorganizations because someone decided in their wisdom that it is in the economic interest of the country to reorganize companies when they are insolvent to maximize employment and economic growth. We buy that argument. When you identify the best country, I presume one of your criteria is: What system allows the recovery or maximization of those terms going forward?
Let us talk about the competitors. Air Canada and certain other companies that have come out of CCAA can come clean, especially companies that require a significantly higher level of leveraging and financing. They rid themselves of their bad contracts, leases and employment contracts possibly. In fact, Air Canada employees say they were shafted in the process. I appreciate what they did but, in fairness, what about the competitors? Sometimes competitors complain that the process is unfair and unless they can go back, they will lose all their equity because they do not have the same operating costs as their competitor. There seems to be a fairness issue. How do you deal with it? I suspect that, irrespective of that deemed unfairness, it is still in the country's interest to permit the CCAAs. Perhaps you can educate us on that issue.
Mr. Leonard: I do not think anyone has found a way to solve that problem. The issue arose in the late 1980s and 1990s when virtually the entire airline industry was in chapter 11 bankruptcy, except for American Airlines. They were flying, making money and paying taxes while all the others were operating and not paying their pre-filing debts. That situation was regarded as unfair, and, in a sense, it was unfair. I do not think anyone has found the answer to that problem.
Senator Massicotte: The answer in that industry was, everyone was doing it constantly. They gained a competitive advantage by claiming bankruptcy every five years.
Mr. Leonard: I do not think there is an answer we can structuralize. It is a problem. American Airlines spent a great deal of time complaining about the process because they were the last company left. No one, to my knowledge, has come up with a theory of how to solve the problem.
The Chair: Against my normal policy, I will take the liberty of asking one question. It seems clear that you favour the U.S. system to our system, or to what is embodied in this recent legislation. I understand that after World War II when Japan was restructured, their new insolvency regimes were based on the U.S. system — in particular, the Chapter 11 regime.
When government officials appeared before the committee, their evidence showed that a policy decision was made not to adopt the U.S. system. We have had many questions in this committee about that decision. The U.S. Chapter 11 regime has a high profile. Even if one is not a bankruptcy expert like yourself or like Senator Goldstein, one is familiar with the concept of Chapter 11 bankruptcy. It has always seemed to me to make a great deal of sense.
The public policy that led to drafting these laws was developed following an intensive study of all stakeholders, followed by a study by this committee, advised as we were at the time by Senator Goldstein. I believe that you were here to assist us, Mr. Leonard. Are you saying they have it wrong; they might want to rethink the public policy and adopt the U.S. system, especially in the interests of uniformity between neighbours?
Mr. Leonard: I do not need to go that far. I am interested in having the best possible system in Canada — developed in Canada and reflecting Canadian values and judgments. That system is my ideal. Resources have never been dedicated to reach that ideal, and so we are left to build our own wonderful system by picking policy pieces from other countries where the system works, and adapting them. However, we could build a system ourselves if we had the resources.
This committee has done much, if not all, of the valuable legislative work in this area. My submission is that the committee take on a longer term role, if possible, in developing and improving our insolvency legislation. This committee is the most talented group, I believe, in this town for accomplishing that task. The committee would have the support of the private sector. It would be a wonderful task for the committee to take on.
I will draw an analogy. In about 1972, Canada started reforming its personal property security legislation. We wondered who had personal property security systems that work. The answer is, next door. Uniform Commercial Code, UCC, article 9 is the best legislation because they spent 20 years developing it. We do not care that it is American; it works.
All of our provinces and territories now have a variation of the UCC article 9, and Ontario has adopted UCC article 2, without calling it that. There should be no pride in not adopting something from the United States simply because it is American. If something works and suits our goals and objectives, then we should look at it. I would like this committee to look at it.
The Chair: Thank you for your kind comments about the committee. In our report, we can submit to the Senate that we might want to rethink our findings in 2003.
