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

Issue 15 - Evidence (December 2 Sitting)


OTTAWA, Monday, December 2, 1996

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-5, to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act, met this day at 6:05 p.m. to give consideration to the bill.

Senator Michael Kirby (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we are continuing our hearings on Bill C-5. The first witnesses this evening are from the Canadian Insolvency Practitioners Association. I am going to ask Mr. Peterson, the president of the association, to introduce his colleagues, and to proceed with the presentation.

Mr. Ralph Peterson, President, Canadian Insolvency Practitioners Association: My name is Ralph Peterson and I am the president of the Canadian Insolvency Practitioners Association. With me today on my immediate left is Bill Drake, past president of Canadian Insolvency Practitioners Association, and to my right Alan Spergel, one of our members who practises in the consumer bankruptcy area, and on my far left Norm Kondo. Bill, Alan and I are all licensed trustees, chartered insolvency practitioners, and chartered accountants.

The Chairman: Can I ask you to do one thing? Tomorrow we will have before us the so-called Group of 100, which I gather is a subset of your organization, or at least a subset of the people involved in the same business. Just for the record, can you tell us what the difference is?

Mr. Peterson: It is actually a different organization called the Insolvency Institute, and many of its members are members of the Canadian Insolvency Practitioners Association.

The Chairman: What is the difference between the two?

Mr. Peterson: They have a more open membership. They include more than trustees. They have lawyers and some managers. It is open to the maximum of 100.

The Chairman: Everyone in your organization is a trustee?

Mr. Peterson: Everyone is a chartered insolvency practitioner. Some of us are licensed trustees and then we have articling students.

The Chairman: Thank you.

Mr. Peterson: I am pleased to note that our submission has been endorsed by the Canadian Institute of Chartered Accountants, which represents approximately 60,000 members across Canada.

We welcome this opportunity to appear before your committee and to provide you with the views and insights of insolvency practitioners across Canada with respect to Bill C-5. The 820 general members of the Canadian Insolvency Practitioners Association represent the majority of professionals acting as trustees in bankruptcy, receivers, agents, and consultants in insolvency matters.

Mr. Chairman, we are on the front lines each day implementing the provisions of the Bankruptcy and Insolvency Act. Our members have been involved in discussions with Industry Canada and other stakeholders, and in general we support this legislation.

The Canadian Insolvency Practitioners Association participated in the Bankruptcy and Insolvency Advisory Committee through seats on the steering committee and on most of BIAC's working groups and task forces. In addition, several of our members contributed their time and expertise to BIAC's deliberations as representatives of other organizations.

We have prepared a technical brief which we are submitting today. That brief addresses a wide range of specific issues and provides some recommendations for refinements to the bill, which we believe will better serve its overall purpose. We do not propose to go through the entire submission before you today. Rather we should like to comment on a few of the issues that, from our unique perspective as people who work daily with the practical realities of bankruptcy and insolvency in Canada, seem to be the most important. As we comment on some of the main issues raised by the bill you are considering, we will be recommending changes we believe will improve the ability of this legislation to meet the social and economic purpose for which it exists.

The basic purpose of this legislation is to provide an orderly, fair and efficient way to manage insolvency situations. It meets that purpose by providing debtors and creditors with clear ground rules, which are needed to operate in an economy where, unfortunately, sometimes bad things happen. It does so by striving to balance the need to rehabilitate and protect the individual's integrity with the need to protect the interests of the creditors involved. In the absence of a bankruptcy and insolvency system, the normal kinds of business and financial risks that are essential to the proper operation of the economy would be intolerable both for individuals and for companies. We stress this broad purpose of the legislation, Mr. Chairman, because we believe it is important to understand that an orderly, fair and efficient bankruptcy and insolvency system has implications not just for those who become involved in bankruptcies or insolvencies but for the community as a whole.

As we consider the changes proposed in Bill C-5, it is useful to look briefly at the last set of major amendments to this legislation. The 1992 amendments aimed to create greater efficiency in the system. The greater the cost in time and resources involved in resolving an insolvency, the less there is left to satisfy creditor claims or to permit the insolvent person to become re-established. The 1992 amendments aimed to encourage insolvent individuals -- and we are talking about consumers -- to submit proposals to their creditors through which they would undertake to make payments to satisfy their creditors rather than declaring bankruptcy. The assumption was that creditors would be willing to respond by working out compromise solutions with the debtor. Proposals were seen to be desirable because they provide a means for people to meet their financial obligations, at least in part, and because they would result in greater recovery by creditors than would have resulted from a bankruptcy.

It has not worked out that way. Last year, out of almost 79,000 consumer insolvencies in Canada, only about 4,100 were resolved through proposals. The rest resulted in bankruptcies.

Since Bill C-5, like the 1992 amendments, aims to promote the use of proposals to resolve insolvency situations, we believe it is useful to examine some of the reasons those earlier amendments were not more successful in encouraging wide use of proposals.

My colleague, Alan Spergel, will now comment on some of the barriers to proposals.

Mr. Alan Spergel, BIA Task Force Member, Canadian Insolvency Practitioners Association: There are three main barriers that prevent insolvent individuals from making proposals and inhibit creditors from accepting them. First, when there is not much money in play -- small debts, limited assets, and limited ability to repay -- proposals may simply not be cost-justified for either the debtor or the creditor. In certain instances, the debtor has already exhausted all of his or her assets prior to acknowledging insolvency. There are higher costs involved in proposals than in summary bankruptcies, and efficiency would suggest that where the costs of arranging and monitoring a proposal outweigh the value of the debts involved, a proposal simply makes no sense.

Second, some creditor behaviour also acts as a barrier to proposals, although banks and other lenders are becoming more responsive to the needs of small- and medium-size enterprises. Managing a proposal involves extra work and costs for the lender and, especially where the creditors are not familiar with the concept, it has been simpler to call the loan, force the bankruptcy, and take the write-off, because creditors are not always convinced that there is a net benefit from accepting a proposal.

A last barrier is that credit rating agencies tend not to acknowledge any difference between a successfully completed proposal or filing for bankruptcy. Bankruptcy wipes the slate clean seven years after the nine-month administration period. People who have completed proposals, which normally take two to three years instead of months, continue to receive bad credit reports for another seven years. This is a clear disincentive.

Like the 1992 amendments, Bill C-5 aims to encourage consumer proposals, but many aspects of the bill will result in current barriers to successful proposals being perpetuated.

As we have said, one of the greatest barriers to consumer proposals is cost justification. It becomes important that the procedures be as simple and straightforward as possible. The reporting requirements in Bill C-5 can be improved to meet that test in a better manner. In our detailed brief, we volunteer to work with the Office of the Superintendent of Bankruptcy to streamline further the reporting and notice requirements.

Bill C-5 does not address the credit rating impact of proposals. In fact, it introduces a risk that, in cases where debtors who have attempted to develop a compromise solution finally opt for bankruptcy, they may ultimately find themselves subject to a conditional discharge order. In other words, they may be worse off than if they had simply declared bankruptcy -- once again, a disincentive where an incentive is what should be called for. Our detailed brief includes recommendations to address this problem.

We also note a good change proposed in the bill, permitting joint consumer proposals. However, this change needs to be extended to include non-consumer proposals, which would be especially beneficial in the small-business sector where the main assets backing loans are often marital property. The dollar limits in the bill may still be too low.

In its effort to encourage proposals, Bill C-5 would make the failure to make a proposal a fact which could lead to a conditional discharge for the bankrupt. That is simply the wrong approach. It undermines predictability, which is an essential feature of bankruptcy, and could stretch a process, which is intended to be clear and quick, into a long and uncertain affair.

In a similar vein, Bill C-5 would require the trustee to give his or her opinion to the court as to whether or not the bankrupt person ought to have made a proposal. That requires a moral judgment after the fact, Mr. Chairman, and it is an inappropriate onus to place on the trustee. The prebankruptcy consultations with the trustee, mandated by regulation, are not taken into account. All alternatives to bankruptcy must be explained by the trustee to the debtor. Unfortunately there are instances where a viable proposal could be made but is not necessarily in the best interest of either the bankrupt or the creditors. Unless the debtor qualifies for a Division II consumer proposal, the proposal process itself can be a more costly use of a debtor's remaining assets.

As well, there can be adverse tax consequences to the individual resulting from the debtor's liquidation of assets, such as RRSPs, stocks, et cetera, by filing a proposal rather than choosing the bankruptcy route.

The statute still provides debtors with the option of choosing between proposals and bankruptcy, depending on circumstances and the debtor's state of mind. We make recommendations in both these areas in our brief. Basically, we recommend that failure to make a proposal should not be a fact that may ultimately compromise the discharge of a bankrupt.

Another area where we believe the provisions in Bill C-5 actually work against their stated goals involve the proposed changes to section 68 dealing with surplus income. The intent here is fine. It is to make sure that, where circumstances allow, a bankrupt person will continue to work to reduce his or her debts prior to discharge. The specific changes called for in the bill, however, will not achieve that goal. The recommended process is itself cumbersome and wasteful of resources, both the resources of the state and those of the official receiver's office, and the process is in danger of being inflexible.

For example, the current requirement that 100 per cent of earnings over a set limit be considered surplus and paid into the estate may or may not make sense depending on circumstances. It can certainly be seen as a disincentive to any effort to earn income above the established limit. Also, the idea that the amount the bankrupt ought to pay should be fixed in dollar terms is simply unrealistic and fails to recognize that circumstances can change during the period of administration.

We make a range of recommendations for improvements in our brief, Mr. Chairman, including a strong argument that rather than setting a specific amount to be paid, there should be an agreed formula that will apply. Our experience is that this is the most effective and beneficial approach for debtor and creditor alike.

My colleague, Mr. Bill Drake, will now discuss additional comments contained in our association's detailed brief.

Mr. William J. Drake, BIA Task Force Chair, Canadian Insolvency Practitioners Association: Mr. Chairman, the Bankruptcy and Insolvency Act is said to be a businessperson's act. As such, the law works best when it is simple, straightforward and cost-effective. We believe that Bill C-5 has unfortunately introduced a tendency to put additional steps and process into the system.

We think a clear example of this tendency is the proposed section 170.1 which introduces introduces a new mediation step through the official receiver into the discharge process. That complicates the process. It introduces additional uncertainty into the process and costs money.

The courts have been, and continue to be, fully competent to apply the law without bureaucratic intervention, provided that the courts recognize this responsibility. At present, courts in some provinces deal with bankruptcy matters quickly and efficiently; in others, they do not. The extra level of mediation proposed in this bill may be intended to address this, but it would apply equally in jurisdictions where there is a problem and in those where there is not a problem. The potential conflicts of interest the process imposes on official receivers, and the unnecessary complication of an already complex process, more than outweigh any conceivable benefit. To be effective, the proposed changes would require a costly delivery of new skills to official receivers.

If there is a problem with the courts in some jurisdictions, we recommend a more direct approach to correcting the problem where the problem exists.

Furthermore, notwithstanding that our members do not believe that the mediation provisions are needed in the Bankruptcy and Insolvency Act, we believe that if they are left there, the concept, as contained in Bill C-5, is seriously flawed. Who will pay for the costs of the mediation process? How much procedural delay will mediation inject into the process? Does the requirement in the bill that documents submitted to the mediator form a part of the public bankruptcy record not run totally contrary to the theory of mediation? We believe that unless these questions can be answered satisfactorily, the mediation process must be scrapped.

Another matter that concerns us is property which is exempt from seizure. What property is exempt from seizure varies from province to province. That is a problem Industry Canada should be working on, by negotiating with the provinces to achieve greater equity, recognizing regional differences which must persist. It is interesting that this is one of the areas where BIAC was unable to reach a consensus in its deliberations.

However, on one issue there was unanimity. That was that all registered retirement savings plans, and similar retirement savings plans, should be exempt from seizure in a bankruptcy, subject to appropriate anti-abuse mechanisms. Under the present regime, group pension plans and RRSPs held with insurance companies are protected, but other RRSPs and similar retirement savings plans are not. Unanimously, BIAC said they should be.

