Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 9 - Evidence - Meeting of February 27, 2008
OTTAWA, Wednesday, February 27, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:25 p.m. to examine 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, witnesses, people in the audience and honourable senators.
I am Senator Angus from Montreal, Quebec. I am chair of the Standing Senate Committee on Banking, Trade and Commerce. To my left is Senator Harb, a senator from the Ottawa area in Ontario; and further down is Senator Massicotte, who is also from Montreal, Quebec. Other members of this committee, I imagine, will arrive as we progress. However, my esteemed vice-chair, Senator Goldstein, the guru on bankruptcy matters, is out of the country, so he will not be with us today.
I wanted to say that not only are we here in person, but we are also on the television network of CPAC and on the World Wide Web. To all our viewers out there, I extend a warm welcome as we continue our study on the recent legislation adopted with respect to bankruptcy and insolvency matters in Canada.
I will not go into a long repetitious description of the history, but I think it is important to explain again what we are doing here. The bills that contain the major revisions are the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. They were passed without study and review in the House of Commons. The reasons do not matter.
There were conditions, however, which boiled down to an agreement by the powers that be that this committee would have an opportunity to review and report on those two bills. One was Bill C-55, back in 2005, which was passed but not proclaimed. It is enshrined in Chapter 47 of the Revised Statutes of Canada, 2005; and Bill C-12, which was passed and received Royal Assent just before Christmas 2007. That bill, Bill C-12, is now part of Chapter 36 of the Revised Statutes of Canada, 2007.
Interestingly, Bill C-12 contains a number of complicated provisions which, in effect, are amendments to the previous bill, Bill C-55.
I have asked for clarification from the powers that be as to when all these new provisions will actually take effect, so that our stakeholders can arrange their affairs properly, and people like you, learned in the law, will be able to provide value for money when your clients ask you what law applies. We are taking the lead here to try to bring some focus.
There are regulations that need to be enacted. There are administrative elements that will make the new provisions work but that have not all been finalized, and that is one of the main reasons for the delay.
There is an informal document being prepared for me and my colleagues on the committee outlining when each and every provision will actually come into effect. I have a preliminary letter today, and there are more to come. When it is all in an order that I think is user-friendly, it will form part of the proceedings of these hearings.
Basically, we are not only giving sober second thought to Bill C-55 and Bill C-12, but we are hearing from all stakeholders, and we have enlarged the scope of our study to also include the Winding-up and Restructuring Act, which applies to financial institutions, insurance companies and banks, and the analogous act relating to farm operations. In the next days and weeks we will hear witnesses on those two bills as well.
The officials in all departments concerned are following our hearings. This being framework legislation, I believe we will soon be bringing in another bill with further amendments that will take into consideration our findings in these hearings. We are, indeed, hearing not only satisfaction from some stakeholders, but also some constructive criticisms of how the bills can be improved.
I have one housekeeping note, honourable senators. I have sent to you all, through Line Gravel's office, our current work plan. We will be having quite a few witnesses as this month progresses. I wanted to highlight that we will be hearing from important witnesses in order to complete our study on interprovincial trade barriers. We are having Minister Prentice, the Minister of Industry, on March 6, which is very soon. We will also be having Mr. Paul Jenkins, well known to Senator Massicotte. He is the Senior Deputy Governor of the Bank of Canada, and he has a particular interest in these interprovincial trade barriers and how they restrict and inhibit productivity in this country. He has some thoughtful suggestions as to how the state of our economy can be improved. He will be appearing on March 12. That will be the final witness. He will be accompanied by Mr. John Murray, the Deputy Governor of the Bank of Canada, recently appointed by Mr. Carney.
Now, I welcome our witnesses from the Canadian Bar Association, which I personally feel privileged to be a member of myself, since 1963.
We have with us Mr. Christopher W. Besant, Vice-Chair, National Bankruptcy and Insolvency Section; and Mr. Robert A. Klotz, Member, National Bankruptcy and Insolvency Section.
I am not sure whether you have both been here before. Mr. Klotz, I know you have. We completed a big study, as you know, in 2003, and we issued a report, which had a lot to do with the provisions in these bills.
I know how the Canadian Bar Association operates, but for the larger audience out there, could you just provide context of how these sections, which are very valuable, work and how they become representative in the practice of this area of expertise?
Robert A. Klotz, Member, National Bankruptcy and Insolvency Law Section, Canadian Bar Association: The Canadian Bar Association is a national association of over 37,000 lawyers, notaries, law students and teachers from all parts of Canada. The Canadian Bar Association's primary objectives are improvement in the law and administration of justice, and it is in that role that we appear before you today on behalf of the Canadian Bar Association's National Bankruptcy and Insolvency Law Section.
Thank you for the introduction, Senator Angus. Mr. Besant practices with the firm of Cassels Brock in Toronto. He is the current vice-chair of the National Bankruptcy and Insolvency Law Section. He will be addressing the commercial insolvency aspects of our submission. He will go first.
I practice with Klotz Associates in Toronto and am a former chair of the section, currently a member at large. I will be addressing the personal insolvency portion of our submission after Mr. Besant makes his presentation.
Christopher W. Besant, Vice-Chair, National Bankruptcy and Insolvency Law Section, Canadian Bar Association: Thank you. I would like to speak briefly about three areas of commercial insolvency that arise from the current state of the law as it has been amended.
First, I should say a word or two about the bankruptcy and insolvency section itself. The Canadian Bar Association's 37,000 members are able to join various sections of practice; in other words, the membership is divided into sections of practice. The bankruptcy and insolvency section consists of approximately 1,600 members across the country.
The national executive is formed of elected individuals, who hold offices, and members at large from across the country, as well as the provincial section branch chairs from across the country, who themselves are representative of the provincial insolvency sections and the provincial section executives.
In coming to our view, we get input from a whole range of sources that is distilled at the national executive level, debated with other sections within the Canadian Bar Association and settled by the national executive of the CBA. That is how our position comes together as a single position we bring before you.
The Chair: Are the provincial sections, those in Quebec, for example, part of the 1,600 practitioners in this area of expertise?
Mr. Besant: Correct.
The Chair: With respect to the consensus that is reflected in this document, you are here with a full mandate from the whole 37,000 members through the executive to make these representations to legislators?
Mr. Klotz: The submission is also aired before other sections — for example, the National Family Law Section — and a consensus is developed. If there is no consensus, then we will revise the document.
The Chair: Thank you. That is exactly what I was hoping you would say. You are quite able in that regard. I see at page 19 you have material on student loans, which has been a very big issue for us, and that will have implications for the family law section, I suppose, or those types of areas. Is that right?
Mr. Besant: Correct. I want to talk about three subjects in the commercial insolvency area. The first is the treatment of wage and pension priority. Second, there is a package of provisions relating to how agreements are shed by companies trying to restructure and the kinds of restrictions that are applicable when they are trying to change their form and emerge as a new and healthy company. Third, I want to focus on is what I call the trade creditors' or suppliers' package of ideas, where we see a bit of a vacuum in terms of attention towards something we think is important to address for the system to run as well as it could.
The Chair: I do not usually interrupt this much, but we have already had about four weeks of hearings on this. Is it fair to assume that you have followed our deliberations in the transcripts? If not, I could perhaps point out two things that have emerged.
Mr. Klotz: I usually watch them live, and when I do not, I read the transcripts.
The Chair: You are aware, for example, that there was a policy decision made not to go the U.S. model on chapter 11 rearrangements? You are aware there is an interest among certain committee members here as to whether or not collective agreements should be allowed to be opened up in a restructuring? How much power should a Judge Farley type have in forming the future of some of these companies? Of course, the other big issue is student loans.
Mr. Besant: On the question of wage and pension priority, we are not here to talk about the policy decision but simply the effectiveness of its implementation. We are looking at it as if we will do it to see what needs to be done in order to make it work as well as it could.
