Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 25 - Evidence, September 24, 2003
OTTAWA, Wednesday, September 24, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 6:25 p.m. to examine on the
administration and operation of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.
Senator Richard H. Kroft (Chairman) in the Chair.
The Chairman: We are here to continue our work on the administration of the Bankruptcy and Insolvency Act and
the Companies Creditors Arrangements Act.
Before continuing, I guess everyone is aware of what has been going on. I want to confirm by explanation — not by
way of apology, because it was not the doing of any of us — that because of the rules of our house and the debates
going and the inability of our committee to legally sit while the house is sitting, it is only in the last few minutes that we
got that consent. I do apologize for whatever dislocation this has caused anyone in their schedules.
Senator Angus: Our only comment, chairman, from this side is that we wish you went earlier and asked the house for
The Chairman: We were there. We have been in the house the last hour and a half. It was not possible.
If you have an opening statement or statements, please proceed. I understand that Mr. Baker will be starting.
Because of the hour, and because there are others waiting, we will try to be as expeditious as possible, but do not let
that restrain you too much.
Mr. John Baker, Immediate Past President, Intellectual Property Institute of Canada: On behalf of the Intellectual
Property Institute of Canada, or IPIC, I thank you for allowing us to appear before you. I am John Baker, the
immediate past president of the institute, and with me is Warren Sprigings, the chairman of our licensing committee
who will be presenting our recommendations. Also present are Rodney Kyle, a member of the same committee, and
Michel Gérin, our executive director.
IPIC is a national organization founded in 1926. It now counts over 1,500 members, consisting primarily of patent,
trademark and copyright professionals.
Our licensing committee was given the mandate to prepare a report regarding the impact of the Bankruptcy and
Insolvency Act on intellectual property licenses with a view to providing a resource for our members and proposing
amendments to existing legislation. The 150-page report was completed this summer, so we are fortunate that the
timing of our committee's work allows us to present our recommendations in a formal manner.
I will ask Mr. Sprigings to continue.
Mr. Warren Sprigings, Chairman of the Licensing Committee, Intellectual Property Institute of Canada: As chairman
of the licensing committee, it is my pleasure to present to you an overview of the recommendations which the
committee is proposing to the bankruptcy and insolvency legislation. Before doing so, I would like to make a few
First, I hope you are not misled by the name of the committee that is presenting this report — the licensing
committee. Although our recommendations are focusing on licensing issues, the report itself took a different spin on
the issues and is focusing more generally on intellectual property issues as a whole. When I refer to intellectual property
issues, I am referring to patent, trademark, copyright and trade secret issues primarily.
The second point I would make is that the committee, when facing this task, took on a non-partisan approach to the
project. We did not and are not here as spokespersons for the intellectual property rights holders in Canada. We are
here to propose the way which we see this legislation should work in the context of intellectual property rights. In
certain instances, that will favour intellectual property holders, and in other instances it will work a disfavour to them.
The recommendations fall into four main categories. The first is with respect to disclaimer of agreements as a whole,
the second is as it pertains to patent issues, the third is copyright issues and the fourth is trademark issues. I will speak
to those briefly in turn.
A major issue that must be addressed in the Canadian legislation, and I believe this committee has heard this before,
is the trustee's right to disclaim an agreement. Aside from certain specific provisions in the Bankruptcy and Insolvency
Act that provide for a specific right of disclaimer, such as in the context of commercial tenancies, the existence of a
general right of disclaimer has been left in the hands of the courts to address in Canada. To date, they have done a very
unsatisfactory job in defining what right of disclaimer exists and when it should and could be exercised.
A number of jurisdictions have already addressed this issue in their legislation. First and foremost is the United
States, which provides that a trustee can disclaim executory contracts. The United Kingdom has a similar provision
that permits the disclaimer of onerous property, which is defined in the legislation as including unprofitable contracts.
The Australian legislation specifically addresses the right of disclaimer of unprofitable contracts by the trustee in
Those three jurisdictions have addressed this issue but Canada has yet to do so. It is important that that this right of
disclaimer is one of the main issues addressed.
In respect of proposing amendments to the legislation, the committee recommends that the right of disclaimer be
limited to unprofitable agreements. That amendment would be consistent with the U.K. approach and the Australian
approach, but differ somewhat from the United States' approach. The committee recommends this difference for a
number of reasons. First, the term 'executory contract' in the United States has been interpreted inconsistently. Such a
term used in the Canadian context would create similar problems in terms of determining what is an executory contract
versus a non-executory contract.
The Erin Features case in Canada highlights that problem. In that case, the Ontario court grappled with whether or
not the contract was an executory or a non-executory contract and came out with a decision that was strongly criticized
by commentators throughout Canada in terms of its rationale for determining that it was a non-executory contract.
The second recommendation with respect to disclaimers is that there should be a time limit placed on the trustee in
bankruptcy in terms of its right to disclaim an agreement and to provide some finality in terms of these bankruptcy
proceedings and some opportunity for the rights holders to determine where they are positioned in these proceedings.