Because we recognize that exemptions are a matter of provincial jurisdiction, a change cannot be made solely through Bill C-5. As a result, self-employed people and other entrepreneurs who rely on RRSPs for their retirement income are significantly more exposed than are members, for example, of a company pension plan. That is inequitable. It is destructive. We strongly recommend that along with the improvements being made through Bill C-5, Industry Canada be encouraged to move aggressively to negotiate solutions with the provinces. We recommend that your committee encourage that process.

Our members are also concerned about a change to Bill C-5 applicable to companies being reorganized under the Companies' Creditors Arrangement Act. Notwithstanding the fact that we believe the process of consultation which led to the policy issues addressed by Bill C-5 was very effective, during the bill's process through the House of Commons an amendment was made to Bill C-5 which we believe could threaten the application of the CCAA and cause the courts confusion and uncertainty. Specifically, clause 124 of the bill proposes to introduce into the CCAA the provision that the court shall not make an order staying actions by creditors unless no creditor would be materially prejudiced if the order being applied for were made. Taken literally, this provision could jeopardize the restructuring of a major employer, creating major consequences to thousands of Canadians if but one small creditor was thought to be prejudiced materially. We do not believe that is the right balance, Mr. Chairman. We believe the appropriate test must be whether the creditors generally will be prejudiced materially by the process.

There is one last area of policy which we would like to draw to the committee's attention. It relates to the qualifications required for monitors appointed under the Companies' Creditors Arrangement Act, and receivers as contemplated by Part XI of the Bankruptcy and Insolvency Act. The current wording in Bill C-5 would require the courts to appoint a person to fill that role. The bill is silent as to the qualifications required for that monitor or receiver. BIAC unanimously recommended that in the case of CCAA the bill should specify that a trustee in bankruptcy be appointed. Obviously, the courts will provide some protection as to who that person will be. Unless the current wording is changed, there is the potential for the appointment of inappropriate persons, and there have been cases where that is exactly what has happened.

There is a solution already in force in my home province of British Columbia. That province's legislation requires that the receiver manager of a corporation be a trustee in bankruptcy. This ensures that those who are appointed in that capacity are both qualified and impartial. We recommend that the proposed subsection of the CCAA be amended to include a requirement that a monitor must be a chartered insolvency practitioner or, failing that, a trustee in bankruptcy.

Mr. Peterson will conclude our formal presentation, Mr. Chairman.

Mr. Peterson: Mr. Chairman, our detailed brief contains 33 specific recommendations regarding the matters we have discussed here and a range of other matters. We are proposing a number of changes that will better protect both consumers and creditors and assist Canadian Insolvency Practitioners Association members to meet their responsibilities as effectively as possible. We look forward to discussing these and other matters with you. We have chosen to focus on these few items in our opening remarks because they are fundamentally important.

We were pleased to learn that our recommendation about shortening the mandatory review of this bill was considered and that the review period has been reduced from the original seven-year period to five years.

We believe the bill should work to streamline the system; unfortunately, some of the amendments actually introduce additional complications. Barriers to proposals should be addressed, and proposals should be encouraged where they make sense. We believe the system should be flexible enough to accommodate reality. It should involve a minimum of uncertainty.

It is important to state that, on balance, Canada's bankruptcy and insolvency system is working well in meeting the needs of the Canadian economy. In particular, the 820 members of the Canadian Insolvency Practitioners Association who work daily in this field want to make it very clear that there is a minimum of abuse in our system, although we would be the first to say that it can always be improved. We include some recommendations to that end in our brief.

We believe the amendments your committee will recommend to Bill C-5 can improve the system so that it can better play its role of providing debtors and creditors with ground rules that make it possible to operate in an economy in which risk is a reality and to balance the need to rehabilitate and to protect the debtor's integrity with the need to protect the interests of the creditors involved.

In conclusion, Mr. Chairman, quite frankly, we were disappointed that the majority of our detailed recommendations contained in our technical brief were not adopted by the House of Commons Standing Committee on Industry. Five of our senior members worked on that brief for more than a year. We believe that each of our recommendations and supporting analysis and commentary warrants consideration by your committee. In this regard, we remain available at your convenience to consult further with your committee or staff on any of the matters we have raised.

We will be happy to answer any questions you may have on anything we have said tonight or the contents of our technical brief. We thank you again for allowing us to appear before you.

The Chairman: As you point out, your brief contains 33 amendments, but you do not attempt to arrange them in order of priority. I would make the assumption that the ones of which you spoke tonight are more important than the ones you did not mention. Is that a reasonable assumption?

Mr. Peterson: Yes.

The Chairman: Is this effectively the same brief you presented to the House?

Mr. Peterson: Yes.

The Chairman: You said one issue was dealt with in the House by an amendment shortening the review period.

Mr. Drake: Mr. Chairman, there were two other recommendations which were partially adopted at the House level.

The Chairman: Essentially we are down to 30; is that right? I am not trying to be facetious.

As well, in your opening comments, you focused on consumer bankruptcy issues rather than corporate bankruptcy issues. You raised questions about proposals, et cetera. Indeed, the preponderance of your comments, 20 or 25 of the 30, deal with the issue of the bankruptcy and insolvency of a single individual rather than a corporate insolvency; is that correct?

Mr. Peterson: I think some of the proposal recommendations may apply to both.

The Chairman: However, in the comments, as I read them, and please correct me if I am wrong, I detected a very strong orientation to an individual as opposed to a corporate entity; is that correct?

Mr. Peterson: Yes.

The Chairman: I am pressing on that point because we have had criticism from witnesses of the proposals as they relate to individual consumers and, relatively speaking, not very much criticism of the bill as it relates to corporations or companies. The feeling one gets is that perhaps the consumers' side was not thought out as well as the other side. Would that be your reading as well?

Mr. Drake: Mr. Chairman, perhaps one of the reasons for that is that the consumer bankruptcy process is more systematized and more driven by regulation and by the rules under the Bankruptcy and Insolvency Act, whereas much of the corporate and business reorganization and, indeed, bankruptcy process is dealing more with business issues. A custom answer must be found to a custom problem to deal with a specific business matter. Perhaps there is more concentration on the consumer because that is where there are more rules which must be followed at a detail level.

The Chairman: You seem to be saying that the system ought to be simpler.

Mr. Drake: Because there are more regulations attached to it, there is more opportunity for those regulations to not hit the bull's eye. Many of our detailed recommendations are trying to aim the dart closer to the bull's eye.

The Chairman: Assuming none of your amendments were made, does the act make the situation vis-à-vis consumers better or worse? You seem to be saying it would be worse, but I am not sure of that.

Mr. Drake: Overall, we would say that it makes it better. There are areas, such as the mediation process, where perhaps the process has not been fleshed out yet. The possibility exists that the flesh which is put on the skeleton could make it better, but we are not optimistic about that.

The Chairman: I am trying to translate your answer into something practical. I think you are saying that Bill C-5 is better than the existing situation, but there is significant room for improvement. Am I reading you correctly?

Mr. Drake: I think we would say that the bill gets an `A' minus, and we think there is an easy opportunity to get it to an `A' or and `A' plus.

The Chairman: This is the first time in a long time I have seen a bill get an `A' minus. However, this committee has a tendency to be very tough graders.

With regard to RRSPs, you could be taking one of two positions, and I wish to understand which it is. You could be saying that all RRSP funds ought to be treated the same: They are all available for seizure, or none of them are available for seizure. If you are recommending that none be available for seizure, are you saying that only because, at the present moment, we exempt only RRSPs which are with life insurance companies?

Mr. Drake: We are saying they should all be exempt from seizure.

The Chairman: Why?

Mr. Drake: Primarily they are a means whereby we plan for our retirement years by putting away money during our earning years. It would be very difficult to seize a pension plan because of the variety of vesting rules. It may be the simplistic answer, but fairness dictates that everything be treated alike if it is in the nature of putting money aside for retirement. Our belief is that there should be protection for those retirement earnings.

The Chairman: Because you cannot seize a pension plan, you would exempt all RRSPs. Clearly the current situation where life insurance ones are exempt is very inequitable. Set that aside for a moment, because there are several ways we could deal with that. You would exempt essentially all retirement earnings; is that right?

Mr. Drake: Precisely, with appropriate anti-avoidance mechanisms so that someone could not load up their RRSP today and go bankrupt six weeks from now, thereby protecting whatever surplus cash was available on the eve of insolvency.

Senator Meighen: The chairman, as usual, has asked most of the questions I had.

You say this bill gets a grade of `A' minus. Without being facetious, we have heard a number of criticisms from people who are interested parties but whose representations were not sought or were ignored or not adopted during the passage of the bill through the House of Commons. I am coming back to the chairman's comments on the number of amendments. If we had a month or two, we could go through each of them carefully. I am in the position of having to seek some sort of order of priority in these because I do not know how else we can deal with all of the amendments, many of which are quite technical, at this stage.

Let me go back to one of our primary concerns, which is that if the law is so structured to promote bankruptcies rather than proposals, it is backwards. You touched on some of the things that could encourage one to make a proposal rather than to declare bankruptcy.

Would you reiterate the essential changes which must be made in order to strike a proper balance, so that people will not find themselves in the situation you describe where it is better to go bankrupt than to make a proposal?

Mr. Spergel: I will elaborate on the difficulty with consumer proposals. The idea of consumer proposals was introduced in the last set of amendments. Frankly, both the trustee community and the administrative community are disappointed in the lack of proposals which have gone forward because of the disincentives which exist in the system today. There are disincentives all the way around. We are slowly trying to correct them. We have recommended a few of them here.

We focused on some clear disincentives which exist with respect to the individual debtors. We are on the front lines, as we mentioned. We interview bankrupts day in and day out. We understand what is important to them. Clearly, one of the most important things is their credit: their credit rating and their ability to get back into the mainstream.

I am sure you are all aware that one objective of the act is the rehabilitation of the individual to return him to the mainstream. Right now, there is no clear incentive for an individual to make a consumer proposal as opposed to filing for bankruptcy. Partly this is as a result of the problem with credit rating. There is no distinction presently between a person who has filed a proposal and someone who has made assignment in bankruptcy.

There are some disincentives from a tax standpoint whereby it is very awkward to file a consumer proposal. Assets are liquidated or used to fund the proposal. The tax attracted by the liquidation of those assets comes into play after the proposal has been filed, and that debt exists beyond the date of the proposal.

We are making great strides in educating the public and the credit-granting agencies about the significant difference. We are talking about a substantial commitment on behalf of the debtor. We are not talking about the nine-month period between the filing of an assignment and the automatic discharge generally received by first-time bankrupts. Generally, there is a two- to three-year commitment. That is a substantial commitment and a great sacrifice on behalf of that individual. That should be recognized within the system.

These are a few of the problems which we are facing in encouraging consumer proposals.

Senator Meighen: I could not agree with you more. Can you take me to the part of your brief which deals with this and which suggests the appropriate changes? I had not seen the brief until I arrived this evening.

Mr. Spergel: At the beginning of the paper, section A.2 deals with the effect of consumer proposals on credit rating.

The Chairman: That is page 1 of 37 at tab D.

Senator Meighen: It comes down to this recommendation: That credit-reporting and credit-granting systems in Canada must recognize the significance of the difference between a successfully completed proposal and a bankruptcy, and encourage continuing consultation toward developing positive benefits to debtors who choose proposals over bankruptcy.

Mr. Spergel: Right.

Senator Meighen: You are not asking for any amendment to the bill before us. You are merely asking us all to say a more enthusiastic "well done" to someone who makes a proposal and struggles for two years and successfully pays their debts as promised. Is that not just motherhood, to be frank?

Mr. Spergel: We are asking for some recognition to be given. Perhaps we do not have the answers for how this might be incorporated in the act, but there is an essential element missing with respect to effectively utilizing consumer proposals.

Senator Meighen: You do not have a proposed solution right now but you recognize the problem?

Mr. Spergel: Yes.

Senator Meighen: I share that view of yours. On one other aspect, you can suggest a concrete solution. That is the amendment which was made at a rather late hour to section 124 of the CCAA with respect to the extension of the order.