There are two issues there. The first you alluded to at the outset: the lingering uncertainty resulting from this issue's being unresolved for such a long period of time is starting to have corrosive effects throughout the insolvency and restructuring profession and throughout the credit granting process. It is difficult to commit to what the future holds if you are borrowing money; you have to plan for two different worlds when you are making a loan. That kind of uncertainty ultimately costs money. It makes things more expensive to do, and risk itself has a price in the financial market.
If this will be done, we think it should happen now. There has been a long enough period of uncertainty that it is important for this process to come to a conclusion on this issue because it is difficult to leave it lingering any further. You cannot even get a publisher to publish a text in insolvency right now because nobody thinks it is worth it until we see how this will all shake out.
The Chair: I am glad you are saying this. It is important for us to get this on the record.
Mr. Besant: Our view is that the decision has been made in terms of passing the law to enact this. Therefore, if the decision has been made, then get on with it. If people do not want to get on with it, then repeal it, but do not leave it sitting in limbo. It becomes a rule-of-law issue at a certain point, and it is getting close to that now. This has been in a holding pattern for a long time now.
The second issue is a practical consideration, which is that the wage and pension priority system contemplates a charge that requires an administrative structure. In every other area of insolvency, if we ask someone to administer a charge for the benefit of other people, we pay them to do it, otherwise it will not get done.
The structure that has been created needs a system to ensure that the insolvency administrator is protected for its fees and disbursements in administering the wage and pension priority system, or it will not work. This requires a special kind of administration, and someone has to do it. If we do not pay them, we will end up with a nice idea that does not play out the way we would expect it to in practice. We are recommending an amendment to recognize the priority for the insolvency administrator's special work that would have to be done to administer this idea.
The Chair: May I understand that this amendment in the regard you are recommending it to us has also been recommended directly? Have you been in touch with the officials on it?
Mr. Besant: Do you mean with the Minister of Industry?
The Chair: Yes, or the Minister of Labour.
Mr. Besant: Our discussions have been internal inside the CBA on an official level.
The Chair: I had a word today with the Minister of Labour on this subject, and he seems to realize there is a need for an amendment. It is coming from somewhere.
Mr. Besant: We are not the only organization that feels this way. I do not know what submissions have been made specifically on that point before you, but I think if you have not heard it, you will hear it from other people as well. It is a sensible part of the system.
The Chair: I would like to introduce you to Senator Ringuette from New Brunswick who has just joined us. Welcome, Senator Ringuette.
Mr. Besant: The second package of issues relates to agreements. If a company is going to restructure, it has to shed its unprofitable contracts. If a company cannot shed its unprofitable contracts, it will ultimately not be able to survive and will have to go into liquidation. We will lose the company if we do not create a vehicle for it to shed the things that are dragging it down. It is painful for the parties on the other side of that contract to be shed, and they have a claim in the process, but that has to happen for a restructuring to occur.
We have a system in this legislation, as amended, for shedding contracts, but in several areas we have put restraints on how that is done, which we think will hold the process back and will make it more expensive and difficult to restructure without adding any value to the process.
In particular, in the cases of both disclaimers of agreements, where you get rid of an agreement you do not want, and assignment of agreements, where you keep an agreement that you think is valuable going forward, there is a system of prior restraint where the debtor management that is trying to restructure cannot make that decision by itself. It has to go to the independent court officer and get its consent or support for that idea. That means that the independent court officer has to study the question — really play the role of management. That means you have an accountant and a lawyer who will spend a lot of money studying that issue when it might not be controversial, when the other side might not even object.
We think this is an issue of business judgment that should be sorted out between the company and the party who is affected on the other side of the contract without any prior judicial, direct or indirect, prejudgment of the question.
The Chair: What about the restructuring officer?
Mr. Besant: There is no need for anybody but the company to say we want to get rid of this contract and then tell the other side. If the other side does not like it, then they can object, come to court, and the court officer can report on the dispute. What we do not need is every business decision being made by the company — whether controversial or not — having a process associated with it that has the potential to go to court. Otherwise, you increase the number of judicial decisions and the cost of the process. We should be moving the other way.
The restructuring process has become increasingly expensive over the last 15 years, and the more judicial decisions are required to be made and the more reports by independent court officers you require in order to make decisions, the more expensive every step becomes. We say unburden the process of getting rid of agreements. Similarly, unburden the process of assigning agreements.
In the case of intellectual property licenses, the amendments contemplate that you can disclaim an intellectual property agreement. However, they get to keep using the intellectual property. If that is central to your company, then it is not a restructuring. You have not achieved anything if you cannotre-grant those rights. If that party is the actual owner of those rights outside of insolvency law, they are the owner of those rights and insolvency law should not be able to change that.
If not, if all they have is a contract, they should not get stronger rights by virtue of being in the insolvency process. Otherwise, that is another restraint on the ability of a company to break its contracts and reorganize. Insolvency is all about breaking contracts and dealing with the consequences of the broken contracts in a plan of arrangement. If you cannot do that, you cannot restructure.
We are saying avoid the prior restraints on managerial decisions as much as possible. Those are three areas where we think improvements can be made.
There are some technical changes we recommend in the area of preferential contracts to make sure those can be properly unwound where they were unfairly entered into prior to the insolvency process. It is a technical amendment and speaks for itself in the report.
The third commercial insolvency issue is the whole area of trade credit and supplier protection in the process. You really have four players at the table in a restructuring: the government, the lenders and finance, the people working in the plant, and the suppliers.
The Chair: Why the government?
Mr. Besant: The government is a claimant because of a series of priority claims and tax claims. The government shows up in every one of these things as a significant stakeholder. Frequently it is the first not to be paid when a company gets into trouble because it has strong priority protections but weak active enforcement systems. In other words, the government relies on its priority for collection rather than on active enforcement. Frequently you see companies in trouble that have not been paying their governmental bills. That is why the directors are liable. It is supposed to be a counter pressure to force those to be paid.
In any event, the government is at the table, and it has strong mechanisms to protect itself. It has a system in place that allows it to be an active participant when it wants in a restructuring process.
Lenders have large aggregated claims. They can be active participants, and they include all financiers, lessors and other debt capital providers. Even the employment community has ways of aggregating its positions and being effectively represented.
As for trade credit, a vast bulk of small and medium supplier companies that are affected by insolvency processes do not have ways of aggregating their position. Even though they are a large number in aggregate in restructurings, they are very poorly represented in the restructuring process. When you have a poorly represented constituency, the other three constituencies end up profiting from that fact. It is a function of how the market works.
We are recommending a strengthening of the systems that protect suppliers and trade creditors — not to change their legal position, not to get funding from other constituencies for protecting them, but really looking at getting some clarity of information and parity of treatment in terms of access to information. This would include things like making sure that the court officer, who is primarily charged with putting information in the system, is independent of the other three stakeholder communities as much as possible. An independence standard for court officers will improve the functioning of the process.
Second is having a standard of disclosure for information in an insolvency process. In a solvent situation, a company that puts out information publicly has to put it out on a timely basis and meet the full, true and plain disclosure standard if they are a public company. There is no similar standard in the insolvency setting even though you are dealing with a mass of constituents like in a public company. Therefore, there should be a standard of disclosure of information to ensure there is proper information coming out of the process.
There should also be a system where when there is a filing the creditors meet every time. You only have that under bankruptcy right now. When there is a receivership or a restructuring, there is no automatic initial meeting of the creditors. That is important because the initial meeting of the creditors can be the place where creditors organize, share costs and be effective participants and where they should be able to vote and choose the insolvency representative, because they are the effective shareholders of a company that files for insolvency.
When you file for insolvency protection, you are admitting that the equity is worthless. The creditors become the shareholders at that point. They should be choosing the insolvency representative in meetings the way they can in a bankruptcy. They can vote to choose a bankruptcy trustee. They do not have any similar powers to vote in relation to selection of monitors, receivers or other parties representing their interests.