The committee has recommended a three-month time limit.
The third recommendation is that discretion be maintained by the court to permit the court to overrule any such
disclaimer in situations when it would cause undue hardship to the person on the other end of the disclaimer and where
that hardship would result in damages that would not be compensable.
Finally, where the bankrupt is a licenser of intellectual property, the licensee should have the right to elect to retain
the licence. This is a provision that would be analogous to the United States where they enacted a similar amendment
to their legislation, on the basis of a decision in a case known as Lubrizol, which involved a company that was licensed
to use some metal coating technology that was subject to a trade secret agreement. The licenser, RMF, went bankrupt
and the trustee promptly disclaimed the licence agreement, leaving the licensee, Lubrizol, without the right to use this
technology. Lubrizol suffered serious harm to its business because of that. The United States legislation was promptly
amended to allow licensees, when faced with a licenser who goes bankrupt, with the right to elect to retain the licence
With respect to the patent issue, you will be aware that section 82 of the Bankruptcy and Insolvency Act specifically
addresses the disposition of patented articles that are in the possession or part of the property of the trustee in
bankruptcy and section 82(1) allows the trustee to sell these articles free and clear of any restrictions. Section 28(2)
gives the manufacturer or the vendor of the patented articles who sold them in the first place the right the purchase the
articles at invoice prices.
The committee has made a number of recommendations with respect to that provision. First, that the definition of
patented articles be expanded to include "protected articles," which would encompass all forms of intellectual property
and not be limited to patented articles. The committee did not see any justification for the distinction in terms of
patented articles as opposed to copyrighted, trademarked industrial design.
On the other hand, the committee did not think that "protected articles" should include articles that would be
subject to trade secrets for the practical reason that it would be difficult — if not impossible — for a trustee to
determine which articles were manufactured pursuant to any trade secrets of a third party and how that process would
even take place because it would require the disclosure of the trade secrets to the trustee in bankruptcy. The committee
recommended a more limited expansion of that definition.
The second main proposed amendment to that section, is that the right of the vendor or manufacturer to purchase
back the articles under section 82(2) should be amended to provide the right for the patentee or a licensee to purchase
back those articles. Should the manufacturer or vendor elect not to purchase them back, the patentee has an interest in
ensuring or deciding whether or not those articles should enter into commerce and on what conditions and terms they
With respect to the Copyright Act, section 83 of the Bankruptcy and Insolvency Act deals with an author's right to a
reversionary interest in copyright on the bankruptcy of an assignee of that copyright. That section was based on a
provision in the UK statute that is analogous to that but was repealed in 1986. That section was based on a decision in
the courts, where an author of a manuscript was not entitled to royalties when the publisher went bankrupt. As a
result, you see language to that effect in our provision dealing with manuscripts.
The committee has made a number of recommendations with respect to section 83. First and foremost — and in line
with recent case law — it should be made clear that section 83 applies to all forms of copyrightable subject matter and
not simply manuscripts. That is the interpretation of the court. As a result, the reference to the term 'manuscript'
should be removed.
I have reviewed some of the submissions made by the representatives of the authors of Canada with respect to their
concern of the rights of authors. One issue that we feel will address their concern in terms of their rights and their
feeling that this relationship between publishers and authors is of a personal nature is addressing the issue of moral
rights. Moral rights allow an author to control the integrity of his or her work and is a separate right apart from
Moral rights cannot be assigned by an author but can only be waived. Section 83 should expressly provide that
where the copyright in a work reverts to the author, any waiver of moral rights should be rescinded. This would protect
the author from the concerns that when a trustee in bankruptcy has copyright in the work that that work will be
assigned to third parties that may not share the same discretion that the original publisher had.
Third, the committee recommends that, because of the imbalance in bargaining power between the author and the
publisher, section 83 should be amended to provide that its provisions should apply, notwithstanding any agreements
to the contrary. Otherwise, the pressure on authors to agree to contracts that supersede section 83 would be a definite
Finally, the committee recommends that section 83 should be limited to agreements where there have been
unfulfilled obligations. Section 83 should not be used as an opportunity to allow authors to obtain double
compensation at the expense of creditors. Where rights have been assigned to a publisher, those rights should not
revert back to the author without the author having to compensate the publisher for any payments he or she has
With respect to trademarks, there is no provision in the Bankruptcy and Insolvency Act dealing with trademarks.
This is a serious omission. Trademark rights are distinct from any other form of intellectual property in that they do
not grant a monopoly on the subject matter of the right without the rights holder having to do anything further. The
rights holder has to take an active roll in maintaining the trademark in order for it to be valid in Canada. As a result,
this requires reciprocal obligations on the part of a licenser and a licensee.
Trademark rights form a part of every bankruptcy proceeding. All companies have trademark rights in one form or
another, be they registered or unregistered. As a result, this is right should be addressed in the Bankruptcy and
Insolvency Act to ensure that there is some certainty in terms of how these rights will be dealt with.