This issue has my fax moving and my telephone ringing. There are those, obviously, who do not share your view. I share your view, but I am not an expert. It seems to me manifestly impossible for a complicated reorganization to be carried out within 30 days. I am basing that on the supposition that to prove that no creditor is being materially prejudiced would be virtually impossible. I think you said that.

There are people who do not share that view. I do not want to put words in their mouth, but I gather they have more faith that the court would take a more reasonable approach and not tie one to the exact letter of that section and a very narrow interpretation of prejudice.

Is there anything you can add to your feeling that this particular change to section 124 is counter-productive?

Mr. Drake: You stated that a complex restructuring would likely take more than 30 days. Even a simple one frequently takes more than 30 days. We would endorse that comment where things are complex and a number of stakeholders are involved. The best reorganization is one where consensus has been built under very trying conditions. That is not an easy process to get through.

One of the joys of the Companies' Creditors Arrangement Act, over the last decade or so, has been the flexibility that it gives to stakeholders and their advisers to custom-tailor a solution to a financial problem and, frequently, to an operating problem as well. Dealing with the complexities and finding the right solutions is not an easy task. CCAA has benefited from that flexibility. Some would perhaps argue that it has been too flexible and, as a result, has left too few hurdles in the field.

The milestone or the extension of the order was a built-on consensus solution. The last minute change fell outside of the consensus which was built at BIAC amongst a number of stakeholders involved in the process. For that process of consultation with the private sector to work as effectively as we believe BIAC did requires that that consensus be listened to. This is one area where there was consensus. It is hard to imagine a major restructuring under the CCAA which has not prejudiced virtually every stakeholder, because that is the idea of a debt restructuring. Everyone gives a little and takes a little short-term prejudice to salvage the long term. Material prejudice to one creditor may unfortunately happen sometimes, and one has to look at the balance of the better good.

Senator Meighen: Would you care to speculate as to why it was put in? It was suggested to me that one of the main reasons was to render it analogous to the position which exists in the Bankruptcy and Insolvency Act.

Mr. Drake: There is an analogous provision in the Bankruptcy and Insolvency Act. The general theme of these amendments to the CCAA was, in a number of areas, to parallel the wording from one to another.

As you said, the courts have done an excellent job managing the restructuring process through the Companies' Creditors Arrangement Act. However, one must ask whether it is fair to put the courts into a situation where they would have to evaluate, on a technical argument, the threat to a multibillion-dollar or several-hundred-million-dollar debt restructuring posed by the material prejudice to one creditor over a mere $1,000.

The Chairman: That provision, whether it is the 30-day limit or, more importantly, the fact that absolutely no one should be prejudiced, seems to a lay person such as myself almost to be a mistake. It is hard to believe that people could have made that amendment seriously. What is the conceivable rationale for that amendment? Intuitively, as someone who has done some of this, it seems totally impractical.

The government witnesses will be appearing. Other witnesses have an answer, and I am sure they will have an answer. They have three days to work on it.

Mr. Drake: I feel their eyes penetrating my back right now.

The Chairman: There is obviously some rationale, but do you have any idea what it is?

Mr. Drake: The basic principle is that one should not have the restructuring of company A cause the downfall of company B. That is a pretty basic element that unfortunately happens from time to time. Perhaps it is in the definition of "material prejudice". Whether it is in the definition of that or whether it is in the definition of "no creditor", the solution has to be found in something which asks the court to take into account the big picture, which the courts have done very well.

The Chairman: In other words, why would you constrain them so tightly?

Mr. Drake: Precisely.

Senator Stewart: Mr. Chairman, you will recall that last week we were told by two witnesses about their views as to the cause of the considerable increase in the number of consumer bankruptcies. If I recall correctly, they mentioned three possible explanations. One was what we call "careless" or "indifferent" irresponsible avoidance of financial responsibilities by consumers; the second was financial incompetence to handle their own financial affairs; and the third was that when they had to meet their obligations, their financial conditions were not what had been anticipated when those obligations were assumed. It was the third of these explanations for the rise in the large number of consumer bankruptcies that those witnesses emphasized. I would not say that they dismissed the others, but they certainly put them well down below the third, the change in financial circumstances or at least circumstances which were not anticipated.

I would like to hear from these witnesses with regard to the explanation of the cause of the increase in consumer bankruptcies, because the cause must be directly related to the solutions, remedies or procedures after the consumer has reached the point where she or he is considering bankruptcy.

From your experience, why has there been the great increase in consumer bankruptcies?

Mr. Spergel: If I knew the answer to your question, senator, I might be seeking another position, namely, rectifying the economy.

Clearly we are going through what has been termed by several economists as a revolution of sorts, a technological revolution and a changing of the shape of our work force. Many people are being caught in that.

If I could focus in on the third point you made, the change in financial conditions, there has been a great disruption of people in the work force. Quite often there are two income earners in the family, and they are walking a difficult financial line to start with. One of them, for one reason or another, may become displaced and lose a job through no fault of their own. All of a sudden, their finances are thrown into absolute havoc.

What the bankruptcy and insolvency legislation allows them to do is seek some refuge from their creditors. I experience it every day. People incur debt honestly believing they will have the capacity to repay it some day. However, given our ever-changing times, they are unable to do so. Clearly, that is one of the major causes of the increase you mentioned.

We have a certain percentage of the work force where people are moving in and out of employment. When they are employed, they incur debts, and when they become unemployed, they are unable to handle them. Some people rebound more quickly than others. If you are able to rebound and find alternative employment, you are able to handle the debts. Those who do not find immediate employment obviously must seek the protection of the Bankruptcy and Insolvency Act.

Senator Stewart: I hope the witnesses can overcome my problem. The explanation given is that individuals are being confronted with what I think the economists call "adjustments". If our economy is so unpredictable insofar as employment and the conditions of employment are concerned, what is the level of possibility that the proposals you are advocating will be adequate? In a sense, the proposal suggests that somehow or other they will get out of the bitter pickle they are in because of presumably improved economic circumstances.

Mr. Spergel: Some people have referred to the bankruptcy process as it exists today as a clearing house for ridding oneself of debts. Quite frankly, a number of people I have dealt with would prefer an alternative process. Bankruptcy for most people is still a great shame.

Senator Stewart: What we are dealing with is a future so unpredictable that these people have been unable to predict in the past where they are today. How can you or anyone else predict where they will be four or five years from now? I have a philosophical problem there.

Mr. Spergel: I cannot obviously vouch for anyone's future actions.

All we can do is try to institute some preventative action, which has been done through the counselling that now exists with all bankrupts. Hopefully, this counselling will prevent a bankruptcy from recurring.

Senator Stewart: Do you think compulsory counselling would be helpful?

Mr. Spergel: I do not believe that compulsory counselling is useful in all circumstances.

Senator Stewart: When you speak about counselling, you seem to be saying that the circumstances change, but they were not very shrewd and counselling might make them shrewder. Perhaps you do not like my word "shrewd". They were not very perspicacious and counselling will make them more perspicacious. Is that what you are saying?

Mr. Spergel: The jury is out. Canada is one of the leaders with this counselling concept. Are we educating better bankrupts for the future, so that they will know the process better? Is that what concerns you?

Senator Stewart: Will they be able to tailor their financial obligations for the future better than they did in the past by reason of the counselling?

Mr. Spergel: There is one element of counselling that is important, namely, sitting down and going through the budgeting process. When does an individual learn how to prepare a budget? To my knowledge, it is not taught in the schools or by creditors. It is not taught by anyone. We are making an honest attempt at sitting someone down and showing them what things really cost. When you actually put pencil to paper and point out how much the cigarettes, entertainment and holiday is costing, and show the end result, namely, that at the end of the day there is nothing left over to buy that new table or repair the television or put some money away for the new car, the budgeting process proves to be invaluable. The budgeting concept is certainly introduced through the counselling process.

I should like to make one other point with respect to the bankruptcy process. One other process is in place now. Unless a creditor objects, first-time bankrupts are automatically discharged after nine months. If you have been previously bankrupt, there is no automatic discharge; there is a hearing. You must go through a formal proceeding to convince a judge why you should be absolutely discharged, which is a good deterrent.

I thought I would mention that because we talked about the counselling as hopefully preventing recurring bankruptcies. There seems to be a feeling out there that bankruptcy is used as a clearing house. Perhaps the first time that criticism can be levelled, but the second time they put the person under the microscope and a closer look is taken as to the causes for the bankruptcy.

Senator Stewart: I should like to turn the coin over. The witness has told us that counselling and the procedure with regard to a second bankruptcy are of educational benefit to the person who has borrowed the money. However, the implication seems to be that the people who lent the money were rather foolish, too.

Mr. Spergel: Do you want me to comment on my daughter, who received a credit card in the mail? She is 11 years old and she was granted a credit line. I wrote back to the president of the company and said that, "On her $2 allowance per month, she would be more than happy to repay you." I returned the credit card with the application.

In many instances, these credit cards are pretty free-flowing.

Mr. Peterson: The bottom line is that counselling is after the fact. We need education of our younger people on financial matters.

Senator Stewart: Not only the borrower, but it seems to me that the lenders are being reckless, too. It is the same set of financial circumstances that are being addressed by the borrowers and the lenders. You are being as discreet as politicians. You do not want to say that they are being careless, reckless and feckless. Let us get the reaction.

Mr. Peterson: I do not think you will get any disagreement from this panel that credit is too easy to get. I can see it in my teenage sons who must have a cell phone to lease, a bank card and a credit card. When they look at their first automobile, what do they want to do? They want to lease it because it is cheaper; there is only a monthly payment.

Senator Stewart: That point is established.

I wish to ask one historical question concerning retirement plans through life insurance companies.

Would I be correct in saying that that is an old feature of the law which probably had a good rationale when it was introduced, but now, in the new family of retirement savings plans, is probably an anomaly?

Mr. Drake: I do not know if that is the background or if it is the fact that many of the plans which are exempt from seizure are inextricably linked to the life insurance itself. This is where the insured person would pay a premium of, say, $100 per month, of which $30 purchased the insurance and $70 purchased a retirement plan.

Part of the practical answer may be the unbundling of that, recognizing that many of the insurance laws are in the provincial domain.

Senator Stewart: When you were speaking about the abolition of the extension of the exemption, you said this should be done in such a way as to prevent potential bankrupts from loading up their plans just before they get into the bankruptcy situation.

Surely, it is more difficult than that. They say that they are in a precarious position year after year after year. They say: "Well, at least I will take care of myself," and they put in the maximum, year after year after year. True, eventually they go under. It is just not those last few months. Have you thought about that problem?

Mr. Drake: We have thought about that. There is no easy solution. As we were debating it amongst ourselves, we felt that one should look for the pattern. If the individual has consistently each year over the past five or six years made a $5,500 contribution to his or her RRSP, and has been doing that on the basis of $150,000 or $100,000 earnings, that is probably something that one could say, in the normal course of financial planning, should be immune. However, if we were into March and we saw that both the past year's RRSP contribution and the current year's contribution were made in the same month, which is totally off the pattern, then that would start setting off the alarm bells.

Senator Hervieux-Payette: You have said that there are 811 members in your group, as well as another 300 members in another category. That comes to a total of approximately 1,100 for the approximate 80,000 bankruptcies per year. That works out to about 80 bankruptcies for each one of your professionals.

Are there any other recognized experts who become involved apart from these 1,100 people? You said that you want the law to recognize that the only officers who could be recognized to administer the law be the group that you have mentioned. Who else can qualify to write your association's exam? Are there people coming from other backgrounds?

Mr. Peterson: They come from a variety of backgrounds. However, the overwhelming majority would be from financial or accounting backgrounds. We have some lawyers who are not practising who are also members of the association. Some are licensed trustees.

Senator Hervieux-Payette: In talking about mediation, you say that it will add to the costs and that it may not be the most efficient process. Would you remove that provision from the bill? You seem to be saying that such a provision does not serve any purpose.

Mr. Peterson: We do not see the need for it. It is something that is being imposed and we do not know why. We think it further complicates and will delay the process. We do not think there is a problem now.

Senator Hervieux-Payette: Would your group be involved in that process?