Other measures include providing them with lists of creditors so that they can contact each other. These are very simple things. Finally, having the power to fund investigations by an insolvency representative, such as a trustee, will give them the ability to gather information.
We think that having a series of measures that improve the quality of information, the independence of the players, the ability to replace the players and the ability to investigate will change the ability of the supplier community, the small business community, to participate in the insolvency process. Without that, what happens now is that large vulture funds come in to insolvencies and buy up the unsecured claims with superior information. That is effectively similar to — I will not say ``is'' — an insider trading problem of substantial proportions in the insolvency area.
There is no reason why insolvency should be operating so differently than the rest of the capital markets. There is room for capital market solutions in the insolvency field that would better protect all the stakeholders.
My final comment, looking at the big picture, is that going forward some technical amendments are needed to what was done. There also needs to be a deeper rethinking of insolvency in Canada. All our reform processes have been looking at individual, technical problems. At some point, there needs to be an attempt to more deeply rethink the insolvency process and move it towards the capital markets process, which it is actually a part of. That is a longer-term reform process, but we would encourage all the players to undertake it.
The Chair: Thank you. You have been dealing with the Companies' Creditors Arrangement Act and now Mr. Klotz will deal with the personal side. Before we pass to that, I cannot resist asking you, Mr. Besant, since we have decided to look also at the Winding-up and Restructuring Act and the Farm Debt Mediation Act, do you have any comments there? I understand that they are not in any urgent need of repair but that they are part of the ensemble of relevant legislation and that we would be remiss in not having a look at them.
Mr. Besant: The Winding-up and Restructuring Act went through one revamp after the last round of financial institution failures. It is an important statute because it looks after financial institutions. Those are big and they have huge consequences, but it has been through a cleanup. It is not in terrible shape.
The Chair: That was in the 1990s.
Mr. Besant: With respect to the Farm Debt Mediation Act, the agriculture sector is probably as far away as it has ever been from needing to use that, but this is a good time to get it done because it is the last thing to get attention and it will not stay like this forever, and the act should be fixed before it is needed again. It is good to fix it now while you are looking at insolvency, because it is very hard to get insolvency onto the legislative agenda.
Mr. Klotz: Senators, in the personal insolvency area, we are very pleased with a number of the changes. However, we are also extremely concerned that this legislation for the second consecutive time has been enacted without any hearings.
That being said, I will restrict my comments to four principal areas, apart from the various items in our submission. The first will be a regret. The second will be a serious, imminent and unforeseen problem, and the third is primarily an issue of draftsmanship.
The first issue is RRSPs, and that is a regret. The Canadian Bar Association is strongly in favour of exempting RRSPs so that there is some parity of treatment of professionals and non-employed people with employees who hold pensions. That being said, the question is how to do it in a manner that is fair and equitable.
It is a central proposition of justice and the rule of law to treat like cases alike. That I am told comes from Book 5 of the Nicomachean Ethics, which I had never heard of until about two hours ago.
The Chair: When you come to Ottawa, you never know.
Mr. Klotz: That is where that proposition comes from. Its counterpart is to account for differences in a different way and not to pretend that they are the same.
Therefore in dealing with exempting RRSPs, we must account for the ways in which RRSPs are different from pensions, and our concern is that what has been enacted in Bill C-36 does not account for any of those differences, and there are two sets of differences.
The first is that in pensions, the pension holder, the employee, has no control or minimal control over contributions. The contributions are regular and in relatively small amounts. RRSPs, however, provide that the debtor is in complete control — the debtor being the ultimate bankrupt — of when to contribute and how much, subject to the limitations of the tax legislation.
The second difference is that pensions are locked in. There is simply no access to pension money until retirement age, subject to exceptions that are monitored by the pension administrator in cases of illness. That is well and good, whereas RRSPs are fully cashable at any time. We have to account for these two differences.
To look at cashability for a moment, is this a problem or is this rare? I have noted that at least one witness before you has said that this is extremely unusual, and I am afraid that that is incorrect. When I was working on the Personal Insolvency Task Force on this question, we looked at two studies. One was a government study from 1997 that noted that almost two thirds of all RRSP withdrawals that year were made by individuals under age 55. Another study, I believe commissioned by the Superintendent of Bankruptcy, showed that early withdrawal of RRSPs is common. Of all the withdrawals by people under the age of 65, 75 per cent were made by people under age 55.
Why is this so? It is because the RRSP is an ideal bank account and savings plan. It is tax-aided in contribution and it is tax-deferred. It is a wonderful place to put money and then to use that money if it is needed. We find in the insolvency area that people do have access to this money. There is no reason for us to exempt bank accounts. The only reason for this exemption is to ensure that people have money available at the time of retirement. That is the social policy for pensions and that is the social policy for RRSPs and for exempting them. We want people to stay off the welfare roles when they retire and not to have to rely on the Canada Pension Plan.
That being said, if we simply exempt RRSPs as Bill C-36 has done, people can pass through bankruptcy and then cash their RRSPs, buy a boat, go off to a vacation in Bermuda, do whatever they want to the dismay and the horror of the creditors and the Canadian public.
The exemption should favour the policy behind the exemption, and by locking in the RRSP as a condition of exempting it, we ensure that the policy is met by the reality. We force the exemption to do what we want it to do, which is to save that money for retirement. The last thing we want is to give the debtor a free pass to a bank account.
That is the lock-in. Now, as to the other aspect, namely contributions, it is well-known that some people are artful or strategic in utilizing the Bankruptcy and Insolvency Act. We need an effective, cheap remedy to ensure that people cannot load up on their RRSPs shortly before bankruptcy. It was the conviction of the task force and it is the conviction of the Canadian Bar Association that there is currently no effective remedy, and there are a variety of practical reasons for this.
Bill C-55, the task force and the Senate in its 2003 review accepted, I believe, that there should be a cheap, effective remedy, and that is where the clawback came from. Unfortunately, under Bill C-36, the clawback is a short one. There is no judicial ability to lengthen it in the appropriate case, and it applies only where there is no provincial exemption. That will have the effect of neutralizing the clawback as soon as the various provinces enact their own provincial RRSPs exemptions. That will happen very fast as they all imitate and match what is being done at the federal level.
That one-year clawback will very shortly be completely irrelevant. It will be history even though it will still be there on the books, because every province will fall into line. I got a call from a gentleman in the Ontario government justice department who wanted to start reviewing that question two days ago. They will all to be the same. That is RRSPs.
The second problem we see as a possible crisis, and that deals with undervalued transactions and preferences. I will start with undervalued transactions. The concern here is not with the arm's-length issues, nor with business issues, which I will not be addressing, but with the non-arm's-length test. The problem is that these provisions replace what we have now, and we are concerned that the drafters have not run the scenarios, that someone has not looked at all of the possible consequences, particularly unforeseen ones.
What are some of these unforeseen consequences? This section allows the court to attack the payment of money from a parent to a child to support the child, for consumption. That transaction is undervalued because there is no consideration being given by the child to the parent. That falls within the section, and that may result in a judgment. The only defence the child has is judicial discretion because the section is drafted so as to say the court ``may'' grant a judgment.
That one word is a slender reed. First, that does not give any guidance as to when that order should or should not be made. It gives no guidance to the court or, more importantly, to the Canadian public as to what is right or wrong. People look to the law to determine what is right or wrong, good or bad. The law is a reflection of that, but it also reinforces that sense of right or wrong, and we are moving away from that in these sections.
The Chair: Was there no such provision in the previous law?
Mr. Klotz: Section 91 was the settlement provision, and it provided a safe haven for conveyances made for the purpose of consumption. That is precisely what this does not exempt — consumption. We will have to rely on the word ``may'' to exempt all of the transactions where someone gives something to someone else so that they can live. Sending your child to day camp can result in a liability on the part of the child. This may seem absurd, but it has happened under section 160. Someone was assessed for sending the kid to camp and the kids were assessed for the cost of that camp experience.