The main recommendation with respect to trademark rights is that the trustee in bankruptcy for a bankrupt
trademark licensee should only be entitled to disclaim unprofitable trademark agreements. Similarly, a licenser should
not be permitted to disclaim a trademark licensing agreement. If a bankrupt licenser breaches the licence or expresses
an indication to do so, the licensee should be entitled to elect between damages and specific performance.
Last, I want to comment on the issue of trade secrets. As I mentioned before, the definition of
"protected article" in
section 82 should not include protected trade secrets, for the reasons I have indicated. However, the definition of
"property" in the Bankruptcy and Insolvency Act should be amended to specifically include trade secrets and
There is a line of cases in Canada reaching up to the Supreme Court of Canada where the issue of whether or not
trade secrets are property is a debatable issue. There is no justification for excluding trade secrets from the property of
a bankrupt and the committee recommends that the definition be amended such that it specifically addresses that issue.
Senator Angus: Obviously, this is extremely technical material for all of us. I would like to ask several background
The Chairman: I understand — this is a courtesy to your guests — that one or more of you may have special
problems with arrangements in meeting aircraft. The committee will not take offence if you have to leave under these
Senator Angus: Is the institute, founded in 1926, a volunteer organization or is it like the bar association, which has
an infrastructure, employees, and a membership of professionals?
Mr. Baker: We are a voluntary organization, but we do have an infrastructure with four employees.
Senator Angus: Of which Mr. Gérin is the executive director?
Mr. Baker: Yes.
Senator Angus: Are you the past president, as a volunteer?
Mr. Baker: Yes.
Senator Angus: Would there be a change of the executive each year?
Mr. Baker: Saturday was my last day as president.
Senator Angus: This report is very timely, as somebody suggested earlier, given our study. I believe you are aware of
what we are trying to do here, which is part of the review that has been done of the CCAA and the BIA. Is it correct
that your remarks in the report deal not with the CCAA but the BIA?
Mr. Sprigings: Yes. The focus of the report was to address issues relating to the BIA.
Senator Angus: These recommendations are very specific. That is what a committee of Parliament likes to hear from
its witnesses; we like to know where you are coming from and how you feel a situation could be redressed.
Have you submitted these recommendations to any other branch in Ottawa, such as the executive, the other
parliamentary committees or the department of industry?
Mr. Michel Gérin, General Director, Intellectual Property Institute of Canada: We presented it to staff from the
policy group that deals with bankruptcy at Industry Canada and staff from the Office of the Superintendent of
Bankruptcy about 10 days ago.
Senator Angus: Have you had any feedback? As a lawyer, I can see that a 150-page document like this, with two
inches of footnotes on every page, is a substantial piece of intellectual property as it is. It is very good work, I am sure.
I cannot speak for my colleagues, but these recommendations seem to make at first blush a lot of sense to me. Have
they been tested on others? Have you brought them in the past before government bodies and been rejected, or are
these things that you would feel would not be controversial?
Mr. Sprigings: Our licensing committee drafted these recommendations and then forwarded them to a number of
other committees within the institute dealing with the specific sections of patents, copyrights and so forth.
Some of the feedback was not entirely in agreement with our recommendations. We deal with that specifically in the
report. We deal with the justification as to why we have made the recommendations we have.
Not surprisingly, when, for example, the report went to the patent group, they took a very pro-patentee look at the
recommendations and recommended that section 82 be abolished altogether because it is harmful to patentees. There
should not be any loss of rights once the patented articles are with the industry.
I would like to say the comments were not controversial, but they did raise those kinds of concerns for some of the
Other recommendations in the report are more technical in nature, such as amending the term
"property" to include
trade secrets, which is more of a clerical clarification issue. They fall into a broad categorization in terms of
controversial and non-controversial.
Senator Angus: I notice that you and your colleague Mr. Kyle, were both on this committee, so you have obviously
participated in depth. You signed the report.
You referred to three other jurisdictions, which would be the kinds of jurisdictions from which Canada would not
differ in any great manner: the U.S., Australia, and the U.K. Would the recommendations for all five areas you
covered or only disclaimer apply to those three jurisdictions?
Mr. Sprigings: I focused on disclaimer for those three jurisdictions. I mentioned briefly the provisions relating to
copyright that we have in our act. Our copyright provisions allowing the author to get this reversionary interest are
ultimately based on a decision in the U.K. That provision has since been repealed in the U.K. Our committee is
recommending that it be maintained in Canada.
I can only say that the disclaimer issues would be consistent with those other three jurisdictions. The other aspects to
the legislation do not necessarily fall in line with the other jurisdictions.
Senator Angus: Let us say we were to recommend that the government that it institute these recommendations in
terms of amendments to the law, are we certain that you are slipping anything by? Is there not some big red flag that
should pop off the page to some real expert?
Mr. Sprigings: If there were a specific exclusion there for me somewhere along the line where I would inherit all the
property in Ontario, that would be one thing. We are not slipping anything in there. Mr. Kyle can speak to that as well.