Mr. Drake: We would have to be involved in that process because the framework for the processes in the bill indicates that this mediation process would be invoked where there is a disagreement between the trustee in bankruptcy, that is, one of us, and the bankrupt debtor. In one of the clauses of the bill, the mediation process sets out an attempt to resolve that loggerhead. Therefore, we would not be there as the mediator; we would be there as a party to the mediation.

Senator Hervieux-Payette: Are you saying that you do not need this clause in the bill?

Mr. Peterson: That is correct.

Senator Hervieux-Payette: How do you interpret the fact that such a small percentage of your proposals were accepted? Do you wish that this process would happen more often? Are you saying that since there will not be one instance in which everyone will agree, then the proposals cannot go ahead? Is there a mechanism whereby a proposal could be accepted; or is it easier to go bankrupt?

Mr. Spergel: It is much easier to go bankrupt. When I tell a bankrupt, "You can make payments of your surplus income for nine months and generally face an automatic discharge if you have never been bankrupt before, or we can launch a proposal which would involve a substantially greater period of time," he generally asks, "What is the difference in terms of my credit rating? How quickly can I re-establish my credit?" I explain to him that, generally, there is no distinction currently made. The person making a logical decision says, "Why would I even consider making a proposal? I will go bankrupt and get on with the rest of my life after nine months."

Senator Hervieux-Payette: I suppose it is only those born in the same generation as my father who would pay for the rest of their life rather than go bankrupt. That kind of person does not exist any more. Today, it seems that it is not part of our value system. Today, in our system, people say, "Let us get rid of this. Let us go over that bad period of life and start all over again. I do not want to carry that on my shoulders for the next decade."

Mr. Peterson: I am not sure if it is a question of value or a question of the circumstances in carrying the financial burden.

Senator Hervieux-Payette: Is there still a need for such a provision, or is it only necessary when we talk about large businesses? We know of some large businesses which are trying to restructure themselves. I suppose that when there are hundreds of millions of dollars at stake, people are more interested in following another route than that of bankruptcy. When you are talking about individuals, is there still a need for that?

Mr. Peterson: I believe there is still a need for it.

The other thing we must keep in mind is that proposals will not work in every situation. There are certain factors which are needed in order for a proposal to be successful. One is an income stream and/or a basket of money. Most of these bankrupts do not have a basket of money or access to money.

I do not want to reiterate what Alan has said about the credit rating. However, I think it is an important issue. If an individual could be given credit on the credit rating, let us say within a two- or three-year period, then that would be enough of an incentive for these people. Very often, they want to do a proposal. They would prefer to do a proposal and will work hard to meet the requirements of that proposal. However, if there is absolutely no incentive for them, and it will take them longer in the process, then it is worse because their bad credit rating is extended by the length of the proposal period.

Senator Hervieux-Payette: Therefore, it is more attractive to go through a proposal rather than through the bankruptcy. At present, it is the other way around.

Mr. Peterson: That is right.

Senator Hervieux-Payette: People often tell me that they cannot afford to go bankrupt because it costs so much to initiate the process. What should we say to such people?

Mr. Spergel: There is a program in effect for individuals seeking protection with the trustee and who find they are unable to pay the necessary fees. My firm belongs to the debtor assistance program in our region. As a service to the community, we do these bankruptcies, recognizing that they may not necessarily be able to pay the fees in full. It is done on a voluntary basis. To my knowledge, there is virtually no one in Toronto who has not been able to find a trustee to act, if he has found the proper channel to go through. It is just a matter of approaching the government official.

Senator Hervieux-Payette: You are volunteers, yet you do not even receive a tax credit for all the volunteer work that you do. Do you do this work out of virtue?

Mr. Spergel: We do it as a part of the service to the community. It comes with the territory.

Senator Hervieux-Payette: Most of the time, the people I saw had nothing left. They are the ones who said, "We cannot afford to go bankrupt." What is your answer to these people?

Senator Meighen: As I read various briefs, I see that there seems to be two schools of thought. One is, "Let us get everything under one act. Whatever the commercial reorganization, whether it is Joe's corner store or Algoma Steel, we can deal with it under one act." There are others who say, "No, no." Indeed, I have had many people tell me how wonderful our CCAA is compared with Chapter 11, which is a name easier to remember than CCAA, which sounds like a hockey organization.

Where does the Canadian Insolvency Practitioners Association come into play? Would you like to see two acts? Do you think large commercial reorganizations should be dealt with under a different set of rules or the same set of rules as a small bankruptcy or reorganization?

Mr. Peterson: There is a place for both acts. The CCAA has served a purpose on the large reorganizations. It would be nice to streamline them to the extent possible, but I would say there is a role for both.

Senator Meighen: That is the streamlining they were trying to do in clause 124 and you do not like that.

Mr. Peterson: They went a little too far there.

Senator Stewart: Do you have anything to say with regard to students going bankrupt on their student loans? Have you had experience relative to that?

Mr. Spergel: Yes. We have had some experience and, essentially, the amendments that are proposed whereby there would not be an automatic discharge from that debt for a period of two years from the time when they would no longer be a full-time student is supported by the association. We are in full support of the amendment as proposed.

The Chairman: What is the policy rationale for treating a student loan different from any other loan?

Mr. Spergel: The student loan was obviously obtained for educational purposes. The idea of obtaining an education which will have future benefit is a concept which should be treated differently. It is not like acquiring other assets for which one has incurred debts.

Generally, an education is regarded to be an asset. Look at a professional who may have incurred a substantial amount of debt and perhaps a substantial amount of student loan in getting an education. Not to pick on any one profession, but let us take a doctor. Obviously the future income-earning potential of a doctor is substantial. I think it is only right to expect, whatever that future income-earning potential is, that he or she should have to wait it out, attempt to earn an income and not immediately file for bankruptcy after completing his or her education.

The Chairman: I do not want to prolong the debate except to make the observation that your theory of assets of a different kind is very interesting.

I would detect underlying your last response that you have some suspicion that some students are borrowing money, getting an education and immediately declaring bankruptcy as a way of effectively ensuring that what they got was not a student loan but a student grant. If you have any evidence, I would like to hear it. You are clearly implying that an asset called "education" is different from any other kind of asset because of its long-term potential.

I would have to rack my brain, but I would suspect I could think of other assets that had similar long-term value which you would not treat differently.

Mr. Spergel: It is unique. The circumstances under which that debt is incurred are unique. Where we run into difficulty is where someone sets out to obtain an education, perhaps gets halfway through the program, drops out and still is saddled with the debt.

The Chairman: How do you treat that situation in your theory? Now the person does not have the education. I want to apply the logic of your previous argument. A person does not have the education. What do you do? It seems to me that is where your argument falls down somewhat.

Mr. Spergel: It could very well. I think that is why the two-year time limit is healthy. It does not survive forever. However, realistically, there should be some requirement that the individual who has obtained a student loan attempt to repay it. The individual circumstances, I guess, are difficult to take into consideration, especially where someone has dropped out of a program halfway through. They are in a difficult position, not having the full benefit of the debts that were incurred.

Senator Stewart: He seems to be saying that the ordinary bankruptcy laws ought not to apply in the case of student loans.

The Chairman: That is exactly what he is saying.

Senator Hervieux-Payette: You can remove the car and the house. It is hard to remove the education. You have it for the rest of your life.

Senator Stewart: That is the same point.

Mr. Norman H. Kondo, Executive Director, Canadian Insolvency Practitioners Association: Education is a different asset. It cannot be repossessed. If you take the view that education per se is valuable, not just getting a degree, even if you have not completed the full process and received the degree, you have still received value that cannot be taken away.

The Chairman: You spoke about the advantages of having both the BIA and the CCAA. What are the pros and cons of having a separate piece of legislation to deal with consumer bankruptcies? Essentially, you would have a piece of legislation which dealt with consumer bankruptcies and one which dealt with corporate bankruptcies.

Mr. Peterson: Are you speaking about splitting the BIA?

The Chairman: Yes. What are the pros and cons of that? One gets the sense when one looks at the BIA that it is an attempt to be all things to all people. I am asking whether there are any advantages or disadvantages of splitting it so a portion dealt with consumers. You would have a consumer and a corporate bankruptcy act.

Mr. Drake: One of the problems becomes definitional. We talk about corporate and consumer bankruptcies. Then there is the individual who is carrying on a business not through an incorporation. The delineation between a consumer bankruptcy and a personal business bankruptcy starts getting blurred.

Perhaps I can give you a rationale for having one act. This may sound somewhat opposite to Mr. Peterson's comment on the CCAA, but if there is one body of rules in one place, and then if different parts of that piece of legislation deal with the different idiosyncrasies of a consumer proposal versus a corporate proposal versus a consumer bankruptcy, then if you want to fix or change something that is common across the thread, there is only one statute that has to be changed rather than having to change things in four our five different acts. Maintaining that consistency by having one piece of legislation has some merit.

The Chairman: Given your 30 recommendations that have not been adopted, and recognizing that some of them do not require a legal amendment, I wonder if you could let us know before Thursday of what your top eight or 10 priorities are. A number of your recommendations are housekeeping matters and a number are substantive. I think it would help if we had some sense of your priorities. This is not being critical of your brief, but the priority does not jump out in reading the brief.

Mr. Peterson: We would be pleased to provide those.

The Chairman: Our second witnesses are from the Canadian Bar Association. Mr. Robert Klotz is the chairperson of the National Section on Bankruptcy and Insolvency, and Ms Tamra Thomson is the director of the Legislative and Law Reform Section.

Thank you very much for attending. I understand Ms Thomson will begin with some opening comments.

[Translation]

Ms Tamra Thomson, Director, Legislation and Law Reform Directorate: The Canadian Bar Association is a national association representing over 34,000 jurists in Canada. Its primary objectives include improvement in the law and in the administration of justice, and the promotion of equality in the judicial system. It is on that basis that we will speak to you tonight.

The Canadian Bar Association supports the general thrust of the amendments contained in Bill C-5. Members of the Canadian Bar Association have actively participated in the consultation process through the Bankruptcy and Insolvency Advisory Committee. We believe that the amendments contained in Bill C-5 are required as soon as possible.

[English]

Senators have been provided with a copy of our detailed submission on Bill C-5, as well as a letter voicing our concerns with amendments made in the other place with respect to treatment of support arrears. It is on that matter that we wish to focus our comments this evening.

Mr. Klotz, who will speak to the substance of our concerns, brings unique expertise and interest to this subject. He has written extensively on family law matters in bankruptcy generally and on this subject in particular. His leading article on this subject has also been distributed to you. On behalf of the CBA, he raised the problem of support arrears treatment in the BIAC consultation process and was instrumental both in ensuring consideration of the matter and in developing a balanced solution.

I should also note that the CBA policy on this matter was sponsored by both the Bankruptcy Section and the Family Law Section and was adopted by CBA Council, which is the highest and most widely representative governing body of the CBA. I will now ask Mr. Klotz to elaborate on our position.

Mr. Robert A. Klotz, Chair, National Bankruptcy and Insolvency Law Section, Canadian Bar Association: Good evening, Mr. Chairman and honourable senators. The Canadian Bar Association has been actively involved in the consultation process of the Bankruptcy and Insolvency Advisory Committee, and in general we support both the thrust and the detail of the new bill. We made our submissions on the bill to the House committee which considered Bill C-5, and a number of our comments were addressed in the version of the bill that was adopted in the other place.

However, in the area of spousal support, our primary concerns were not met. Indeed, the bill before you exacerbates the problem we identified in our submission: that is, the problem of collusion. There is no doubt that reform is needed in this area. The Bankruptcy and Insolvency Act is anachronistic in its treatment of support. That is why we proposed this amendment and fought hard for it. What we proposed was a balanced amendment based on equal sharing. What appears in Bill C-5 is not balanced and contains deep flaws. The problem lies in recognizing that, in many cases, financial failure and marital dissolution occur together. Each contributes to the other. In many cases, the issue of support between the spouses is negotiated when creditors are looming.

This creates the risk of collusion. Collusion goes by many names: fraudulent conveyance, fraudulent preference, reviewable transactions. The concept is well known in bankruptcy law and is the subject of numerous cases. Our concern here is that the new remedy is an invitation for collusion and has no controls.