This is not fanciful. Judges are human and they make mistakes too. We have to anticipate that as citizens and as lawyers. This section gives us neither moral nor legal guidance whatsoever on where that line will be.
The effect on separation agreements is much more of a concern. Typically, the test for whether a separation agreement or a transfer pursuant to a separation agreement should be challenged in bankruptcy, and this is the problem with strategic bankruptcies and conduct before bankruptcy, looks at the good faith of the spouses, whether the process has been respected, and whether the transfer made or the agreement drafted is within the range of what a family court would order. Those are good and proper tests and are universal in Canada. However, the undervalued transactions test replaces all that with arithmetic such that the fair market value of what was transferred minus the fair market value of the consideration equals the judgment for the difference that may be granted. We are now out of the realm of good faith, knowledge and morality and into arithmetic. There is no reason for that. It is regressive and sets aside all of the case law in the country, in my view.
Married spouses are treated worse than common-law spouses under this new remedy. Married spouses are presumed, or deemed, subject to evidence to the contrary, to be caught by these non-arm's-length rules, which are very harsh, whereas for unmarried spouses, it is a question of fact that determines which set of rules apply to them. There is no earthly reason for this distinction to be made. Why should marriage be discriminated against in this setting when there is no substantive or reasoned excuse or justification for it? It is difficult to understand why that has been chosen. In our view, it will give rise to a constitutional challenge.
The Chair: What is the reverse? Maybe it is payback time.
Mr. Klotz: The usual test is separation. That is the functional test and what differentiates the two situations. That is what section 160 of the Income Tax Act does. I am not saying that that should be done, although it is one solution to what will be an imminent problem.
The arm's-length test is simply the wrong test in this situation because someone will have to pass judgment on whether the spouses are at arm's length. The spousal relationship is so much more complex than that. Two people can hate each other's guts and fight tooth and nail in court and yet, when it comes to saving the money in the family from creditors, they will be united and act as one, despite that hatred, hostility, separate lawyers and litigation with tooth and nail. Is that pair at arm's length or not at arm's length in this respect? It is impossible to say with any precision and it is impossible to predict with any precision. It is the wrong test.
We commented on the section back at the time of Bill C-55 and said that it was a problem. The response of the government was to implement section 95, which makes the problem significantly worse. Again, we have this non-arm's- length problem treating married spouses worse than we treat common-law spouses. Instead of having a judge who may grant judgment, we have no discretion at all if the test is met in the non-arm's-length scenario, because the transaction is void. There is no discretion whatsoever. Now, we have eliminated morality and good faith as a consideration, and discretion. This means that if the parties enter into a separation agreement, are separately represented and using good faith, if a judge determines that they are at non-arm's length and the husband declares bankruptcy within a year, that agreement and transfer will be set aside. Spouses will be unable to order their affairs for one year after the separation agreement.
The effect in some provinces is much worse, because three of the provinces — Ontario, Manitoba and Prince Edward Island, and to some extent Quebec — are equalization provinces where this preferential aspect is critical because the family law remedy for property is a debt-type remedy. In the other provinces, it is a property-type remedy. I will not go into the technicalities, but this problem will be faced in serious terms in those three provinces more than in any of the other provinces.
There will be an impact on the collaborative family law process. All provincial governments and the federal government have utilized substantial resources to get people to the table to collaborate in solving these horrible problems of family schisms and the wreckage it makes of children's lives in those families. They have devoted resources to mediation, et cetera. These efforts are intended to result in a separation agreement that is now under threat and is fragile.
I spoke with a family lawyer earlier today because I am not a family lawyer, although I work with lots of them, and I wanted to know their views. After explaining this situation to this lawyer, she told me that she would not be able to sleep tonight because she is worried about her cases and the agreements she is working toward. I did not find that an overreaction.
No one in the family law bar knows of this amendment, no one asked for it, no creditor group asked for it, and no one intended it; but it has a significant social policy effect.
The Chair: You are saying that it is an unintended consequence.
Mr. Klotz: Absolutely.
The Chair: The drafters unwittingly created this problem. It was not a policy decision.
Mr. Klotz: To a large extent, that is absolutely true. I have reviewed the papers that originated this concept and, in my view, they do not focus at all on the personal area. It was economic efficiency that drove these changes, which is valuable in the commercial sphere but not so important in the personal sphere. In the personal sphere, ethics, morality, good faith, adherence to a proper judicial or negotiating process, the policy of getting people to stop fighting and to enter into that agreement are the important elements. Efficiency is not the important element.
The third issue is one of draftsmanship in regard to surplus income. Our concern is simply that the section is badly drafted, in particular the definition of ``total income.'' The definition of ``total income'' includes damages for wrongful dismissal, workers compensation and pay equity. That is expressly stated. By bringing in damages for wrongful dismissal, presumably someone thought that all such damages were lost income, which is far from the truth. What has been brought into total income are items that have never been considered as income by the bankruptcy process; they have been exempted entirely.
For example, I spoke with an employment lawyer to get this list. Damages for mental distress are awarded in wrongful dismissal cases. Because of this definition, instead of being exempted from bankruptcy, they are brought into income.
Loss of reputation, which has never been part of income or of the bankruptcy process, has been brought into income. Punitive damages have been brought into income. Damages for tortious behaviour have been brought into income. General damages awarded for breach of human rights — when someone is fired because of discrimination, for example — are part of total income. Currently, in Ontario, legislation that specifically deals with the right to claim these damages will come into force in July 2008, and these items will become part of total income. No one asked for this.
These three items — wrongful dismissal, workers compensation and pay equity — are on the list but there is one item missing that should be included on the list: lost income damages in a tort case, such as a car accident case. You can get a huge award for lost income but that income is not on the list. It is like forgetting that there is an elephant in the room when you are asked what is in the room. You say there is a chair and a table but you forget to mention that there is an elephant. The omission of tort damages for lost income from this list, by the principles of interpretation, means they are intentionally excluded. That means that a huge category of lost income, which should be and currently is part of total income, will be excluded from total income.
Perhaps when assessing the construction of this proposed section, a court will ignore the plain wording, but, at minimum, there is complete lack of clarity and complete confusion on this point.
I will comment briefly on two other issues, the first of which is student loans. You have heard submissions from many sources about the concerns in this area. We share these concerns. We do not like the 10 years; we prefer 7 years to 10, and 5 years to 7 years. I will stop there because, given the realities, we would prefer it to be as short as possible. We would agree with Senator Goldstein here.
The Chair: You know about his private bill going to 2 years?
Mr. Klotz: Very much. It started at 2 years; I was before this body when it was raised to 10 years. It was by the skin of my teeth that I got here because there was no notice. We raised the same concerns back then.
It is a bit complex. We all know two years is essentially meaningless in terms of its actual function. If they are legitimate, no one will go bankrupt within two years, so what does it do? It sends a message to the courts that this is a problem.
There are other provisions like that — for example, the income tax provision we will have. What that provision actually does if the taxes exceed $200,000 and 75 per cent is mandate a discharge hearing. However, the government can get that discharge hearing simply by filing a notice and paying $50 under the current legislation. That section saves the government $50 in every tax bankruptcy; that is all it does. However, its moral effect is much more significant. It sends a message to the courts: Treat taxes harshly in these circumstances.
That is precisely the message that this student loan provision, when it was at two years, sent to the courts. What do you do when the courts are not sufficiently taking a serious gaze at the student loan problem? How do you send a message to the courts? You do it by enacting a section that, of itself, does not necessarily do that much, but it acts as a guide.
We think that if this is brought down to two years — yes, two years is, in some sense, meaningless — it will serve the function of acting as a guide to the courts. The case law has realigned by virtue of these provisions; and that process will be locked in place, I think, regardless of whether it is two, five or ten years. However, if it is two, we can avoid the hardship and the misery in proper and just cases. In our view, in the experience of our members, those cases do arise.