We have tried to take a very fair approach and address what we perceive as being issues in the legislation. As I tried to
make the case at the outset, we did not take a pro-IP rights-holder approach to this. In a bankruptcy, the rights-holders
could be on either end of the stick; you could be a licenser or a licensee of the rights. As a result there are really no
winners and losers.
Senator Angus: In terms of the professionals, your association embraces both ends of the stick.
Mr. Baker: That is right.
Senator Angus: Therefore everyone with an interest has already had or will have a kick at the can on this.
Mr. Baker: Some of the members of our organization are members of law firms that do work other than intellectual
property law. While we were drafting this document, we asked them to review the bankruptcy area to make sure we
were not far off base. Our organization is proud to represent our members — patent, copyright and trademark people,
as opposed to their clients. As Mr. Sprigings said, one of our members could one day be working for the licenser and
the next day working for a licensee. Therefore, we had to follow a middle path. I think the document is fairly unbiased
toward one side or the other.
Senator Angus: My last question relates to disclaimer of agreements. You are referring to specific types of
agreements — namely intellectual property licences — correct?
Mr. Sprigings: The draft provisions we are recommending fall into two categories. We are talking about
unprofitable agreements as a whole —
Senator Angus: Unprofitable licensing agreements?
Mr. Sprigings: Unprofitable agreements across the board, which is the same as the provisions existing in the U.K.,
Australia and the U.S. It is not limited to IP agreements. However, there are specific provisions in there to address
situation involving IP agreements, such as the licensing context. Where a licenser goes bankrupt, to protect the
licensee's interests, we have specific provisions where we have recommended that that be taken care of.
Senator Angus: For example, you are not referring to a collective agreement that the bankrupt company may have
with a trade union?
Mr. Sprigings: We have not narrowed it specifically to intellectual property agreements primarily because we wanted
to make a recommendation that was in line with the other jurisdictions on that front.
We did limit it to unprofitable agreements. That term has received a lot of judicial consideration in Australia as to
what it means. The courts have clearly said that means is that you do not disclaim an agreement because you think you
can get a better deal. It has to be unprofitable in the sense that it is adversely affecting the trustee and the bankrupt's
business. It has to be disclaimed in order to allow the bankruptcy of proceedings to take the shape that they are
supposed to take — that is, to reach an orderly distribution of the assets.
The Chairman: There is a great deal of detail and technical, as opposed to conceptual material here. That is good.
However, it is challenging for us, with little pre-work, to come to grips meaningfully with the nuances and the details of
your work by way of questioning. If we seem uncharacteristically restrained, it is because you have challenged us. Let
me say that it will go into our research very thoroughly, and all these questions will be asked.
Trademarks are not now in the Bankruptcy Act. Can you explain a little bit of the history of that? Are they not
deemed to be an asset?
Mr. Sprigings: I believe they have been deemed to be property that falls as part of the property of a bankrupt. First,
the Lubrizol case in the United States, to which I referred earlier, prompted immediate amendments to the United
States Bankruptcy Code to deal with the case where the licenser goes bankrupt to protect the interests of the licensee.
That amendment to the U.S. Bankruptcy Code resulted in a provision dealing specifically with intellectual property —
namely, patents and copyrights — but did not address trademarks.
They did not address trademarks with that amendment because it is a complicated and technical area in which to
preserve that asset in the context of a licensing arrangement. They felt they did not have enough opportunity to deal
with that issue in their amendments.
I do not believe there is any statutory history in Canada dealing with trademarks in terms of it being in the statute at
one point and removed at another point. I do not think it has ever been addressed in the Canadian statute because it is
such a complicated issue.
The benefit of this report is that you our trademark people, who deal in this area daily, state their position in terms
of what steps are necessary to preserve that asset for both the creditors and the public as a whole. It is a complicated
issue and the recommendations are somewhat complex, but they are necessary to address the issue.
The Chairman: If it is the licensee who goes bankrupt, should the trustee not be permitted to treat the licence as an
asset and therefore be permitted to assign it for consideration and use the proceeds for the creditors? I understand you
say that is not the case, but I am wondering why.
Mr. Sprigings: We are concerned with the situation in which the licenser goes bankrupt. Where the licensee goes
bankrupt, the trustee in bankruptcy steps into the shoes of the licensee and has the right to disclaim that licence if it is
unprofitable to the licensee — or, to take that licence and to treat it as an asset of the trustee in bankruptcy. I am not
sure I am following your concern.
The provisions in the act specifically deal with the case where the licenser goes bankrupt. Where the licensee goes
bankrupt, it should follow that what you are saying: the scenario in which they treat it as an asset of the licensee
The Chairman: We have your response. Thank you.
Senator Moore: When you say, for example, that the "trustee may
disclaim," do you mean he may say "we have no
interests in this licence and we are walking away from it."? What do you mean by
Mr. Sprigings: It is the same thing as being a fundamental breach of the licence:
"We are not carrying out the terms
of that licence any further."