Let me explain by way of the example I noted in the letter of a heavily indebted husband earning good income who jointly owns a home with his wife. Let us say he makes $100,000 in income and the home is worth $200,000, owned jointly. If they separate, under current law he will lose half his home and will have to pay his wife or ex-wife support. His creditors will obtain some dividend. Under Bill C-5, he will say to himself, or his lawyer will say to him, "Why not agree to pay her $100,000 in lump sum support? She will keep the home. The creditors will get nothing. You, husband, will not have to pay support over the next five years."

This remedy, as currently drafted, allows this to be done by way of a separation agreement done the day before bankruptcy. There is no limit on the amount. This is not a settlement under section 91 of the act because no property changes hands. It is not a fraudulent conveyance under provincial legislation. It is not a fraudulent preference under section 94 because it is the act itself which creates the preference, not the parties. This new preference is unlike any other in the existing act because it can be created by agreement, whereas every other preference currently in the act is created by status: an employment relationship, a worker's compensation claim, a tax liability. The problem is that future support will be paid on the backs of creditors instead of out of the husband's future income or out of his exempt assets such as RRSPs.

What is the effect of not having anti-collusion control? This is something that might not be intuitive unless you look at the act and think about it a bit. The new remedy has an anti-family impact. When the financial going gets rough, it creates terrific stress on the family. It is crucial to encourage the family to stay together against this adversity, but Bill C-5 as currently drafted does the opposite. Since the spouses can save the family assets through a support agreement done the day before bankruptcy, the family will be under pressure to split up to take advantage of it. If the wife is in a troubled marriage and the husband is going bankrupt, if she leaves, she can get priority for thousands of dollars. If she stays past the date of bankruptcy, she gets no priority whatever. Why do we want to create such a terrific incentive to split up the family?

There is a problem of creditor confidence in the bankruptcy system. We must be concerned about the moral and ethical tone of the bankruptcy laws, as you, Mr. Chairman, said yourself in the Senate, and about the disgust that some creditors will feel when they lose their dividend in these circumstances. As a result of our submissions to the House committee, no anti-collusion provision was added; instead, the remedy was strengthened by making provability, that is, sharability, unlimited instead of limited, as it had been in the earlier version. Thus, a spouse gets priority and, as well, can get equal sharing for any balance, which may be a 15-year-old arrears claim that no one can challenge and that may not correspond to the reality over that 15-year stretch.

There are several solutions to the problem, none of which is perfect. I would be pleased to describe these in greater detail if you wish to explore this matter through your questions.

Mr. Chairman, honourable senators, this is an important amendment. It can help needy spouses and children. However, if left unfettered, it can damage creditor confidence, lead to dismay with the system, and drive apart struggling families. For all these reasons, a more balanced solution ought to be seriously considered by this committee. Thank you.

The Chairman: Thank you. In your comments, you focused on the issue that was the subject of the covering letter that came with your brief. As you know, your brief contains a number of other amendments, approximately a dozen. Are there any of those upon which you wish to comment?

The recommendation that the mediation process be deleted, for example, was also recommended by the group that was here before you. We have already talked about the RRSP inequity or anomaly, whatever you call it, and shortening the review period. At least three of your 12 points have been covered by other witnesses, and I think the committee's questions would indicate where their heads are at on those. Are any of your other amendments ones to which you specifically want to draw our attention as being critical?

Mr. Klotz: Yes, there are three which we still feel strongly about. They are numbers 1, 2 and 11 in our summary of recommendation on page 18.

The Chairman: Do you wish to make a few comments on those?

Mr. Klotz: Yes.

You have heard much about the desirability of strengthening the consumer proposal remedy. One of the suggestions that we make to encourage that remedy is to raise the threshold from $75,000 to a higher figure.

We have not proposed a specific figure but we suggest that one way to make it more popular is to increase that number. We do not see any significant downside to raising the threshold from $75,000 to some reasonable number above it.

The Chairman: From a layman's point of view, would you recommend that that number be in statute or in regulation? I ask that because of the difficulty in changing a statute; it is so much easier to change a regulation. Do you have any view on that?

Mr. Klotz: Regulation makes sense as long as it is visible to the group who will be utilizing it. The trustee community can convey that limit, if it is in regulations, to the general population. I do not see a problem with that.

The Chairman: Therefore, your statement that it should be increased to an amount greater than $75,000, without specifying an amount, can be accommodated by having a statute setting out the amount as X, and then X is determined by regulation.

Mr. Klotz: We have not recommended a specific amount, but presumably an amount would be set through regulation.

Senator Angus: Would it vary?

Mr. Klotz: Again, we do not have a fixed view on that but it seems appropriate to raise that amount, given the numbers with respect to consumer proposals and the fact that $75,000 is not the hefty amount it once was.

Senator Angus: It is a substantial increase that you have in mind?

Mr. Klotz: These are my personal views now. The number should start somewhere over $100,000. It is, after all, a consumer proposal, not a business one, so the number cannot be astronomical.

The second submission which we support and emphasize is that the mediation process be deleted. The Canadian Bar Association, particularly the insolvency section, has confidence in the mediation skills of trustees. All of us in the insolvency business constantly balance interests. Trustees particularly are trained to deal with the conflicts of interest that arise. They have recourse to the courts when they cannot manage those conflicts.

We have strong concerns, after looking at the proposals, that the cost will outweigh the benefit; that the added bureaucracy, the added training and facilities, will not be sufficient to improve what can be done directly by trustees.

Our third submission is number 11. The CCAA threshold should be lowered to make the act available in certain sections of the country where the dollars are not necessarily as high as they are in Toronto or perhaps Vancouver. A number of our members were concerned that, without some kind of judicial discretion, CCAA arrangements would not be available where they are appropriate and suitable and that we would have a focus in the two cities that I mentioned rather than across the country.

The Chairman: I understand the intent of your proposal. From a practical standpoint, how would you see that being done?

There are two ways of doing it. You could make the numbers so low that everyone is automatically included. The other option is choosing a number which, subject to judicial discretion, could be raised or lowered. Which of those two do you prefer?

Mr. Klotz: There has to be a number; we do not have a problem with that. There should be a judicial discretion to lower the number in an appropriate case. That discretion can be defined in terms of certain factors, which could be geographical factors, economic factors, and so on. I would personally approve of that type of solution.

The Chairman: It would be helpful to us if you could, in the next couple of days, give us some wording to meet that need. We understand the intent. The question is what it would look like in an amendment to the act.

Mr. Klotz: Yes.

The Chairman: Thank you.

Senator Angus: You have narrowed it down, Mr. Chairman, to highlighting these three areas plus others that are duplicated. Is that all you want?

The Chairman: You do stand behind all of them?

Mr. Klotz: Of course.

Senator Angus: You opened your presentation this evening by saying that you support the thrust and the detail of the bill. Then you highlight certain flaws which are different by degree. You have highlighted the spousal one, but these other ones are there.

Do you consider that, without these amendments, this legislation would be so seriously flawed as to cause you to withdraw your support for the thrust and detail of the bill?

Mr. Klotz: Do you mean apart from the particular items which I have just discussed?

Senator Angus: Yes, I refer to the 10 or 12 items.

Mr. Klotz: We would support the bill.

Senator Angus: You feel it is basically a good bill?

Mr. Klotz: Yes. Members of our association sat on the various working groups of the Bankruptcy and Insolvency Advisory Committee, as well as at the steering committee level. We have had tremendous input and cooperation in general. Much of what is here has been put forward, considered, and vetted in conjunction with our comments. We are very pleased with that.

Senator Angus: There is a good consensus on these issues?

Mr. Klotz: I would say so.

Senator Angus: You are saying that it is basically the bankruptcy and insolvency subsection of the bar across the country that has had input and has led you to be here?

Mr. Klotz: Yes, through individual members and, as well, our association has had some contact.

Senator Angus: I would like to accept your invitation to ask you for more detail on how the highlighted items might be addressed. I read the summary of your brief on my way up here tonight from Montreal. I was amazed at what I understood to be the statement that it is widely prevalent for marital break-ups and bankruptcies to go together hand and glove in a substantial number of cases.

Mr. Klotz: There are a lot of similarities between the two areas. There was a stigma in both divorce and in bankruptcy which has eroded over the years. That is why, to some extent, they do come together. The cost of matrimonial litigation is unbelievable. That alone can put anyone into bankruptcy.

Finally, it is no surprise that, when financial pressures start to rise, disputes come up. It is not unusual to see the two happen together.

Senator Angus: Has there been some cross-referencing between your subsection of the bar and the family law section on this issue?

Mr. Klotz: I would say considerably. The position of the bar association has been approved by both the family law section and the bankruptcy and insolvency section.

Ms Thomson: Yes, the matters relating to support arrears have been the subject of council resolution within the CBA. That resolution was sponsored by both the bankruptcy and insolvency and the family law sections.

Mr. Klotz: Are you interested in the possible solutions which might be available here?

Senator Angus: Absolutely. You said there are three or four, but perhaps there is one that you might prefer.

Mr. Klotz: I should preface this by indicating that the Ministry of Industry, Science and Technology has had a dialogue with us where some of these have been explored. We had hoped that one of these choices would be selected in the bill. Let me briefly run through some of the possibilities.

The first is a cap on priority. That is a dollar limit to be imposed on the section 136 priority that the act provides. The number that was suggested at one point was $30,000 but there is no magic in it. This would stop the high dollar cases. However, the committee should recognize that most consumer bankruptcies involve under $30,000 of assets.

Senator Angus: You gave an example earlier where a lump sum settlement is made on the eve of the assignment. The asset, the house or whatever, may be worth up to $300,000, but in this proposition you could not go beyond $30,000.

Mr. Klotz: That is right. The priority would be capped at $30,000. The same problems will occur but only in the smaller-dollar cases. Unfortunately, it is in those cases where there is not enough money at stake for the problem to be challenged.

We will restrict the collusion problems to the cases where there is no practical remedy because the asset values are simply not large enough. That is one of the problems with that solution.

Another possible solution is to provide for a delay period or a look-back period. We see this with other kinds of anti-collusion devices. For example, with respect to fraudulent preferences, the look-back period is either three months or, if it is a related party, 12 months. With respect to settlements which are fraudulent conveyance transactions, the look-back period is one year or five years. We could have a look-back period of three months or a year.

This will solve some problems. It will solve the "day before" problem, but I think we will find that spouses will enter in an agreement and simply wait. Since most bankruptcies are done by voluntary assignment and not by creditor petition, that waiting is certainly something that can be done. It will stop some kinds of collusion.

The third possibility is a general anti-avoidance provision, that is, a provision which says a court may, in its discretion, reduce or extinguish the priority for support depending on various factors, such as the existence of collusion, artificiality, an intention to defeat creditors or if the support is not really support.

Senator Angus: There would be a big burden of proof there, would there not?

Mr. Klotz: The problems are that it is uncertain remedy and it is an expensive remedy. We want certainty in this process for many reasons of which I am sure you are aware.

The final possible solution, apart from those three or some combination of them, is to go back to the provability amendment alone -- that is, to provide for equal sharing, which is new. Equal sharing has a built-in anti-collusion protection.

Senator Angus: How does that work?

The Chairman: We wind up talking about "amendments", meaning amendments to the existing Bankruptcy Act, and then there were the amendments that the government -- I almost said jammed through, which is an incorrect statement -- dumped on the table with one day left before the House of Commons committee. When you say "go back to", can you give us some sense of what you mean by that?

Mr. Klotz: I was referring to the initial proposal advanced by the Canadian Bar Association, which was that support arrears ought to be provable to a limited extent -- that is, they should share with other creditors. At the risk of telling you what you already know, presently support arrears are not considered a debt. They survive bankruptcy. They can be enforced despite the bankruptcy, but when everyone gets 10 per cent or 20 per cent or 2 per cent or 90 per cent, the support arrears creditor gets zero. That is an historical anachronism, but that is the problem.