Finally, we regret that a number of provisions recommended by the Senate were not adopted by the government, and we have listed those in our submissions.
The Chair: I want to thank you both very much for excellent submissions. We have just received notice that there will be a vote at 5:40 p.m. on Bill C-2. Our next witness has come all the way from B.C. Senators, do you think if we adjourned at 5:30 p.m., we would have time to get over there?
Senator Harb: We could hear the second witness.
The Chair: That would give us 15 or 20 minutes to hear her, and her brief is comprehensive. I do not know whether we will be able to come back and do our questioning, but I would like our next witness to have an opportunity to be heard.
Senator Harb: Mr. Besant and Mr. Klotz, if we have some questions, we can give them to you over the phone or send them by mail.
The Chair: Our next witness is Janis Sarra, Professor of Law, University of British Columbia, and Director, National Centre for Business Law.
I am glad you two gentlemen will be staying for this.
Welcome, Professor Sarra. Your reputation precedes you. We are delighted that you could be here and we are only sorry that, first, we have delayed getting started and, second, that there will be a vote. If you can make your main points to us, we have until 5:30 p.m. and then I will have to adjourn.
Janis Sarra, Professor of Law, University of British Columbia and Director, National Centre for Business Law, as an individual: Thank you very much for inviting me to come and speak. I appreciate it. I am here to answer whatever questions you have about the legislation, but for opening remarks, I will briefly address two issues.
Overall I am very supportive of the legislative amendments as they have been enacted, although as others have said, there are some issues for further study.
The first issue I want to address is the treatment of employee wage and pension claims in insolvency. I am supportive of the amendments as they have been enacted. In my opening statement, which you should have before you, I provided the Senate committee with a comparative study with 50 other jurisdictions that I am engaged in currently. I thought that might be helpful to locate where Canada's reforms are within the global context.
I have supplied some graphs. There is a much longer, 200-page report, which I am happy to give the committee at some point if you are interested. I will point out a couple of things.
First, in case there is any issue about whether or not Canada should have enacted both a priority system and a wage guarantee protection program, we actually join the 46 per cent of all other countries who have adopted a hybrid or a dual model to try to protect employee claims, which I think is significant. Of note is that the amount of wage claims that we are protecting under the Wage Earner Protection Program is limited. Canada ranks among the lower countries in terms of the amounts.
On page 3 of my opening statement, you will see some comparators. Under France's wage guarantee program, the cap is — and I have converted everything to Canadian dollars — $93,000 as opposed to Canada's $3,000. Under Japan's wage guarantee, it is $27,000. It is an area in which the Senate may choose to look at where we are situated globally.
Second is the wage priority over the cap of $2,000. Again, this is a very positive public policy initiative, and I applaud Parliament and the Senate for this. As you can see, we have done a comparison here also about where that wage priority falls in other jurisdictions. Of the 50 countries, 30 per cent have a priority over both secured and unsecured claims. In terms of situating the initiative to put it over current assets only, you can see that we have moved forward positively, but it is a modest change at best.
With respect to the pension-related claims, again, I think it is a positive development and I think it is important that the priority has been granted in the way it is. Of note is that it would be helpful for the Senate committee to consider trying to develop some policy around a national pension guarantee fund, which a number of jurisdictions have done. I appreciate that there may be some jurisdictional challenges, given that pensions are the domain of the provinces, but the majority of countries surveyed already have this kind of guarantee fund. It could be incorporated into the Wage Earner Protection Program administratively, and I think it is a significant thing.
A series of studies has been done recently for the expert commission on pensions in Ontario, as the senators I am sure are aware. Ontario is the only jurisdiction that has a pension guarantee fund. It has been remarkably helpful in distressed firms in particular, but also in firms going bankrupt and in the number of plans that it has assisted and the amount of pensions and pensioners that have been protected by that wage guarantee fund. However, its existence in Ontario alone means that there is inequitable treatment of pensions across the country when employers become insolvent.
I want to touch briefly on the second issue, and I believe you have both the paper I wrote last summer as well as my opening remarks. It is the question of the treatment of claims arising out of securities law violations in insolvency. These are claims by equity holders, but not those out of the ordinary business risk, which I think everyone would agree should be subordinated to creditors' claims. Rather, these are the claims that arise out of fraud and other conduct in violation of securities law.
They are swept into the subordination provisions under the new legislation. I think this occurred without any public debate, or almost no public debate on the last round. I can tell you from the various associations that I am a member of, many of whom have appeared in front of you already, that this was almost a non-issue until people started thinking about it.
As a result of the article I completed last summer, I have started to canvass a number of jurisdictions. Of the 10 I have canvassed, so far only Brazil has decided to opt for this particular complete subordination model.
The U.S, which I think probably some of the policy was modelled on, in fact does not have this system, because it has what I call a concurrent system. On the one hand, it subordinates these claims in the bankruptcy code, and on the other hand, under the fair funds provisions of the Sarbanes-Oxley Act, makes these funds available on a pari passu basis with unsecured creditors. It is done through the regulator, the U.S. Securities and Exchange Commission, SEC, who becomes an unsecured creditor. You can see figures in here about the millions and hundreds of millions of dollars that have been returned to investors because of fraud and other securities law violations.
I think the Senate should consider this. I am not advocating a particular option, but I am suggesting that it is actually a complex and timely issue that deserves consideration.
With respect to the option that I have set out at pages 10 and 11 of my opening statement, you will see there is a whole list of jurisdictions that have said these claims look a lot more like unsecured creditor claims than equity claims. You will see Japan, Mexico, France, Greece, Australia, India and in a number of instances the U.K.
In fact, there is much information globally about how to treat these claims, and it is really a question of fairness, efficiency and risk allocation. It is a question of how we align to the extent possible the objectives of securities law in protecting investors and the objectives of insolvency law in creating fairness to creditors, including unsecured ones.
That is a quick summary of what I had intended to say. I am happy to answer questions on UNCITRAL, the United Nations Commission on International Trade Law, or collective agreements. I will end with a couple of small observations about things that I would hope the Senate committee would pay some attention to in its deliberations.
The first observation is with respect to securities law firms that become insolvent. This is a recent change that I think has not been addressed anywhere, and that is the definition of net equity.
In the last round of amendments, we put in place special provisions to deal with brokerage firms and other firms that go bankrupt. These were important initiatives to deal with trust and tracing problems at common law. The difficulty, though, is that it did not deal at all with the issue of fraud, so the definition of ``net equity'' in the Bankruptcy and Insolvency Act does not deal with those cases as in the Portus case recently where, in fact, ``fraud'' meant that the customer accounts never were created; therefore, absent the judge giving a purpose of interpretation of the situation, which he did, the controlling people would have gone away with millions and the investors left penniless.
The second observation is the issue of aging elderly bankrupts. The pace of aging bankrupts is far outstripping their pace of growing in the population, and that is a significant issue.
The final observation is that these issues, as you have seen from your deliberations and as I have read in the transcripts, are complex matters. I put a plug in for having some sort of mechanism that allows an ongoing policy review from stakeholder groups so that these issues get developed and a consensus is built over the long term and not just on a periodic basis.
The Chair: You did a marvellous job. Honourable senators, I understand that we could be back here by 6 p.m. and that the room is available. If we could come back with questions, we owe it to these witnesses who have done such a good job. I urge all of us to go do our thing across the road now and come back here immediately after the vote and continue.
I would like to adjourn temporarily. Do I have any disagreement to suspend? I am assuming you are with me, and maybe we can pick up a few other senators. Are our witnesses okay with that? Thank you for your understanding. It is a bit of a special day today.
The committee suspended.
The committee resumed.