Senator Moore: You are saying unilaterally "we are removing ourselves from that contract, insofar as we the
trustees are concerned, as administrators of the assets of this bankrupt
Mr. Sprigings: That is correct.
Senator Moore: What do you mean by "executory contracts"? Please give me an example.
Mr. Sprigings: "Executory contract" is the wording used in the United States. It has been somewhat adopted by the
courts in Canada when grappling with the whole issue of disclaimer. The phrase
"executory contract" means that there
are obligations outstanding by both parties, such as payment of royalties. In the Lubrizol case, they found the right of
forbearance, which is that if the licenser licenses the right to another party at a better price, then he has to go back to
the licensee and say, "Here is the better price."
The courts have gone to great lengths to find these obligations that would make this licence executory. For example,
if you had an obligation to keep an accounting of everything you sold, or to keep your books in good order for
inspection, the courts have gone out of their way to interpret that as making the licence executory.
Senator Moore: Are you saying that there is some other act to be executed to make the contract complete?
Mr. Sprigings: Yes. There are ongoing obligations.
It has been very difficult to predict when a court will find an ongoing obligation. For example, if an agreement says,
"You shall keep this information confidential for 10 years," does that make it executory? The contract is over, but you
have this ongoing obligation that flows with the agreement. You would not think that would be executory. You would
think it would be an obligation that is there in every agreement.
However, it renders it very difficult to predict what would be considered rendering a contract executory. As a result,
we thought that "unprofitable" was the better route to go.
The Chairman: I am following the definition chain here. It is important to make sure we all understand what these
This concept of "unprofitable," which seems to be so well understood, seems, from an evidentiary point of view, to
pose enormous problems. Can you give me an example of something that everybody would understand as
"unprofitable" as opposed to a borderline case?
Mr. Sprigings: I am not saying "unprofititable" would not be met with certain ambiguities. The Australians have
found that out in their case law.
Let us use the Air Canada scenario as an example for a moment. Let us say that Air Canada developed some unique
reservation software and licensed it to a third party. Let us say it licensed it to American Airlines for a royalty of
$100,000 per year, but under the terms of that licence agreement, Air Canada had to provide support for the software.
Let us say that Air Canada was not successful in persuading 20 airlines to use their reservation software and their
technical support cost them $150,000 per year. They would be losing $50,000 per year. That would be unprofitable for
What would not be "unprofitable" is if their technical support was costing them $50,000 and they were getting
$100,000 in royalties. They would be making $50,000 from the deal.
However, let us suppose that United Airlines then offers them $300,000 for the software on the condition it is
exclusive. "Unprofitable" does not mean that you can disclaim this agreement to get a better deal somewhere else.
The Chairman: On the face of it, basically, if the net result is negative, it is unprofitable.
Mr. Sprigings: Yes, on the face of it. You look at the agreement as a whole and the court or the trustee weighs it and
determines whether it meets the criteria.
The Chairman: Do you feel that the expertise required of trustees in these situations is likely to be available in many
cases? As I listen to the examples and read the point, it sounds like the trustees could well be called upon in many of
these areas to deal with extraordinarily subtle and sophisticated issues. Is that a problem without trustees with
Mr. Sprigings: I appreciate your concern. I think it valid.
The problem is where the state of the law is in Canada today: Some courts feel that
"improvident" agreements can
be disclaimed. What is an improvident agreement? That is a good question. Some courts feel there is an absolute right
to disclaim any agreement. There has to be a line somewhere. Without giving the trustee a blanket right of disclaiming
every agreement that comes across his desk, the line has to be drawn somewhere.
I agree that determining whether something is profitable or unprofitable can be a significant challenge. There are a
number of cases in Australia — probably 10 or so — where the courts have addressed that challenge. The courts setting
out principles on how that job is to be approached should provide the direction to a trustee to try to come to grips with
that. It certainly will be a challenging job.
Senator Hervieux-Payette: Everybody is aware that quite a few software firms went bankrupt due to a lack of
financial resources to market their product. With all this software, would the trustee just try to contact those who can
buy it? Let us say that a company such as Microsoft gets a hold of it and makes zillions of dollars. What is the global
situation if it has been sold for a very small amount of money and the author of the software was the majority
shareholder in the bankrupt company? Is there anything left for him, or is it just gone with the wind and the intellectual
property rights transfer to the company that acquired the software?
The essence of your document is to protect them. In a real situation, however, what happens to the software?
Mr. Sprigings: The current provisions and the provisions in the recommendations only address the situation where
the author has assigned the software directly to a bankrupt. That is the first point.
If the author assigns it to a company which then sells it to another company, which sells it to another company, and
that company goes bankrupt, the copyright on that software do not go back to the author; he is out of luck.
Where the author has assigned it to Microsoft and Microsoft — heaven forbid — should go bankrupt, then that
copyright would flow back to Microsoft on the provision that the author meets the various conditions — such as
payment of whatever expenses at whatever point in time.