Senator Goldstein: Is it fair to say, Mr. Leonard, that the provisions of the model law that we did not adopt are, by and large, provisions that deal with the status of a personal representative before the courts? The answer in my mind is that our court system, both common law and civil law, does not require an additional conferring of status because that status already exists. Therefore, it seems to me that the reasoning of the department in not adopting those 12 sections is that fully 10 of them deal solely with the status of personal representatives.
Mr. Leonard: I have difficulty agreeing with that position. You can go down the list on pages 16 and 17 of the material. On page 16, item (d) was not adopted and it provides for the availability of additional assistance to a representative. The U.S. and the U.K. are okay with that provision, but we took it out.
Senator Goldstein: Do we not have that assistance available without this provision? That is the point I am trying to make.
Mr. Leonard: I guess you could make the case that there are elements of what we deleted.
Senator Goldstein: Is that true of most of those provisions? I raise the question because I do not want people around the table or people listening to think that the model law, which is an excellent piece of work, was so badly amputated by the Canadian legislator that it cannot work anymore. That is not the case.
Mr. Leonard: I would be more persuaded if the government had said, with regard to these deletions, ``They are covered in X section, so we do not need them here.'' The U.S. and the U.K. had the same situation.
Senator Goldstein: You do not need a legislator to tell you that information. You know it.
Mr. Leonard: I am a fan of uniformity. We led the process and we voted for it. I cannot see any principled reason not to have it in Canada.
Senator Goldstein: With respect to Mr. Ward's presentation, his observation was that all the suggestions made in your excellent submission are suggestions that are not policy change suggestions but rather streamlining and procedure-easing suggestions. That view is encouraging.
The Chair: Thank you, gentlemen. We all appreciate your appearing today. We will take your comments and submissions into careful consideration when we prepare our report.
We welcome our witnesses from the Canadian Association of Insolvency and Restructuring Professionals. We have with us Alan H. Spergel, Chair; and Guylaine Houle, Bankruptcy Trustee, Pierre Roy and Associates Inc. We look forward to your presentation. I will not summarize the purpose of this meeting. I hope listeners on television and the Internet will be in sync with the proceedings that have already taken place this afternoon.
Alan H. Spergel, Chair, Canadian Association of Insolvency and Restructuring Professionals: I will open with a few remarks and then defer to my colleague who will make specific presentations contained in our brief.
The Chair: We have your brief. It forms part of our proceedings. This brief is dated February 13, 2008. I believe you have been before us already on this same exercise. Am I correct?
Mr. Spergel: My association has been before you. Unlike the previous appearance, where we discussed corporate issues primarily, this afternoon we will focus on personal insolvency issues. There is a difference in our presentation this afternoon.
The Chair: I am pleased you made that distinction. There was controversy amongst the stakeholders as to why we gave you two kicks at the can. The fact is, you are dealing with two entirely different aspects of the subject matter. We are interested in the individual bankruptcy aspects.
Mr. Spergel: Appearing with me is my colleague, Ms. Houle, a past Secretary-Treasurer of our association. CAIRP, as we are known, is the national organization representing insolvency and restructuring professionals. Our 880 general members are identified by the certification mark, chartered insolvency restructuring professional, CIRP. That certification is gained through a combination of study, work experience and licensing as a trustee in bankruptcy. Our association applauds the Senate's passage of Bill C-55, now Bill C-47, and, most recently, Bill C-12, now Bill C-36. We strongly supported adoption of the insolvency reform legislation. Indeed, our association contributed to its elaboration at every stage of the process.
We are pleased that your committee continues its review and we thank you for the opportunity to testify further today.
Today, our submission focuses on personal insolvency issues. While the reform legislation certainly improves the options for individuals seeking rehabilitation, we believe that certain provisions, if amended, would enhance the fairness and efficiency of the insolvency process. Before discussing the substance of the legislation, our association wishes once again to propose a name change for the Bankruptcy and Insolvency Act, BIA, so that it better reflects the nature of many current insolvency engagements. We would like to see it named the Canadian Insolvency and Restructuring Act, or CIRA.