The Chair: I will reconvene the hearing relating to bankruptcy and insolvency. We have with us the three witnesses: Professor Sarra and two gentlemen from the Canadian Bar Association, Mr. Besant and Mr. Klotz.
It has worked out pretty well. It is only 5:55 p.m. The vote has happened. The government has not fallen. The results were 19 to 16, I think, and many abstentions.
I know you rushed through your presentation, Professor Sarra. If you would like to add anything before we start questioning, I would be pleased to give you the floor.
Ms. Sarra: I appreciate that.
The Chair: I personally have noted — and my colleagues have remarked to me privately — how beautifully prepared your material is and how you get the issues we are wrestling with. I would be very pleased if you had more to say.
Ms. Sarra: No, thank you. Actually I would rather be responsive to questions, concerns or observations you have.
The Chair: That will be fine.
Senator Harb: Thank you very much. With your permission, I would like to ask Mr. Klotz and Mr. Besant a couple of questions. With respect to student loans, in your presentation you talked about the hardship hearing and the partial discharge element. Could you tell us about a scenario where a student will have a partial discharge?
Mr. Klotz: I want to make sure I understand your question. The case law has developed so that the judge or registrar hearing the mercy or hardship hearing can say only yes or no. He cannot say 50 per cent, 25 per cent, or 75 per cent.
The job is to do justice. This is after the ten years or seven years. It is too late, in my submission, but the job is to do justice. Why should the judge be hampered by this rule and not be able to do justice? It does not make good sense, in my mind.
Does that answer the question?
Senator Harb: Yes. I just wanted you to put on the record exactly what you said. Thank you very much.
My second question deals with your oblique suggestion about RRSPs and creating some sort of a lock-in. If I put money in RRSPs, I should, in a sense, be protected so that no creditor can come in and take the money away. I if understood, your suggestion is perhaps to take it even out of my hands by creating some sort of a mechanism.
Mr. Klotz: Let me make it a little clearer. We are not suggesting that anyone would buy an RRSP and check a box that says, ``I have no access to this RRSP.'' That would not sell well. What we are saying is that if you go bankrupt and you want to hold onto your RRSP, you have to convert it at that moment into, in effect, a pension. It is only at that moment that you have to do so.
Senator Harb: As a lawyer, you know how tricky that would be. If you have a debtor with $300,000 in his RRSPs on the one side and you have the creditors on the other side and the negotiation is taking place, all you need is one of those creditors to say no to an arrangement and then you cannot do the arrangement to reorganize this particular person. Undue pressure, although perhaps not direct, would mount exponentially on the person who has the RRSP, pushing for him to cash in his RRSPs.
I submit that the only way to achieve what you are attempting is by putting the onus either on those who are doing the reorganizations or in the law itself to prohibit even the mere suggestion that somebody who is a debtor will have to cash in their RRSPs. That is the only way you can handle what you are trying to achieve, would not you agree?
Mr. Klotz: I think it is a different problem. I recall an exchange between you and the gentleman from the insurance firm raising this issue. We are now discussing proposals. Let me recast it to make sure I understand the question.
I want to make a bankruptcy proposal. I have nothing but a $300,000 exempt RRSP. I make a proposal and I have a big creditor who says, ``No, we want $150,000. You will have to cash your RRSP if you want us to play ball.''
I think your suggestion is that we want to stop that kind of pressure. I do not really have a problem with that pressure, because if the person wants to go bankrupt and keep their RRSPs, they can do that. That is a free choice, and I do not believe that choice should be restricted in any way, in the same way that if the debtor has to access a house that the debtor's wife owns, or borrow money from a friend, they should be free to get that money from wherever they want.
There may be some people who want to have a proposal fly and who are prepared to use exempt assets. Most people probably would not, but there are certainly circumstances that I could imagine, and probably some I have been engaged in, where it is rational to use those assets, because otherwise some other transaction will be attacked or the brokerage license will be lost in a bankruptcy, and that is just part of the give and take of a proposal setting.
Many RRSPs are not exempt now at all, and even if they are exempted, under what is in Bill C-36, they can be cashed at any time for any purpose.
The Chair: I would like to introduce Senator David Tkachuk, from Saskatoon, Saskatchewan, who has joined us. I also wish to advise all that we have until 6:30, which should give us plenty of time.
Senator Harb: I noticed in your presentation that in none of the recommendations do you talk about the possibility of introducing binding arbitrations or mediations. You seem to make most of your references to the court. Is that something in your culture? I thought you people pushed quite hard in order to ensure that mediation and arbitration are part of the process throughout, and I was surprised that this did not jump out at me anywhere in your whole briefing.
Mr. Besant: In the commercial insolvency context, it is already possible to use mediation and other tools to resolve claims. The Companies' Creditors Arrangement Act is very informative about how claims against the estate are quantified and determined, but what are now sections 20 and 21 say only to look at the Bankruptcy and Insolvency Act and you will find there somewhere how it works.
It has evolved as a matter of practice under the Companies' Creditors Arrangement Act that the courts have several creative ways of resolving claims that do not involve litigating them, that involve appointing special experts to deal with the issues in writing or to have mini trials and arbitration. That has not been a pressing problem because the court has been very good at limiting the amount of litigation to resolve disputes. In fact, one thing judges are very good at is driving disputes towards resolution without litigation. The philosophy of a restructuring should be that we are not litigating everything, because that is almost the opposite of what you are trying to do in a restructuring.
Arbitration is encouraged in the process already. It was not something that we saw as a weakness. That is the only reason it would not be addressed.
Ms. Sarra: I would agree with Mr. Besant; that is certainly the case in Ontario. There have been problems in other jurisdictions in Canada about the lack of finality of the process and also the lack of a good group of judges who have both labour relations experience and commercial insolvency experience. Ontario has been extremely fortunate to have some very senior judges in that respect and has had a very successful record.
There are some very positive initiatives with the amendments as they have been passed. The preservation of collective agreements, the preservation of successor rights to new purchasers, and the protection against liability for trustees are all important initiatives.
The one thing that is perhaps lacking in the bargaining model is the notion of finality. My view is that there should be something akin to a final offer selection process that could be introduced, which could have all sorts of protections for unions and debtor companies.
In fact, a study that I conducted in 2005 tried to chart a model and then canvassed 50 or 60 practitioners to see what would work. It is pretty clear that the risk is that if you do not have a series of judges across Canada who are trained to do both the insolvency side and the labour relations side, you may have some skewing of the process. It would be a relatively simple thing to enact it and to put it in place. I brought a copy of that study, which I am happy to leave with the clerk.
Senator Harb: I would love to get a copy of it. In essence, what I am driving at is that you go through all of that and then you put the onus on the court; in some cases, the court has to get into intricate details that are technical and complex in nature, and suddenly we are putting the onus on the court to delve into all of these things and in some cases to start all over again.
I am not a lawyer but an engineer, but I have been told by many that often a judgment missed the point, precisely because the expertise is lacking in that particular area. Therefore, could you set up a buffer zone, where you drive everything right to the buffer zone and then everything after that will be a yea or nay, ``I take your judgment or I do not''?
Ms. Sarra: The model that I considered was driven to create an incentive for the parties to do it first themselves. It is only as a fail-safe mechanism that you would then have to access a third party.
Senator Harb: I wanted to mention how impressed I am by your presentation. Unlike some witnesses who have appeared, you have really hit on the point you wanted to make. Although I have some philosophical differences with some of your arguments, you were very convincing in some of your arguments, although I am still not too convinced.
You made your point extremely well when it comes to dealing with the equity investors during insolvency. I think we are missing one important element in that, the sophistication of what is now taking place in the market. There are the early investors, the people who put in the money before you go on the market, and there are the early investors who come in as soon as you go on the market. The differential between the two is a complex matter. You admitted that in your submission, and I appreciate that very much.