You make the point that that would likely be cost prohibitive to that poor author in terms of trying to recoup from
Microsoft his expenses. That may be the answer to the situation in terms of finding a balance for the creditors, because
the author could not recoup that software without compensating the trustee. If he can get financing that does that, then
Microsoft's creditors are better off in terms of being somewhat compensated and the copyright owner gets his rights
back to deal with as he sees fit.
Computer programs do not typically fit into the realm of literary manuscripts or musical works. They have more of
a commercial bent. It would be difficult and problematic to draw that fine distinction in the act. We felt that the
legislation should still encompass those kind of literary works, referred to as computer programs.
Senator Hervieux-Payette: Nothing will change for these companies following your report. Most of the time, they
must assign their rights to get more funds. The situation is that they seldom own the rights — unless it is a one-person
company. What would the venture — that is, web finance — do with this asset? There is no recourse and everything is
gone. There is not much money.
The Chairman: Thank you, witnesses and senators. We will have to draw this portion to a close. Thank you for your
patience and for your presentation.
With apologies for the timing, we would like to recognize the presence of Mr. Saul Schwartz, Mr. Dave Stewart and
Ms. Guylaine Houle.
We are dealing with a substantial report, a large body of material and a very late hour. I ask that we make our
collective best efforts to focus on the critical issues with the understanding that if we miss things in the course of our
work, we can come back to you again.
Mr. Saul Schwartz, School of Public Policy and Administration, Carleton University, Personal Insolvency Task Force:
Thank you for inviting us here today. The Personal Insolvency Task Force was a large group drawn from a
section of professionals who are deeply involved in the Canadian bankruptcy system. The task force comprised 23
academics, bankruptcy trustees and lawyers. For that reason, its recommendations should be taken very seriously, and
I am sure the committee will do so.
There was widespread discussion, a lot of argument and compromise in connection with each recommendation in
this voluminous report. We will not talk about all the recommendations; we will only hit the highlights. We did not
agree on everything. Two of the members wrote dissenting opinions that appear in the back of the report.
Today, we will discuss several of the major recommendations. I will briefly discuss the recommendations that relate
to the discharge of student loans and the limited exemption that we propose for RRSPs. Ms. Houle will address the
task force's proposes for streamlining the summary administration process and the task force's suggestions concerning
payments made by the bankrupt individual after they file for bankruptcy.
On my left is Dave Stewart. I have asked him to accompany us because he really has a full and comprehensive
understanding of not only all our recommendations, but of many things relating to personal bankruptcy. Mr. Stewart
is here as a technical adviser, not as someone taking a position on any of the recommendations in the report.
With respect to student loans, our recommendation is that we make it easier to discharge student loans in
bankruptcy, reducing the waiting period from the current 10 years to five years, and introducing the possibility of a
hardship hearing one year after the debtor leaves school. There is a strong principle here at work that permeates
bankruptcy as a whole — namely, that all creditors, and therefore all debts, should be treated equally unless there is a
compelling policy reason to treat them differently. For example, we do not allow the discharge of child support
obligations, because we believe that to do so would affect the welfare of the affected children.
Some would argue that there is a compelling reason not to allow discharge of student loans because there is an
intimation that, somehow, that discharge would be abuse of bankruptcy provisions. If these young people have
completed a university degree and are about to go on to well-paid careers, allowing them to discharge their student
loans would be an abuse of the bankruptcy provisions.
However, my own survey research and the experience of many trustees such as Ms. Houle seem to suggest otherwise.
It seems that most of those seeking the discharge of their student loans do not have degrees. Perhaps they went to
university or college or trade school, did not get a degree and did not, therefore, benefit from their education in terms
of higher earnings. In addition, they have very low current income. In fact, it is clear to me, at least, that these are not,
by and large, young professionals seeking to get rid of six-figure debt so that they can go on to make bigger bucks later
on. If anything, the financial situation of most of those seeking to discharge student loans through bankruptcy is worse
than that of a typical bankrupt. For that reason, the task force believes that current provisions concerning the
discharge of student loans are inappropriate.
On the subject of RRSPs, we have recommended a limited exemption for RRSPs. This is a fairly limited problem.
Most bankrupts do not have RRSPs. We are talking about one in ten or one in twenty. A fairly small proportion of
those declaring personal bankruptcy have RRSPs that might or might not be discharged. On the issue of RRSPs, there
is a principle at work here as well. The principle is that future earnings should be exempt. When you go through
bankruptcy, you are discharged from your current debt. The future earnings that you make after you leave bankruptcy
cannot be put over to the creditors. Similarly, registered pensions, the kind of pensions that I have at Carleton
University, are exempt from seizure. No one can take my Carleton pension from me, even if I should declare
bankruptcy tomorrow. The principle there is that those pensions substitute for future earnings as well. They are the
earnings I might have after I retire.