Today, a chartered insolvency and restructuring professional may be appointed to assume a wide variety of functions governed by the BIA such as proposal trustee, proposal administrator, trustee in bankruptcy, interim receiver, court appointed receiver and private receiver.
While all these appointments fall under the BIA, the act's title does not indicate this wide variety of potential roles. Also, the title does not reflect the shift in Canadian policy towards restructuring and rehabilitating both companies and individuals. Since bankruptcy has now become the final option of indebted companies and individuals, we should no longer be guided by an act whose title suggests that bankruptcy is its primary purpose.
It is noteworthy that in the U.K., upon whose system our insolvency legislation is based, the relevant laws are known today as the Insolvency Act, 1986, which has since been amended several times, and the Enterprise Act, 2002. No mention is made of bankruptcy.
Moreover, if the BIA were to become the CIRA, perhaps the name would no longer deter financially-stricken companies and individuals from seeking help before it is too late. We do not want to scare individuals or companies away from seeking our services by continuing the use of bankruptcy terminology in the title of the legislation. After all, hospitals do not overtly advertise their morgues, and dentists do not advertise extractions. Our members would prefer to become known as insolvency and restructuring professionals rather than trustees in bankruptcy. This name change would be in the public interest.
At the moment, insolvent individuals seek help from many unscrupulous, untrained and unprofessional advisors. We are perceived as offering only a service of last resort — bankruptcy — and are often consulted only after financial charlatans have used up all available credit for consulting fees, and no further options are available other than bankruptcy.
We believe that the removal of the term ``bankruptcy'' from the legislation's title would be a tremendous step in encouraging debtors to seek help from extensively trained and regulated professionals.
Finally, I draw the committee's attention to three personal insolvency issues highlighted in our executive summary to be presented by Ms. Houle.
[Translation]
Guylaine Houle, Bankruptcy trustee, Pierre Roy and Associates Inc., Canadian Association of Insolvency and Restructuring Professionals: Mr. Chair, the first aspect of personal insolvency we wish to speak to deals with student loans.
Although amended, the provisions still seem to us unduly harsh for former students who are struggling with their debt burden.
We also wonder why students who are in dire straits financially should not be allowed to at least bring their case before a judge for adjudication and potential relief. We support without reservation the more generous provisions contained in Senator Goldstein's Bill C-205.
As far as registered retirement savings plans are concerned, we agree that, on a basis of fairness, RRSPs and RRIFs should be treated the same as pensions. However, we endorse the anti-abuse provision requiring that RRSPs that are exempt from garnishment under the act be locked-in to ensure these funds are used for retirement purposes only.
The last point we draw your attention to relates to owed income tax. One of the reasons behind the 1992 amendments made to the Bankruptcy and Insolvency Act was to put Crown claims on an equal footing with other creditors' claims. We believe that the Canada Revenue Agency — and Revenu Québec for those who practice in Quebec — already have sufficient collection powers without giving them the additional preferential treatment that is being considered in this reform. If anything, this preferential treatment shouldn't be the sole prerogative of the Canada Revenue Agency or Revenu Québec, but should also be granted to all other creditors in the same situation.
Honourable senators, my colleague and I are now ready to answer your questions.
[English]
The Chair: Thank you, Ms. Houle. We will move to questions.
Senator Moore: I will ask about your recommendation in your written presentation on the period of discharge for student debt. When we reviewed this law in 2003, the time period was 10 years. Almost everyone who came before us at that time recommended five years, including the banks. Most everyone suggested that five years was a reasonable length of time.
Ms. Houle, you say that seven years is too long and five years is too long to wait for relief in cases of hardship. We had a provision whereby hardship cases could be looked at sooner, did we not?
Senator Goldstein: We asked for a report looking at the legislation.
Senator Moore: Yes, Ms. Houle, you recommend that in cases of hardship, this issue should be dealt with at the bankrupt's hearings and be dealt with immediately.