Mr. Klotz: Senator, could I make one brief comment about the question of arbitration. You have to bear in mind that in reorganizations there is a strong public element. In other words, it is not enough for the two parties or the multiple parties to drive a deal. Ultimately, public policy and the public good have to be reinforced. An arbitrator is not government-appointed and does not have a higher duty to the public or to the cause of justice. That is why many matters are put before a judge, because the judge is representative and the judge has a higher calling, so to speak. That is one of the limitations of arbitration and mediation.
Mr. Besant: One other point on that score is that you do get out-of-court negotiations. That is normally the first step across all these processes in a restructuring context.
Second, the court normally sets up a standard form of claims determination process that supplements what you see in the act now. There are a series of model order processes in a number of the provinces that have tried to standardize ways in which that claims process can be used creatively to try to create alternative dispute resolution systems. Then, within the case, the judge can design something that is specific to each kind of dispute to try to get it resolved in a way that does not end up in litigation. It is only through appeals from those processes that it ends up before the court.
In my experience, not that many issues about disputed claims are decided by the judges. You tend to get resolutions one way or another through these processes, either privately or through the claims process or negotiations when people realize there are weaknesses in their case. You do not get hundreds and hundreds of claims determination processes in restructuring. It has not turned out to be the practical problem that, looking from a distance, theoretically could overwhelm the system. It does not seem to have worked out that way.
Senator Massicotte: I will jump a little bit. You just made a passing comment, Ms. Sarra, that you really liked the fact that legislation enshrines clearly in the act the protection of union agreements and so on, and therefore you see that favourably. If that is the case, how do you maintain the balance issue? How do you maintain the hammer or the motivation for people to agree and negotiate if they are not threatened with the fact that it possibly will not be maintained? Maybe the restructuring does not work because the union negotiated poorly or called the shot wrong and did not concede certain points, so it is dead. Then you have many people involved.
I can appreciate that labour has a certain position or interest as it is their lives and livelihood and families and so on, but for many creditors, including smaller companies, it is their lives also and their livelihood. Why would you favour them? I can abide favouring them, but I have difficulty not having the hammer and the judge saying, in this circumstance, ``Sorry.'' If there is no hammer, how are you motivated to concede as much as everyone else may have to concede?
Ms. Sarra: Your observation is an important one.
The reason I applaud that measure is that there has been a great deal of litigation on it and a lot of uncertainty, and so it codifies what the appellate courts have settled on. It will save future litigation.
It is a little different than trade-supplied contracts in the sense that they are statutorily based across the country. Having said that, I also agree with you that there must be some incentive for them to go to the table seriously and say, ``What is the economic situation of the company and how are we going to look at our collective agreement?''
I am sure you know that collective agreements can be opened up at any time by unions and employers if they agree. The process that the amendments try to bring about is that if the employer can establish that there is a necessity for opening up the agreement, then they must bargain and they should both be bargaining in good faith, and the union should be given the relevant information it needs for the insolvents to the collective agreement to be persuaded.
The model I am suggesting is not a private arbitration model but rather using a cadre of judges with specialized expertise. Final selection arbitration says to the union and the employer, ``If you cannot agree on your own, there will be someone who says that in order for this company to survive these things have to go.''
Final offer selection says, ``You propose your best collective agreement.'' That forces people to the middle, because if one is unreasonable, then the judge will take the other collective agreement, and so it forces everyone to be reasonable in the collective agreement they are prepared to sign.
Senator Massicotte: You would recommend an amendment to the act as currently being proposed and accepted to provide for that.
Ms. Sarra: Yes. My example would be first-contract arbitration in Ontario, which addressed a similar problem, the difficulty of getting parties to the table in a first-contract situation many years ago. The first-contract arbitration brought people to the table and forced them to be reasonable because they could be out in the cold if they were unreasonable, and it has worked extremely well.
Senator Massicotte: Ms. Sarra's paper quotes what is happening in other countries, which is both useful and interesting. The percentages are not there, but many countries give priority to the unfunded pension plan, including many times severance, I understand, to employees. They give them priority or super-priority. They are not general creditors as they are in Canada. What are your thoughts on that? Why should it not be applicable? Obviously you do not recommend that.
Mr. Besant: The thrust of the Canadian Bar Association's position was to look at the mechanics of what is proposed, and we have not undertaken an examination of the underlying policy on that. We view that as an underlying policy decision rather than a rule of law issue that we were focused on. In considering that question, bear in mind that if you create a structural rigidity, like a priority or a collective agreement that cannot be broken, you change the economics of the financing of those companies, and you change the manoeuvrability the companies have in restructuring. You will change the financing and restructuring outcomes.
Whether that is good or bad is a much deeper economic question than we have the resources to answer. There are some practical aspects and some deeper economic aspects.
You may be able to demonstrate on an economic basis that not having those rigidities in the long run actually leads to a healthier economy. The Canadian Bar Association is not in a position to make that sort of judgment. We are in a position to look at a specific proposal and say that you have made a decision and gone through an assessment, and now what you have written here will not work that well because you need to tweak it.
Senator Massicotte: Regarding student loans, you commented earlier that you do not like the 10 years; 7 years is better and 5 years is better than 7 years, and you talked about 2 years. Help me a bit on that process. We heard all kinds of testimony saying that within the current provisions you can delay your file, if you have financial problems, for at least 18 months and maybe a lot longer. You also have the argument of duress or cannot do so, and yes the government has the right to say I will apply for that.
What is the right timetable? I think the starting point should be that we decide in our society that we will not give free education; and therefore, people have to raise a bit of money, at least room and board and some tuition fees. The thinking among most of society today is that society is investing in these students. They are subsidizing their education. Therefore, they should not be treated as a normal creditor. There needs to be payback. The payback is so many years ahead. That is why you have the issue of term. The argument could be made strongly to treat them like any normal creditor. Help me with that logic. Why not treat them like a normal creditor? Give me some structure to the thinking of two or four years.
Mr. Klotz: What I can do is offer a series of insights that are not necessarily integrated.
Senator Massicotte: As long as they are coherent.
Mr. Klotz: One of them is that the bankruptcy treatment must, in some sense, coincide with the treatment outside of bankruptcy. We know there is a program for deferral of up to five years. One could rightly say there is no point in wiping out a debt if someone goes bankrupt before the obligation to pay has come into effect.
I can see the sense of a period that is five years or over, given the rules that are presently available. That would start to lose force if it were discovered, and I think this is the case, that in many cases that deferral is not available. I am told, and this is purely anecdotal, that the students have to be current to take advantage of the deferral, and all too often, they come into default and are not able to get the deferral.
We are dealing with a group of people whose defining characteristic is that they are young. They do not know how to work the system yet. Second, they have not fared well in life, which also suggests they are not expert at working the system. These are people who fall between the cracks. It is unfortunately easy to say, look, there is a five-year deferral here. They can take advantage of it. The problem is if a number of them simply are not able because of their lack of wherewithal to take advantage of it. That would suggest the period be lower than the five years.
Senator Massicotte: I gather the need to be current is an administrative policy, not the law. Someone decided that the ability to apply for deferral was dependent being current.
Mr. Klotz: That is the nub of it. I raised this point in 1998 when all sorts of promises were made by the student loan people about how their own systems would pick up the slack when discharge is not available for those ten years. The response was, ``Well, so you say, but how can we rely on that? Where is the regulation? Who is going to look at it? Who is going to be satisfied that, in fact, it does the job that you are asking us to change legislation for?''
Here is the problem. They hire outside collection agents who make life a living hell for these poor students, and I know because I hear from them. That is the nature of things. In fact, I have sympathy sometimes for the collection agents. They get paid by the job, by recovery. They have to be miserable to people to make enough money to provide for their own families. It is a cycle. I am not pointing the finger of blame.
They have the collection agencies and the administrative rules, which may be good rules if the captive group is educated or savvy or if they are able to work the system, but these people are not. They are young, and a defining characteristic of youth is being unable to look forward into the future, or looking at the future with rosy glasses rather than the realistic gaze that we oldsters have.