Similarly, RRSPs are intended to be a source of retirement income for those who do not have registered pension
plans — the self-employed and other professionals for example. In contrast to registered pensions, those RRSPs are
not currently exempt. We, therefore, recommend their exemption. The problem is that that exemption must be limited
to avoid abuse.
The three limits we are proposing are quite clear. First, the RRSP must be locked in until the person actually retires,
because RRSPs, unlike my Carleton pension, can be cashed in tomorrow. I cannot, in any way, turn my Carleton
pension into money, but I could, with a penalty, turn my RRSP into money.
Second, all the RRSP contributions made within three years of the date when the person is filing for bankruptcy
must be turned over to creditors. The reason is clear: If they were known to be exempt, people might be tempted to
make RRSP contributions in that three-year period instead of paying that money over to their creditors as, perhaps,
Finally, the size of the exemption should be capped. Otherwise, you might have special cases where someone wisely
invested his RRSP money and had millions of dollars that he is claiming to be exempt in bankruptcy. That would seem
unfair. The cap is roughly in the order of $300,000 for a 40-year-old debtor. There is a specific and fairly simple
The last thing I want to say about RRSPs is that our group was especially concerned to make our recommendations
practical. There were a lot of trustees and lawyers sitting around the room. We were trying to come up with a system
that would not impose a huge burden on the system and we believe we have done this.
Ms. Guylaine Houle, Litwin Boyadjian Inc., Personal Insolvency Task Force: Senators, I would like to thank you for
having me here tonight. First, I will present a brief, two-part summary. I would first like to talk about the changes
proposed by the task force concerning the bankruptcy procedure.
Concerning personal bankruptcy, there are two important points to remember. We must maintain the integrity of
the system and an optimal level of efficiency in order to allow interested parties to defend their point of view in the
relevant files. With this in mind, the task force recommended that creditors be given more of the information normally
issued in initial notices which demonstrates that the debtor has gone bankrupt. This would allow creditors to establish
their level of participation in the bankruptcy file in question.
Second, I would like to briefly discuss the voluntary agreement made by bankrupts to make payments to the trustee
after the discharge.
The current law that is applicable follows the Bethelet ruling which establishes that a payment agreement that
extends beyond the bankrupt's discharge date is illegal; thus, since the Berthelet ruling, trustees may not extend such
This decision has reduced the funds accessible to creditors and trustees, which causes a funds shortfall in summary
administration files. These are minimal amounts in any case, be they for the trustee's fees or fees inherent to the simple
administration of the bankruptcy, but these funds are insufficient. The fact that there is a funds shortfall is not a
sufficient argument for the trustee to oppose the discharge of bankrupts. Repeatedly, the courts have advised us that
they would not accept this ground as a reason to oppose the bankrupt's discharge.
Moreover, in our task force's discussions, it was established that the interested parties in personal bankruptcy are in
general seeking a probability of payment and not necessarily a guarantee that the trustee's fees and administrative fees
will be paid in the bankruptcy.
For these reasons, the task force recommends that a change be made to the Bankruptcy and Insolvency Act in order
to allow the trustee, under certain conditions, to conclude a voluntary payment agreement with the debtor who has no
excess income. The first condition is that a ceiling be set on the amount to be paid, which would correspond to the fees
established by a regulation pursuant to the Bankruptcy and Insolvency Act. The second condition is that there be a
maximum payment period set during which the debtor may make these additional payments. To these two conditions
we would add the following one: the bankrupt must not be placed in an excessively difficult situation with regard to his
or her family expenses.
Mr. Schwartz: We would appreciate any questions you might have of us.
Senator Angus: I note that all three of you were on the task force. You served on it and put in thousands of volunteer
hours representing different constituencies: Mr. Schwartz, from the academic side; Ms. Houle, a trustee in bankruptcy;
and Mr. Stewart, from the government side and the chairman of your task force. Whatever we are unable to resolve
this evening, rest assured that we can go to Mr. Goldstein with our concerns.
Mr. Schwartz: We are not sure we want him to speak for us unilaterally.
Senator Angus: He has been flattering in his comments about you folks.
Mr. Schwartz: He was a great chairman, and you should listen to him whenever you can.
Senator Angus: This report — and I confess that this escaped me before — is more than a year old now. A lot of this
work took place in 2001 and the early part of 2002, and maybe even earlier. I appreciate that you may be seeing the
light at the end of the tunnel.
I direct my comments to you first, Mr. Stewart, if I may. When do you see legislation coming in your role as a
Mr. Dave Stewart, Special Project Leader, Office of the Superintendent of Bankruptcies, Personal Insolvency Task
Force: In my role as a technical advisor, I would hope to see legislation as soon as possible. Is that general enough for
Senator Angus: I think that is a good start, as we say. Actually, are you aware of draft legislation that is being
prepared as we speak?
Mr. Stewart: No, there is no draft legislation. We are waiting for your report.
Senator Angus: Okay. That is helpful. You were in the room for the previous witnesses on the intellectual property
issue. Did your task force take cognizance of any of the points on intellectual property, the disclaimer of agreements,
and so on?