You have supported Senator Goldstein's private member's bill for two years. You seem to say here that five years is not be so bad if hardship cases can be dealt with before that five years. Your organization was here in 2003 and you were in the five-year group then, so you have changed. Tell us about that. You have gone from five to two.
Mr. Spergel: You need to look at the genesis of how the student loan provisions came about. We are lucky to have Ms. Houle here today because she sat on the personal insolvency task force, which was comprised of almost all the stakeholders in the insolvency process. I will let her give you her firsthand recount of what transpired in those discussions and how we arrived at the five-year period and at the two-year period today, agreeing with Senator Goldstein's bill today.
Ms. Houle: To put it in the fewest words possible, we would love to have no time — zero. The organization sees no reason under the act to treat a student loan as a different kind of loan. That is our position. We strongly believe that the Bankruptcy and Insolvency Act is in place to treat all unsecured creditors equally. That principle is the reason for the BIA. However, today we are stuck with an act that provides for a 10-year period. Obviously, any time below 10 years is better than 10 years.
In 2003, we said that five years was convenient for us. However, drafters came back with seven years. We would love to see less than seven years and five would be better, obviously. Two years, which was the original provision, was something that came into force in September of 1997 for only approximately nine months — a little less than that. On June 13, 1998, the act changed and, suddenly, we went from two years to ten years.
I have no intense research but I am sure that between September 1997 and June 1998 no data was recovered from anyone to say whether two years was correct. We simply went from two years to ten years without any consultation.
When Senator Goldstein presented his bill, our organization determined that to go back to the two-year time period would be good, given the intense study by Senator Goldstein. It would bring us back to the two-year restriction of September 1997. In cases of hardship, there is no reason why a person who suffers a particular hardship should wait any amount of time.
Senator Moore: In 2003, when we heard the evidence, we were told that the period went to 10 years primarily at the urging of the chartered banks. At the time, there seemed to be a rash of bankruptcies by graduates. It was thought that students were taking advantage of the law and of the circumstances to rid themselves of their debt soon after graduation. Apparently, that must have been addressed because students were one of the parties that came back and said that five years would be more appropriate now.
Ms. Houle: I do not want to say that the data from the banks was wrong, but I find it difficult to believe that the banks had a rash of losses when only about 100,000 individuals, on average, go bankrupt each year. Of those individuals, maybe 50 per cent have student loans. I find it difficult they would call it a ``rash of bankruptcies.'' Having said that, we are still looking at 10 years today. Obviously, they must have provided data to the legislator to show that 10 years was more appropriate.
Senator Jaffer: I have a quick question. Did you conduct research to determine that if you changed your name, people would be more able to use your services? Why do you make that claim?
Mr. Spergel: That question is an excellent one. One of the major reasons we propose the change in name is that we are trying to reflect the changing insolvency policy. As you are probably all aware, some two reforms ago, the emphasis on rehabilitating the personal debtor was introduced through what we term a ``consumer proposal.'' Prior to that reform, we primarily helped debtors only with bankruptcy. As you know, reforms on the books right now deter people from bankruptcy and push them towards consumer proposal whereby, on the second-time bankruptcy, they must remain an ``undischarged bankrupt'' for a longer period of time, depending on whether they have surplus income.
Our role has changed substantially. Most of our work that you see is highlighted in the papers under major restructuring under the CCAA. How many times do you see headlines with respect to a bankruptcy action? We generally become involved in the restructuring area.
I do not think this change has been translated and communicated properly yet to those seeking assistance in the personal area. Our association name, as well, has changed over the years. We think that going to terminology that refers to us as the insolvency and restructuring professionals is more reflective of what we do.
On another note, it is somewhat disconcerting that we refer to our chief regulator, the Superintendent of Bankruptcy, as the SOB, which some people think is improper. We thought something they might also welcome in that the Superintendent of Bankruptcy would become the Superintendent of Insolvency and Restructuring. Thus, we would no longer refer to that individual as the SOB, but as SIR, which is more effective.