I have reluctantly concluded, and I think the Canadian Bar Association is of the same view, that we cannot rely on those administrative measures. It is a fog to some extent. We hear the anecdotes and we see what students sometimes go through. That suggests to us that this administrative system does not fulfill the promised function that we were all told about.
Senator Ringuette: I would like to follow up on the issue of student loans collection agencies. Most of them do not even identify themselves as collection agencies. They give the impression that they are employees of the government within the student loans program. I have talked to many students who have had very bad experiences with what they thought was a government employee but who was from one of those agencies eager to collect the fee.
I can concur from my conversations with different students. In no case that I know of did the collection agencies speak of the opportunity of the deferral system available. That is not their job. Their job is to collect. They are paid to collect. We need to highlight that situation.
Mr. Klotz: I have read the testimony of the student loan people. Frankly, I found the testimony convincing and very useful. I do not discount its value. The difficulty is the gap between what is portrayed and the reality. The people that we are concerned about are the people who fall into that gap. They are the people who are the losers of the system. Those are the very people who are often insolvent. They are cast into a netherworld that we want to protect them from, or at least have the ability, if they are deserving, to protect them from.
Senator Ringuette: I have one question for you, Dr. Sarra. It is in regard to your full study of the 50 jurisdictions. You say that the full study is forthcoming in 2008. I am interested in your findings and the different systems that are in place. I do feel that there is a need to have a national pension guarantee mechanism for Canadians. Is it possible to request a copy of your study once it is published and out?
Ms. Sarra: I would be happy to give you one.
Senator Tkachuk: Send a bill to her.
Senator Ringuette: I will share with my colleagues.
Ms. Sarra: There is a draft, which is just under 200 pages. I am waiting for the various government officials, judges and others who have helped to verify the country pages to make sure that I have accurately portrayed what they have told me in a series of surveys and exchanges.
I anticipate that we will be finished by the end of May. It will take a little longer to publish it, but as soon as it is finished, I would be happy to send it along.
Senator Ringuette: I would love to have it.
Ms. Sarra: I can suggest looking sooner at the study that I did for the Expert Commission on Pensions in Ontario with my colleague, Professor Ronald Davis at UBC. It looked at insolvency and the intersection of insolvency with pension law. We were able to get some very good statistical analysis about what is happening. I have a copy of that, which I am happy to leave with your clerk, if you would like.
The Chair: We will accept that offer. Thank you.
Senator Jaffer: I will start with the study, if I may. Did you study students? How do other countries treat students?
Ms. Sarra: I did not study students.
Senator Jaffer: How about the training of judges? One of our recommendations was, in consultation with stakeholders, to find a way to enable judges to develop specialized expertise in the area of insolvency law. I would like to hear from all of you whether you agree with that recommendation.
I heard you say earlier that Ontario perhaps was more advanced than some other jurisdictions in terms of national standards. What do you three feel about that?
Ms. Sarra: I think Canada ranks ahead of a number of other jurisdictions in its judicial training. I say this because I do get called from time to time to teach judges not only in Canada but also internationally. There has been a real effort by the National Judicial Institute and the Canadian Institute for the Administration of Justice to increase the amount of judicial training in this area. There has also been willingness by a number of the benches — I can think of judges in the Atlantic provinces, Quebec and B.C. — to put more energy into insolvency and bankruptcy training for the judiciary. I am very optimistic about its progress over the last year and a half.
Mr. Klotz: Toronto, Montreal and Vancouver all have specialized bars and, to some extent, specialized courts. They are excellent. They have a worldwide reputation for their competence. Other centres tend not to have as much volume.
Under the Bankruptcy and Insolvency Act, the Chief Justice in every province appoints bankruptcy judges. Every judge in the province can exercise that jurisdiction, but the Chief Justice is supposed to appoint one or more people to learn and do bankruptcy. That seems to be effective, except when a mega-case comes to town. No amount of training would be sufficient to cope with that kind of problem. It would perhaps be a misuse of resources, if those cases are so infrequent, to have someone take time away from their judicial career to become an expert in something that happens quite rarely.
Senator Jaffer: I have many questions, but I do not think any of you have touched on one question. We have heard we might rename it ''insolvency and restructuring.'' You showed compassion for people who get into difficult circumstances. Do you think people would approach the insolvency issue faster or seek support faster? What have you found from your study or your experience?
Mr. Besant: The word ``bankruptcy'' has a set of associations with it that go back a long way and that are pejorative. There is no question that a number of other jurisdictions that have adopted legislation have not used that word in more recent acts.
It is not a harmful thing to do. I do not know that it will have a transformative effect. It would have more of a symbolic than a practical impact. There is nothing wrong with doing it, but there are probably other things that are more likely to impact whether people will access the system. For example, trustees are not really allowed to advertise and solicit business.
The Chair: They just come to the Banking Committee.
Mr. Besant: There are more fundamental things that might influence people's awareness of the ability to find solutions and the ways in which to reach out to people to get those solutions. I do not think that renaming will end up having a deep impact. It will be more a symbolic change.
Ms. Sarra: A number of other jurisdictions, such as the U.K., have moved to calling it the insolvency act. Other jurisdictions like Australia use insolvency to deal with commercial insolvency, and bankruptcy to mean consumer. Of course, the U.S. uses bankruptcy for just about everything. I am inclined to agree that changing the name would not have a transformative effect. Having said that, there is no question that the word still has a tremendous stigma in Canadian society.
I did a study about two years ago of older bankrupts. It was pretty clear to me in the survey part of it that it had taken older bankrupts really to the end of their financial means before they would file because of their own preconceived notion of what it meant to be a bankrupt. It was a very painful process for their self-dignity, quite aside from the financial arrangements they had to make. That study allowed me to realize that those of us who use the words all the time perhaps do not feel that stigma in the same way as those approaching the issue for the first time.
Senator Tkachuk: It would make a person feel better to say ``insolvent'' rather than ``bankrupt?''
Mr. Besant: ``Restructured.''
Senator Tkachuk: There is nothing wrong with that.
Senator Massicotte: We have serious problems, then.
Senator Tkachuk: That is right.
Mr. Klotz: I think changing the name of the act will not have that effect. You would have to change the name of what happens when people file an assignment with the Superintendent of Bankruptcy. If you decided to call that a ``potato,'' pretty soon the word ``potato'' would have negative connotations. The Canadian Bar Association has no official position on that.
The Chair: I would like to draw these proceedings to an end, in view of the clock. However, Mr. Besant, I have a request in view of your comments at the outset regarding how grave the circumstances are now, in that we are neither fish nor fowl. The old law is there, and it is probably applicable. The new law is there, but it is not in effect. No one will publish books. You gave a rather eloquent statement on that. If you could follow up with a letter to the officials in the industry — Human Resources and Social Development Canada and labour departments — that would be helpful.
I think everyone is wrestling with this. Senator Goldstein and I are getting a lot of phone calls from stakeholders who do not know. I have been wrestling with the issue myself. Anything you can do to assist would be helpful, especially coming from the organizations you represent.
Professor Sarra, I am sure you feel the same way. It is a difficult time. You evinced a modicum of understanding in the sense that with the Wage Earner Protection Program Act, there is a need to set up a structure. You cannot suddenly say it is in effect without the proper mechanisms, but there are so many other provisions out there that could be. We were of the view at this committee way back that the two should have been separate. The Wage Earner Protection Program Act should have been in a separate statute, and then it could have done its own thing in its own time.
In any event, I think you hear me. I would like to thank you on behalf of my colleagues very much for your patience tonight under these special circumstances and for your very thoughtful input. If you have any questions, now is the time to ask them. Otherwise, I will call the proceedings terminated.
Mr. Klotz: I would like to thank honourable senators for listening to us. It was a wonderful opportunity.
The committee adjourned.