The amendment proposed by the Canadian Bar Association follows a similar Australian amendment from 1980, which said, to a limited extent of one year's arrears plus any lump sum, support arrears should be provable in bankruptcy like every other creditor. They still continue to be enforceable, despite the bankruptcy, unlike every other creditor, but they should get the 9 per cent or the 90 cent or the 2 per cent as do all other creditors.

We put that forward as a moderate amendment that would not swamp all the other creditors. It would not take priority over other creditors. The advantage is that it has a built-in anti-collusion device.

If you look back at the example I began with, the husband has $100,000 in assets. He agrees to give the wife $100,000 in an agreement. He is free of it. There is no reason for him not to do this. It is absolutely in his benefit to do this. It does not require trust between the spouses. In fact, spouses who loathe one another with a passion will still do this because it is in the husband's self-interest.

Senator Angus: I am not sure of the current state of divorce laws. He may think he has a "forever deal" on that lump sum of $100,000, but can the other spouse not come back later for further maintenance?

Mr. Klotz: It is true that there is a limited ability to do that, and nothing can ever be done to prevent that or limit that, although family lawyers will do their best to do so. The fact of the matter is that he can successfully give that $100,000 to the wife under the wording as drafted.

If it is a simple provability amendment, which is what we proposed in the first place, there is a risk for the husband to do this. The risk will lead him to avoid collusion. This risk is this: If he agrees to $100,000 of lump-sum support, she will only receive "X" per cent, the same as the other creditors. That advantages him. However, let us say she receives 50 per cent, as all other creditors do. He must think to himself, "If I do this, she will have a $50,000 support order against me that I have agreed to after my bankruptcy. It will survive my bankruptcy, so I will have to trust her." As people who separate often do not trust one another, that lack of trust is the disincentive on him to give her a sweetheart deal at the expense of the creditors. That is the internal logic of a provability amendment.

Once you have priority attached the way this bill did in first reading and does before you, you have a collusion problem which is very difficult to control. That is one of the beauties of the proposal put forward in the first place. It had its own anti-collusion logic to prevent this kind of collusion between the spouses.

Senator Angus: You say this was brought in in Australia in 1980.

Mr. Klotz: This is the curious thing. They did not have an anti-collusion provision, and they had to come back seven years later to fix it. What we are proposing before you and what we proposed in the other place is simply to do it right now so we will not have to come back in five years. That is why we are appearing before you today. We see what happened in Australia. What happened in Australia was that spouses did precisely what we are talking about here. You can see it in the case law and in the paper which was provided to you. We have the examples. In Australia, they allowed happily married spouses to do this. A company with three directors was about to be sued for millions of dollars. The directors made a separation agreement. Actually, they were still living happily together. They made a domestic agreement with their spouses, gave them all the assets, and the court said there was no anti-collusion protection, and this was permissible under this amendment.

We will see that. Not only will we see it, but bankruptcy lawyers will be advising family lawyers and family lawyers will be advising their clients on how to do it. Family court judges will go along with this because their job is to protect the family. The Divorce Act requires them to have regard for child support. This is a great way of doing it. Nothing in our legislation, as currently before you, tells them not to.

Senator Angus: This is another form of collusion where they are not actually trying to break down the marriage. They are trying to fraudulently beat the creditors.

Mr. Klotz: Collusion is the nasty name for it. In fact, there are far nicer words for it -- an attempt by the courts or the parties to provide for the welfare of their families. The family courts will do this.

Senator Hervieux-Payette: That is good. The husband will be at the mercy of the wife for the next seven years. Why are you opposing that? That is the best thing I have heard. A woman probably suggested that.

Senator Angus: Are you finished?

Mr. Klotz: Senator, I am never finished on this subject.

My concern is that future support is something that ought to be paid out of future income and that this is being done on the backs of creditors. It is the submission of the Canadian Bar Association that we have not looked at all the ramifications of this. When it happens, it will not be very nice.

Senator Hervieux-Payette: I think some of your recommendations are similar. The mediation seems not to be the most popular.

Senator Stewart: I was a little surprised by your endorsement of the bill in general as it is now, recognizing that you have these specific amendments. We had witnesses here last week who were quite critical. For example, we heard from a lawyer by the name of Ramsay. Did you happen to read his testimony?

Mr. Klotz: I did, and I have spoken with Professor Ziegel.

Senator Stewart: They seem to be knowledgeable persons, and I am a bit confused that you, as a knowledgeable person, seem to disagree almost diametrically on the general value of the bill as it now stands.

Senator Angus: No collusion amongst lawyers.

Senator Stewart: No, but it casts great doubt as to the competence of lawyers.

Senator Meighen: I thought that was a given.

Mr. Klotz: I have spoken with Professor Ziegel about this and I have given some thought to that discrepancy. I think part of it is orientation. We in the Canadian Bar Association are practitioners. We work in the world of the real. We work with what we have. The professors have a broader scope than we do. They want to look at the system as a whole and structure it and have the house committee particularly, and perhaps, this committee, look at the underpinnings of the system. Our perspective is much more minute. We take the system to some extent as we have it, and we ask: How can we incrementally improve it? This bill definitely incrementally improves the system. Does it solve the underlying flaws that Professors Ziegel and Ramsay have pointed out? Probably not. Are those important flaws? Probably. However, our scope is much more restricted and we are dealing perhaps in the edges of the problems, to try to solve them in a practical way rather than create a better structure which, perhaps, they are focusing on.

Senator Stewart: But you seem to be saying, by stating your choice, that you feel that their approach is -- and I do not want to be unkind <#0107>- academic.

Mr. Klotz: Our terms of reference are different. I have the highest of respect for Professor Ziegel. I have read his submissions and many of his comments strike a chord in me and should be taken seriously. My role and scope is not so broad, nor that of my association. We have worked too hard with the Ministry of Industry, Science and Technology and with the Bankruptcy and Insolvency Advisory Committee, and we have put too many unpaid hours into this to say that because we have not gone back to first principles and have not solved all the flaws in the system, this is a bad bill. We do not feel that way. We feel that there are certain advances here that are good. Does it solve all the problems? No. Does it make some problems better? Yes, with some exceptions that you have heard about.

The Chairman: I understand all your recommendations, with one exception. It is your recommendation 9, in which you say that the bar recommends that section 14.06 be amended so it that it safeguards trustees and receivers from direct liability arising out of successor employer legislation. Can you explain that to us?

Mr. Klotz: It is my understanding -- and perhaps the experts behind me might assist on that -- that that has been addressed and that amendment was made.

The Chairman: I am looking at Mr. Mendelson or Mr. Marantz. Are you nodding "yes" or "no"? It has been made? One nodded "yes"; one nodded "no."

Mr. Gordon Marantz, Legal Advisor to the Department of Industry: It is been dealt with, but one keeps pushing for more.

Senator Angus: There have also been some submissions about the environment. Could you elaborate on that?

Mr. Klotz: Yes. In respect of the environmental issues, the Canadian Bar Association fractured. Our environmental section, to simplify matters horribly, felt that the provision should be stronger. The insolvency section felt that they were too strong. We agreed to disagree, and our submission before you, as a result, does not make a recommendation one way or the other. It simply demonstrates that there is a division of opinion here.

Senator Angus: Perhaps the solution in the act is the middle course and it might have some merit.

Mr. Klotz: Certainly by some perspectives -- that is, if both opposing poles are dissatisfied -- there is a truism that might apply.

The Chairman: It is part of the Canadian principle of equalized unhappiness.

Senator Meighen: Do I infer from recommendation 11 that you feel that both the CCAA and the Bankruptcy and Insolvency Act should continue in existence and that the two acts have some merit, separate but different?

Second, did you consider the amendment by the house to proposed section 124? By not commenting on it, can I conclude that you did not deem it to be of significance?

Mr. Klotz: We did not examine it, so I do not think you can draw the conclusion that we felt it was of no significance. We limited our scope to the matters that you have heard tonight. However, I have some sympathy.

Senator Meighen: You did not consider it because it came after the fact -- that is, after your study?

Mr. Klotz: That is right. We did not prepare a fresh submission on that point.

In terms of the two tracks or the one track, my personal view is that we need the two tracks. To some extent, it is a matter of drafting and convenience, whether it is in two pieces of legislation or one. We do not have a firm view on whether it should be in one or the other. We do like it to be all in one, but it does not give us any difficulty at all having it in two.

Senator Meighen: Since you are good enough to give us your personal view, what is your personal view of the amendment to proposed section 124?

Mr. Klotz: My personal view is outside the mainstream of the opinion of the insolvency section. I would speak instead of the mainstream opinion in my section, which would be that that proposed section is a problem.

Senator Angus: As amended?

Mr. Klotz: As it is before you. My personal view differs from that. I would be delighted to share it, but I believe I am not speaking for my constituency.

The Chairman: Thank you, Ms Thomson and Mr. Klotz. This is the second presentation we have had from the bar association within the last month and both have been absolutely outstanding. Thank you very much for coming.

Our final witnesses this evening are from the Canadian Life and Health Insurance Association. For once, we are not here talking about financial institutions. It is such a refreshing change to see the representatives of the Canadian Life and Health Insurance Association on another topic. Thank you for coming here tonight.

I know you came in and heard some of the earlier discussion. You may want to comment on your way through your opening statement about your reaction, as the two previous witnesses and others from whom we heard last week did, concerning the issue of RRSPs and the fact that in the current law, RRSPs by insurance companies are treated as non-seizable whereas everyone else's RRSPs are seizable, and whether you would have any objection to an amendment which would treat all RRSPs equally. I invite you to do that in your opening comments since you would be asked the question anyway.

Mr. Daniels, for the record, please introduce your colleagues. Since you have been here as a witness many times before, I presume one of the three of you will begin with a brief opening statement and then we will have questions. Please proceed.

Mr. Mark Daniels, President, Canadian Life and Health Insurance Association: With me today is Mr. Paul Cozzi, chairman of the CLHIA Committee on Bankruptcy and Insolvency; and Mr. Sam Steel, chairman of the CLHIA Committee on Environmental Liability.

As honourable senators will be aware, the life and health insurance industry has had the opportunity to appear before this committee on several occasions over recent years -- indeed, in recent months. We welcome the important opportunities these occasions provide to discuss significant issues in the financial services sector with members of the committee.

Today, Mr. Chairman, we want to offer some thoughts and observations on Bill C-5 and the proposed amendments to the bankruptcy rules that it contains. I want to note that as a review of these proposals proceeds, my industry colleagues and I are at your disposal to make any contributions we can to the committee's work in whatever way you might find useful.

Mr. Chairman, before I ask Mr. Cozzi and Mr. Steel to comment on some of the specifics of our submissions, I want to make it clear that, on the whole, the industry is strongly supportive of Bill C-5 and its proposed amendments to the Bankruptcy and Insolvency Act and to the Companies' Creditors Arrangement Act. The industry believes that most of the government's initiatives in Bill C-5 will contribute to significant improvement in these acts.

For example, in the context of insurers acting as landlords, the industry endorses the proposed amendments relating to commercial leases. The purpose of these changes is to stop any further abuse of those provisions of the BIA which allow an insolvent commercial tenant to repudiate a lease of real property. The misuse of these provisions by some tenants was not contemplated when these provisions were passed in 1992. That misuse has, in some cases, resulted in significant problems for landlords. The proposed changes to the rules for insolvent commercial tenants to make proposals to disclaim leases would result in a more appropriate balance between the rights and responsibilities of landlords and insolvent commercial tenants, as we believe was intended in 1992.

The industry also supports the continuation of periodic reviews of the bankruptcy rules. Such framework legislation is an essential component of a properly functioning economic system and should be regularly updated.

Mr. Chairman, with a view to making the bill even more effective, our submission presents comments and recommendations on only two particular dimensions of Bill C-5: amendments to the CCAA and the issue of an environmental super-priority. With respect to the proposed super-priority, members of the committee will have just received a brief document which, in abbreviated form, sets out the industry's view on how these provisions can be made fairer and stronger. My colleague Sam Steel will be elaborating on that issue in a few moments.

The Chairman: Senators, for the record, the document is entitled, "Bill C-5: A Proposal for Fairer and Stronger Provisions for Environmental Clean-up Costs".