Seriously, I think that our members who now focus largely on restructuring and rehabilitating both companies and individuals would find this name change more reflective of the work they perform.
Ms. Houle: A stigma is still attached to the term ``bankruptcy.'' Unfortunately, as much as we want to counsel debtors to file a consumer proposal with trustees, it is difficult. By the time they come to us, they have used up whatever little money they may have had. They have lived through difficult times. By the time they come to us, it is difficult to counsel them towards a consumer bank proposal. At that point, we must file a personal bankruptcy.
Removing the stigma of the term and allowing debtors to come and see us more at the onset of the initial event that creates the financial difficulty allows us to file more consumer proposals. We would have the time and perhaps more money available to propose something to the creditor that makes sense and would work.
Senator Massicotte: I am confused. I read your presentation and know who you are. You have 880 members, and your name is the Canadian Association of Insolvency and Restructuring Professionals. We heard earlier from an association called The International Insolvency Institute. Your presentation relates to individuals. Is your practice predominantly individuals? The other group made a presentation on the corporate side. Do these groups intermingle?
Mr. Spergel: There are a wide variety of practices. There are insolvency professionals who practice primarily in personal areas and only in personal insolvency. Likewise, there are professionals who deal solely with corporate matters. A number practice in both.
The answer to your question is ``yes'' and ``no.''
Senator Massicotte: Are you a recognized professional body? Must anyone working in this field be registered with your association?
Mr. Spergel: No, there is no absolute requirement to be registered with our association. However, our association works closely with the Superintendent of Bankruptcy. At the moment, to qualify for becoming a trustee in bankruptcy and obtaining the licence, one must go through a joint qualification program called the National Insolvency Qualification Program. It is sponsored jointly by our association and the Office of the Superintendent of Bankruptcy.
Senator Massicotte: That office organizes and gives permits to become a trustee, is that correct? Are all your members trustees?
Mr. Spergel: Yes.
Senator Massicotte: All 880 members?
Mr. Spergel: Yes.
Senator Massicotte: Are the 80 members of the International Insolvency Institute members of your organization?
Mr. Spergel: I think it was 80 countries they represent. With respect to The International Insolvency Institute, some of our members may belong to that organization. However, I believe lawyers and possibly some bankers and regulators belong to that organization, primarily.
Senator Massicotte: What is the predominant professional background for your members?
Mr. Spergel: It is chartered accountants. Our group is associated with the Canadian Institute of Chartered Accountants, CICA. There should be a letter from the CICA.
The Chair: We must draw this session to a conclusion.
Ms. Houle, when you raised the whole issue of the stigma surrounding individuals filing bankruptcy, it made me think you may have read the transcript of our hearing last week. Some groups before us talked about individual bankruptcy. I raised then the question of the stigma that is still there, all these years later. One cannot become a member of the Canadian Bar Association if one is in bankruptcy. Various professional associations have these restrictions. There is a barrier.
I cannot believe that simply changing the name will remove that stigma. In closing, I wonder if there are more concrete steps we can take to help remove the stigma of ``legitimate bankruptcies,'' if I may use that term.
Mr. Spergel: I think we need to be careful about removing the stigma of bankruptcy. We do not want to encourage people to use it and flaunt it. We thought the change of name was a good first step, which would allow us, as insolvency and restructuring professionals, to do our job.
The change will not flip attitudes overnight. However, as an organization, we have already assumed part of the responsibility to educating the public that we are not all about bankruptcy. Bankruptcy is the final solution, but there are other intermediary measures of which you are all aware. We want to consider restructuring and proposals before bankruptcy.
This name change would be a good first step in working in harmony with us to educate the public. Unfortunately, a number of individuals hold themselves out as counsellors who take advantage of individuals who are vulnerable. I think we must do a better job of reaching these individuals. It is frightening when we see the number of people coming into our offices, who have used the services of unregulated individuals. We wanted to take the stigma out of the name and, hopefully, encourage people not to be afraid to talk to us. We do not want them to think we are only about bankruptcy but we are there to help them settle their financial affairs.
The Chair: This is the point. The more that is said about it, the better. This is one of those opportunities. We are conducting the study. You and the previous witnesses indicated we have some ``drag'' or ``clout'' with our report. There is still a propensity, in 2008, for individuals to use unregulated individuals who could obtain relief under the regimes that exist via proposal, or even by going bankrupt and receiving a discharge within the shorter delays.
Yet, instead they continue to incur debts and go to pay-day loan operators to take out a loan that bears usurious interest rates. People who are desperate do desperate things, and that desperation often leads to alcohol abuse and other social problems.
Senator Massicotte: In every large city, a couple of shops are set up by chartered accountants or others with a business plan for high volume bankruptcies predominantly for individuals. The business plans are highly oriented to bankruptcies. Is that approach not negative? You can see such shops in Toronto and Montreal, where they advertise in the Yellow Pages.
Mr. Spergel: We must acknowledge what is accomplished with the existing legislation: By extending the period of time where one remains an undischarged bankrupt, one must look at the alternative of a consumer proposal. If one looks at 21 months to 36 months as an undischarged bankrupt, the alternative of filing a proposal and making similar payments over a similar period of time, without the mark of bankruptcy against one's record, bodes well. The legislation is moving in the right direction. I hope we will have a greater number of consumer proposals filed, and fewer personal bankruptcies.
Senator Eyton: You heard my question to the earlier witnesses from The International Insolvency Institute. Do you have a good sense of, and can you provide the committee with, information on the total cost of administration of an insolvent or bankrupt estate in general? In bankrupt estates, often nothing is available to ordinary creditors. What is the percentage for administrative costs?
Mr. Spergel: I believe that the previous witness referred you to a website in that regard. I have seen reference made to that information where they track larger situations. We must look at the cost of administration and how insolvency legislation has evolved over the years. When I started in this profession, an insolvency proceeding was driven by the creditors. Today, if we take a hard, close look at the proceeding, it is no longer overseen solely by the creditors, with the trustees commanding and essentially taking stewardship of the proceeding in reorganizations. Instead, the process has been moved into the courts, so it is under the control of a judge.
It seems that we have moved too far in one direction. That is why I am enthused about the amendments; so that we will see more and more equitable treatment. The BIA is still structured in such a way that the process is driven by the creditor, and creditors are the ones who dictate whether a reorganization is acceptable. Now, several of the advantages that were previously available only under the CCAA have been rolled into the BIA. Hopefully, we will see the costs of these reorganizations reduced as a result.
Senator Eyton: The process is a combination of cost and time, as Senator Massicotte pointed out. A five-year period will cost more than a one-year period.
Mr. Spergel: Under the BIA, they have six months to come forward with their proposal. We can appreciate the fact, especially tonight, that when we have time limits, we usually must abide by them. That situation is true for insolvency. I welcome the amendments as contained, and look forward to the changes. I do not think that is a direct answer to your question, but the amendments address the problem of costs. With the amendments, more reorganizations should be able to seek refuge under the BIA rather than under the CCAA, which tends to be more expensive.
Senator Goldstein: You are happy that we passed the bill into law rather than waiting for these hearings to be completed?
Mr. Spergel: No, that is not quite it. I know the bill has been passed but it is my understanding that we are waiting for proclamation.
Senator Goldstein: We are waiting for some parts to be proclaimed because the regulations are not finished, but they are working on those regulations quickly.
Mr. Spergel: What would make me most happy is that we continue the insolvency reform process and do not with these two acts. We still have a long way to go. These acts are two large steps in the right direction, but let us not stop here.
Senator Goldstein: We are trying to continue the process.
Mr. Spergel: I am happy with the two steps but I would like to see more.
The Chair: Ms. Houle and Mr. Spergel, thank you for coming. We had a great session, honourable senators.
The committee adjourned.