Mr. Daniels: Before I ask my colleagues to comment on the two main issues in our submission, I should like to comment specifically on the process that led to the development of the proposed environmental super-priority provisions. I want to make the point that the life and health insurance industry did not have an opportunity to comment on the proposal prior to its introduction in the bill. We understand that some lenders were consulted on the issue, but this did not include the life and health insurance industry.

Mr. Chairman, I am probably being a bit precious when I say that, because the other lenders who were consulted were the banks. These super-priority provisions tilt the playing field rather steeply in the direction of the banks. Therefore, this is a matter of considerable concern to us.

Mr. Chairman, I will now ask Mr. Cozzi to begin.

Mr. Paul Cozzi, Vice-President and Associate General Counsel, Sun Life Assurance Company of Canada, Canadian Life and Health Insurance Association: Mr. Chairman, Canada is the only country that has two separate statutes each dealing with the same objective: that is, the reorganization of commercial businesses. One is the Companies' Creditors Arrangement Act, known as the CCAA, which was passed in the 1930s. The other is the Bankruptcy and Insolvency Act, which was passed after considerable study and deliberation in 1992.

In our written materials we have commented on the weaknesses we see in the CCAA and the reasons we have previously recommended its repeal. These include the adversarial nature of proceedings under the CCAA and the expense and time-consuming nature of the process.

Notwithstanding this, our industry recognizes and appreciates the efforts that have led to the CCAA provisions of Bill C-5. In this regard, we support the changes to the CCAA that are contained in the bill. For example, as you know, there will be a minimum threshold of $10 million in liabilities before a company can make an application for restructuring under the CCAA. As well, the bill now sets out a test, similar to the one contained in the BIA, that the debtor company must meet before it obtains an initial stay order or a continuation of that order. This is clause 124, which members of the committee and previous witnesses discussed.

Debtors will be able to make an application for an initial order staying the rights of creditors. This initial stay order will have effect for no more than 30 days. There is no need for the debtor to notify creditors that that order is being applied for. There is only one single test that must be met before that initial order is granted. That single test is that circumstances exist that make such an order appropriate.

Within 30 days of obtaining that initial order, notice must be given to creditors who are owed in excess of $500. Those creditors and the debtor will then come back to court for a hearing to determine whether the stay order will be continued. It is at that point that the three-pronged test that has been discussed, and which is contained in clause 124, will become relevant.

In passing, I would point out that, from my experience, CCAA proceedings in an informal continuum sense do not just start when the debtor goes to court to obtain an initial stay order. Typically, there have been discussions going on for a considerable period of time between the debtor and its creditors because the debtor did not just wake up one morning and realize that he had serious financial difficulties. That has been known for some time. Typically, the debtor has triggered some financial covenants in some agreements and trust indentures. Certain creditors will be aware of that and considerable discussions will have taken place, typically long before the initial stay order is applied for. I think that is relevant in taking into account the time limit that is now proposed under the changes to the CCAA.

I would also point out that there is no requirement that a plan be presented at the end of that 30 days. The only requirement is that the debtor and the creditors come back to court and that the three-pronged test contained in clause 124 be met if the stay order is to be continued.

In our view, this is a significant improvement to the CCAA for four reasons. The first is that it shows that Parliament has given direction to the courts as to the tests that must be met before the initial stay order or the extension of that order are granted. Parliament was previously silent on this matter. There was no direction given to the courts as to the test that should be applied.

Second, this will move the CCAA closer to the BIA in this important area. It is consistent with the thrust of other CCAA amendments where the CCAA is being moved closer to the BIA. I would point out that in the eligible financial contracts section, the environmental provisions sections and many others, you will see language that is similar or identical to the language contained in the BIA. In our view, there is a definite movement of the CCAA toward the BIA.

Third, the tests that will apply under clause 124 are the same as those that are used in equivalent circumstances under the BIA. These are the tests that were the subject of extensive study and scrutiny prior to the passage of the BIA; and they have been in the BIA since 1992. There has been no suggestion that any of those tests be changed in the BIA.

It has been suggested to you that the CCAA will be used only for larger reorganizations. I note that the BIA is available both for large and small reorganizations. From my personal experience, I can tell you that the Birks reorganization was done under the BIA, not the CCAA. In my view, large reorganizations were done under the BIA, as well as the CCAA.

The fourth reason is that, in our view, this test in clause 124 will direct the courts to turn their minds as to how a stay order will affect creditors. This reinforces what we regard as an important principle of bankruptcy legislation, that is, there must be a balance between the interests of debtors and creditors while the reorganization process is taking place.

There are some other recommendations we have made which are contained in the brief. They deal with keeping statistics and information on commercial reorganizations. There are some suggestions concerning monitors and the need to have some finality in the process.

Certainly, we regard the most important change as one that is already there. It relates to clause 124. Our industry believes that by offering the constructive suggestions we have, we can make a meaningful contribution to the improvement of the legislation dealing with insolvencies and restructurings.

Mr. Sam Steel, Assistant Vice-President and Associate General Counsel, Sun Life Assurance Company of Canada, Canadian Life and Health Insurance Association: Mr. Chairman, Bill C-5 proposes to create a super-priority for environmental remediation costs which would rank above all claims, including those of secured creditors such as mortgagees. The environmental clean-up would be paid for through a first charge on the bankrupt debtor's real property and any adjacent real property of the bankrupt debtor that is related to the activity that caused the environmental damage.

The proposed amendments recognize that trustees and receivers are not polluters and are, therefore, relieved from personal liability. They are given time to assess the cost of complying with environmental orders as well as the ability ultimately to abandon properties.

By the same token, lenders are not polluters. However, in the case of contaminated property and insolvency, lenders are exposed to major financial loss, if not complete loss of their security, which is their investment.

The essential point of the super-priority proposal contained in Bill C-5 is that environmental remediation would be secured by a charge on the affected real property of the debtor. It would not be secured by a charge on other business assets of the debtor, such as machinery and equipment.

The life and health insurance industry does not accept that lenders on the security of the real estate should be subject to a super-priority lien for the cost of remediating environmental damage while lenders on other business assets used in the activity resulting in the contamination are not similarly required to share liability for that clean-up.

We are asking the committee to amend the proposed super-priority provision in the bill to make both real property and the other business assets of the debtor subject to the super-priority lien. Such an amendment would make the super-priority provision more consistent with the principles of fairness and "beneficiary pays" enunciated by the Canadian Council of Ministers of the Environment.

The principle of "beneficiary pays" states that those who will benefit from the clean-up of a contaminated site should not be unfairly enriched. People benefiting from the activity resulting in the contamination should share liability for the clean-up with other responsible persons.

The difference in treatment between lenders on real estate and lenders on machinery and equipment is of paramount importance to our industry, since among all financial institutions operating in Canada, life and health insurance companies are the largest source of financing of commercial mortgages.

Life insurers provide more than 50 per cent of the commercial mortgages in Canada while banks account for only 25 per cent of all such mortgages. Life insurers currently hold $32 billion in commercial mortgages, accounting for 21 per cent of their total assets in Canada. For banks, on the other hand, commercial mortgages represent only 3 per cent of their Canadian assets.

Comparatively speaking, other lenders would not be affected to the same extent by the application of the super-priority since they finance primarily on the security of such property as equipment and current assets. Life and health insurers do much more lending secured by commercial real estate. That is the type of property from which the remediation costs would be drawn the most.

Mr. Chairman, we believe that the application of the super-priority to real property only is inequitable and inappropriate. The life insurance industry recommends that the super-priority should apply to both real property and the other business assets of the debtor. Such an amendment would be relatively simple and would lead to fairer environmental clean-up provisions by removing the inequitable advantage the current version of Bill C-5 would confer on the banks vis-à-vis life insurers. It would also lead to stronger environmental protection by making greater financial resources subject to the Crown's first charge for environmental clean-up.

In a related matter, we also believe that the extension of the lien against adjacent real property of the debtor would be problematic for lenders on real estate. We therefore suggest that before a lien can apply to adjacent properties, there should be a causal connection whereby the use of the adjacent property has contributed in some significant way to the situation existing on the contaminated site. Lenders crave predictability and abhor uncertainty. The adjacent-property provision will add uncertainty and confusion to the environmental landscape.

It is not enough that the property merely be related to the activity that caused the environmental condition or environmental damage. While the deep pockets of some lenders might seem attractive targets for the solution of the problems of contaminated sites, to target lenders in such a way would be self-defeating in practice, resulting in a restriction of the flow of credit, more abandoned sites and the scarcity of funds for rehabilitation.

That concludes our remarks. We would be pleased to answer any questions committee members may have.

Mr. Daniels: On the question of creditor-proofing life annuities and other life insurance policies, the committee is aware that this is an extremely complex area of federal and provincial law. There is much complex jurisprudence on the issue. Frankly, if the committee wants to consider our views in this area, we would be delighted to take some time to prepare testimony and to appear before the committee on that particular subject. We would like an opportunity to look at all the relevant features of the issue. I do not just want to put out a quick view in front of the committee. This is a subject on which we have a significant amount of material. I would want to consider it before I place a view on the table. I do not think it would be fair to my principals or fair, more importantly, to honourable senators.

The Chairman: I could understand that position if the proposal had been essentially to take away the right that already exists. However, do you need the same amount of thought to respond to the question of whether or not you would have any objections if RRSPs other than those owned by insurance companies received the same protection from creditors that RRSPs with insurance committees now have?

Mr. Daniels: Senator, I do not know the answer to that, and I have learned to take the time to think these matters out. I would never just throw an opinion out before this group.

The Chairman: You recognize it might come back to haunt you.

Mr. Daniels: It could come back to haunt us. However, more importantly, it is an important question. I would not feel that we were meeting our responsibility to this committee if I just threw out any one of the answers that might come to mind.

The Chairman: In reading your brief, you have two recommendations, on pages 10 and 11, which deal with the role of a monitor.

I would like to you expand on those recommendations, if you would. The first is at the bottom of page 10 under "Appointment and Duties of Monitor".

Mr. Cozzi: The recommendation at the bottom of page 10 is founded on the fact that the trustee, who plays an equivalent role under the BIA to the monitor under the CCAA, is required to comment on the cash flow and financial statements put out by the debtor. There is no requirement under the CCAA for the monitor, who plays the equivalent role, to comment on the exact cash flow and financial statements. That is an important feature.

If you are a creditor relying on that information to make a decision as to whether you will support a stay order or whether it is worthwhile participating in a restructuring negotiation or supporting the company, it is important to know that the financial information has been commented on by an independent source. It is important to have that comment coming from the monitor.

Just picking up on my comment about an independent source under the BIA, as I am sure you know, the company's auditors cannot be the trustee. The reason for that is that there is a lack of confidence on the part of creditors in the company's auditors. The company's auditors have been around for too long, they are too closely associated, and there is too much of a tendency to sell the company's position. They have too much at stake. They were the people who brought them there.

In our view, we should have the same independence under the CCAA in terms of the monitor that there is under the BIA in terms of the trustee. There should be an independent accounting firm which goes in and comments on the cash flow and financial statements in order to build up the confidence that is necessary to be built up in the creditors before a restructuring will work.

The Chairman: The monitor must be perceived to be independent. That perception, you suggest, and indeed many people would agree, does not necessarily exist if the auditor is also the monitor.

Mr. Cozzi: Yes, sir.

Senator Angus: Mr. Daniels, I take your point on the process, but I am not sure I understand how that happened and, knowing how well you know your way around this town, how you were not able to deal with it.

Mr. Daniels: Senator, I think the simple answer is that we were not able to deal with it because we did not know about it. We kept calling and asking when this would happen. The next thing we knew, it had happened.

Under normal circumstances, one would not worry about that, but you get this peculiar imbalance here where, as Mr. Steel said, we are dealing with 20 per cent of our portfolio, whereas a major group of competitors is dealing with 3 per cent. If there is an environmental override on this one group of assets, it could introduce a bias into the process.

Senator Angus: You are saying that, in its simplest form, your mortgages will be diluted, if not wiped out, by this super-priority.

Mr. Daniels: The simple answer is that there will be some potential effect on the spreads.

Mr. Steel: I do not think it is a level playing field.

Senator Angus: You are saying the asset-based lender has a better deal, and I understand that, but I would like to get a little more information from you on that.

On the face of it, it is a very reasonable proposition that you are making, and the people whose eyes are boring into the backs of your heads are not unreasonable people. I would just like to know what I am missing here, if anything.

Mr. Daniels: It is not clear to us either, senator, what you are missing. We did attempt to bring this to the attention of the government in the Commons committee, evidently without success. We were told to come to this committee. I cannot tell you, senator, the substantive answer to the issue because I frankly do not know.

Mr. Steel: Both lenders have the capacity to influence the activities of their borrowers with respect to environmental matters; therefore, both lenders should share in the remediation of any environmental contamination resulting from those activities.

Senator Angus: Indeed, I think you are also saying it could be the very assets which form the security for the other financings that could have caused the environmental prejudice.

Mr. Steel: That is a perceptive comment. You could have a situation where a bank or a lender on the chattels will, in an insolvency situation where the property has been contaminated, be allowed to go on the property, take the accounts receivable, take the equipment, and leave the contaminated property for the lender on the real estate. In some cases, the inventory on which the bank will have security may have become waste. That may be because it is insecticide or some household cleanser, but because of the volume that exists, it will become waste, stale-dated, whatever. The bank has no responsibility under this proposal to contribute to the decontamination, or even removal of the inventory on which it has security. Who will be responsible for cleaning that up? It will be the lender. If the lender decides to walk away or not to clean up and government walks in or remediates the damage, there will be a super-priority lien on the lender's security.

Senator Angus: You lose both ways.

Mr. Steel: You lose both ways, and it is not a level playing field. There is no rationale for why those two lenders should be treated differently.

Senator Angus: You are here representing only your association, but there are many other lenders, I suggest, that would be affected similarly. You are saying that mortgages represent 20 per cent of your portfolio?

Mr. Steel: We provide more than 50 per cent of the commercial mortgages in Canada. Those mortgages represent 21 per cent of our assets. They only represent 3 per cent of the assets of the banks, because banks lend primarily on chattels and equipment. That is why the banks are not sitting here. They are quite happy with this provision. We will be affected to a much greater extent as lenders on the real estate than they will be on the equipment or chattels.

Senator Angus: Do you have statistics or back-up evidence that you could present to us in terms of the incidence of pollution or environmental decay on these assets that you lend against?

Mr. Steel: I have not come across any statistics in Canada.

Senator Angus: In other words, how theoretical is this argument?

Mr. Steel: I can give you some statistics on the effect of environmental legislation on lending. I am not quite sure what statistics you would like.

Senator Angus: An example would be, of the last 10 bankruptcies involving property, was there any environmental damage to that property or remediation expenses that were required to be incurred by an authority?

Mr. Steel: I do not have those kinds of statistics.

Senator Angus: I am trying to anticipate why the policy makers would ignore your entreaties.

Mr. Steel: You need to look at the effect this will have on lending.

Senator Angus: That is another way of asking my question, because if the incidence were high, obviously it would have a major effect on lending. Your industry has a set of guidelines that underlie your lending practices, and I am wondering if you can tell us, from what you know now, to what extent this bill, if enacted, would change your lending habits.

Mr. Steel: I think I have some statistics here from the U.S., if you will just give me a minute.

Senator Hervieux-Payette: I heard during the sale of Petro-Canada that most of its lands in the eastern part of Montreal were contaminated.

Senator Angus: But there were no laws in those days.

Senator Hervieux-Payette: However, these pieces of land could not be used. It would have cost more than the price of the land to decontaminate them. This was in the middle of Montreal. The equipment in the refineries was much more valuable than the piece of land. Of course there would have been mortgages on these properties.

I know of another example where a company that nearly went bankrupt had a naphtha plant and a lot of equipment, and the cost to decontaminate the site was horrendous. It was 10 times the price of the piece of land. I can understand that, most of the time, when you have that type of operation, the equipment is more valuable than the piece of land.

Mr. Steel: I think you can anticipate that if we have this kind of legislation, lenders will need to be much more cautious.

I have some statistics here on the effect of this kind of legislation on lending activities and policies. There was a study done of banks in the United States, and out of 159 banks that participated in the study, 97 stated that they have refused to make loans between 1 and 10 times; 30 have refused between 11 and 50 times; 9 have refused between 51 and 100 times; and one has refused more than 100 times.

It is only reasonable to assume, with legislation that exposes lenders to this kind of liability, that lenders will take action to protect their interests.

Senator Angus: Mr. Steel, you may be making the government's point in that answer. Some witnesses have told us that our bankruptcy and insolvency situation arises partly because credit comes too easy in Canada.

Are we looking at a deterrent? I do not know. I cannot put my head into the minds of the legislator.

Mr. Steel: We are in favour or more caution. Legislation in the last half-dozen years has caused lenders to increase their due diligence and to do environmental investigation. That is all for the good.

There must be some balance in terms of how you allocate responsibility for environmental contamination in society. I do not think it is realistic to expect lenders to carry that responsibility. You can look at discussion papers. You can look at recent legislation in Nova Scotia, British Columbia, or Manitoba. Legislators have come to the realization that deep pockets cannot be the determinant for who must solve our problems with orphan sites and historical contamination.

There is nothing wrong with raising the level of environmental due diligence. There is a problem if due diligence becomes so prohibitive and so unrealistic in proportion to the work that it prevents ordinary economic activity.

Testimony was given before the U.S. Congress by a number of dry-cleaners who could find no place to carry on business because of the strict environmental legislation. It calls for joint and several responsibility and responsibility for historical contamination. One dry-cleaner could not take occupancy of premises until he addressed a potential remediation of $1 million, legal fees of $38,000, and a cost of $8,000 for environmental testing. The landlord was simply not prepared to accept potential exposure from that activity on his site.

If you want to raise the bar to a different standard for lenders on real estate as opposed to lenders on equipment and chattels, lenders on real estate will look more carefully at whom they allow to carry on activities on those properties. It is fine to say banks will be exempt; they may lend on equipment and chattels. Still, those operators must operate somewhere; they must find premises.

Senator Angus: You are making a good case. There are grounds here for an interesting discussion. You have made your point clearly, and I understand it.

Mr. Steel: We have no objection to having standards of environmental due diligence. We understand that if the government is going to come in and carry out remediation, no lender should benefit from that remediation.

However, there should be a level playing field. Every lender who has the ability to influence the activities of his borrowers should be subject to responsibility for those activities.

Senator Stewart: That is a real problem. There is a loan for the real estate. Over the years, the process is improved and changed. Perhaps some relatively minor changes are made in the mechanism and the chattels which result in major pollution. The insurance company which has lent for the real estate would inevitably now be in a kind of superintendent or supervisory role. They would be the target for costs. On the other hand, with a late change in the process and added machinery which results in massive pollution, they cannot be assigned the same kind of supervisory role. They are simply auxiliary to an ongoing process. Nevertheless, their new chemical may well be what caused the pollution.

I am trying to discover why real estate is targeted. For practical reasons, it seems to be a very good target for the legislation. I am not saying it is fair, but for practical reasons, it is much more likely to work than if you try to have a kind of general superintendence, a supervisory role over all the changes in the pulping process, just to take an example.

Mr. Steel: I do not think it is a good target; I think it is an easy target. It need not be. I am repeating myself, but a discussion paper in Manitoba stated it well when it stated that every lender has the capacity to influence the activities of its borrower with respect to environmental activities. I as a lender on the real estate can put provisions in my mortgage about the kinds of activities that a borrower can carry on on the property. I can monitor that.

A bank lending on the equipment the borrower uses to carry on those activities has the same capacity to control the activities of the borrower in terms of how he carries out those processes which may lead to contamination.

Why should I as a lender on the real estate be treated any differently? In fact, I am not doing anything. I am passive. I provided a place for that activity to be carried out. It is the bank that has actually lent on the equipment which is being used to create the environmental problem.

Senator Stewart: I will leave it there, Mr. Chairman.

Senator Meighen: Mr. Cozzi, on the infamous section 124, do I understand you to say, in essence, that the BIA has been used in large reorganizations? In most instances, there are long discussions that go on before we get into a situation under the CCAA or the BIA, so everyone knows where everyone is coming from anyway. There has probably been enough time so, really, 30 days is enough. If it is not, there is always the possibility, however remote, of meeting the three-pronged test.

Is that a vulgar but not unfair summary of your position?

Mr. Cozzi: That is pretty close, senator. There is no obligation on the company to come forward with a plan at the end of 30 days. The company may well come forward. I would anticipate, in more cases than not, it would come forward with a request for a continuation of the stay order.

If there was opposition, the company would have to meet the 30-day test. In the meantime, if the company had enough discussion with its creditors and had been able to satisfy them there was a chance of success, then the company would likely be able to convince the court.

There are other prongs in that test as well. The company must be able to satisfy the court there is a viable chance of an arrangement or a compromise, which once again parallels the scheme we have had under the BIA for five years now. That usually means a group of creditors vote as a class. If that class is unalterably opposed to the stay order continuing for the company because it perceives there is no chance for a successful reorganization, it will stand up and oppose the continuation of the order and likely the stay order will not be continued.

Senator Meighen: You have to convince the judge, presumably.

Mr. Cozzi: The creditors would have to convince the judge under those circumstances. All I am saying is there are other tests there as well.

The third test -- which as you point out is just a continuation of what is in the BIA already -- is simply a matter of striking a balance between creditors and debtors, which we regard as appropriate.

Senator Meighen: Supporters of the two-track approach of a CCAA and a BIA say -- and you may find this totally fallacious -- that it is a different kettle of fish when you are dealing with a large reorganization. It would not be difficult for any creditor to prove they are being prejudiced. Perhaps the wording should be that "creditors generally are not materially prejudiced" rather than "no creditor". The argument goes that it will not be very difficult to find one creditor.

Mr. Cozzi: I think you make two good points. I will deal with the specific creditor first. I heard the CIPA representatives discuss this point. They posed the hypothetical that there could be a company with many employees and there could be one small creditor. I can give you an example from my personal experience.

I sat around the table during the attempted O&Y restructurings. Other life insurance companies were there as well, and one of them was Confederation Life. I also sat around the table during the Bramalea reorganization under the CCAA -- the second time, I might point out, the time they actually went bankrupt -- and Confederation Life there was represented by a receiver under the Winding-up Act. It could well have been that under the O&Y proceedings, Confederation Life could have made an argument that they would have been materially prejudiced. I suggest that the purpose of that test is to strike a balance.

In the insolvency O&Y went through, relatively few employees lost their jobs. It hit the papers because the numbers were huge. The affected creditors were immense. There were the banks and insurance companies. There were foreign lenders. There was Canary Wharf. It was all over the place -- the U.S., Canada and the U.K. It was very high profile. However, when you look at the number of jobs that would have been lost at O&Y, there were very few. Compare that with the number of jobs lost at Confederation Life. I am not suggesting that Confederation Life failed as a result of the O&Y situation. I am saying there should be the chance for that to be proven.

The other point you make is a very good one, that is, the question about whether there should be two statutes or one. I heard the CIPA representatives discuss that. I know what Professor Ziegel likely said to you because I have had discussions with him. I heard the submission by the Canadian Bar Association. It is a matter of ongoing debate. I sat on the BIAC committee dealing with commercial reorganizations. I know specifically that what went forward was couched in language which said that this is what we presently recommend in terms of the CCAA, but when you look up the wording, you will see that it was couched in a qualifying language which indicated that was the best we could come forward with now. I know that language is there.

Having sat on the BIAC committee for commercial reorganizations, I can tell you that what went forward was the lowest-common-denominator consensus. If BIAC had another six months, quite possibly we would have seen a different recommendation.

That does not take away, by the way, from our support for Bill C-5 in terms of the CCAA amendments. I suppose I am saying that I am looking forward to the next round of BIAC discussions because I think you may well see a different set of amendments coming forward on the CCAA. Obviously we support one statute. That is implicit in what I have been saying.

The Chairman: Thank you very much, gentlemen, for your testimony. We may well be back to you on the RRSP question.

The committee adjourned.