Mr. Stewart: This particular task force dealt with personal insolvency.
Senator Angus: That is what I thought, but I thought that those things would apply sometimes in personal cases.
Mr. Schwartz: I do not believe that we considered or made recommendations on the intellectual property issues that
were raised by the last group.
Senator Angus: I was leafing through the report and did not see any mention of intellectual property. In respect of
the RRSP issue, I was a little confused. I recall that there was an issue that certain RRSPs that are registered and are
administered by insurance companies enjoy a certain status under these applicable statutes, whereas self-administered
RRSPs, which, from a fiscal point of view, enjoy all the same tax benefits — maybe greater, maybe lesser risk, who
knows — do not enjoy these benefits under insolvency legislation. Am I right on that? What is the difference?
Mr. Schwartz: Yes. One type of RRSP administered by insurance companies under certain circumstances is exempt
under the BIA. All other RRSPs, are not exempt. The argument against that is that only people who are either prudent
enough to find out for themselves or who can afford good advice and who anticipate the possibility of bankruptcy
might purchase such RRSPs.
There was already a precedent for exempting some kinds of RRSPs, but it did not seem favour to exempt only one
narrow tranche of RRSPs when we felt the entire range should be exempt.
Senator Angus: I fully agree with you. However, my concern is that particular tranches — the insurance companies
that are already exempt — have no restrictions on those exemptions along the lines that you have outlined for other
ones that would be afforded an exemption subject to this cap. I am aware of some RRSPs with insurance companies
that have had good investments with several million-dollar asset values that are totally exempt. Are you suggesting
they be brought into that?
Mr. Schwartz: Absolutely. Our recommendation G on page 23, says basically that provincial exemption for the
insurance-type RRSPs should be set aside so all RRSPs are covered by the same statute and, therefore, treated in the
Senator Angus: That addresses directly my point. It is consistent.
Mr. Schwartz: I was not immediately involved in the details of this recommendation. We gave considerable attention
to exactly the kinds of concerns that you have raised. These are legitimate concerns and we talked about them at great
length. Embedded in this long report are these very practical deliberations, which resulted in a recommendation that is
well thought out and practical.
Senator Angus: The recommendations are quite specific, as I gather. As legislators, we like to see that in terms of
proposed amendments to the law. Do you feel that these are generally acceptable to the stakeholders? You had five
main groups represented.
Ms. Houle: Our discussions took into consideration all the stakeholders. It was important to us to consider
everyone's opinion. The compromises that reached satisfied everyone.
Our recommendations are very specific. We did not feel that the act required a complete change. We felt that certain
portions needed to be changed because of the change in the economy and society. We reviewed the things that do not
work so well in order to make them work better.
Everyone agreed. There are a few dissenting opinions published at the end of the report. While we did not reach
unanimity on many topics, once everyone's point of view was discussed, we made some compromises and arrived at the
recommendations, which were in greater part accepted by the unanimous committee.
Senator Angus: I find that extremely helpful, particularly, inasmuch as one of the stakeholders — and perhaps
ultimately the most important one — is the government, which was participating in the deliberations and debate. There
is no particular resistance from the government representatives.
I understand, Mr. Stewart, you were one of nine or 10 representatives saying that this would never fly and you could
not get it through Parliament.
Mr. Stewart: We did not take a lead role on the committee. We did not have a vote on the measures that were
brought forward. We were there to provide support, technical information and statistics.
Senator Angus: You would have been aware of all of the directions in which they were going. Would it be fair to say
that if you found them going the wrong way you might comment?
Mr. Stewart: We never got to that point.
Ms. Houle: When we were not certain of which direction would be most appropriate, we would discuss with it. We
were not there to provide a report that we knew would never pass Parliament.
All of us love what we do; work in bankruptcy in many forms. Therefore, it was in all our interests to make the
system work better. When we were not sure, we would go to a government representative who would know more about
the policies that we, as practitioners, may not be aware.
Senator Angus: That is very refreshing. You were right on the point that I was raising.
Being the Standing Senate Committee on Banking, Trade and Commerce, we get many financial submissions. We
get submissions from persons with positions that they want to advocate in the financial area. For example, we may get
a proposal for a change to a tax treaty, a tax law or some financial regulatory provision. The first question I ask is,
"That makes a lot of sense to me, but have to tried it out in the Department of
Finance?" When they reply that they
have not run it by officials from that department, I wonder what they are doing here.
It was in that spirit that I asked my question. You answered it in that spirit. I am comforted.
Ms. Houle: That was certainly the spirit in which the report was written and in which we worked on the report.
Senator Massicotte: The report is very well put together. I agree with several of the recommendations that have been
I have an issue with the RRSP. I buy in easily when you say to make it comparable and fair from the perspective of
the life insurance issue. However, should they do so? I gather that the life insurance exclusion started several decades
ago when it was for the benefit of the heirs of the deceased. That is when the court excluded it.
Let us say that I lend you two dollars. You tell me that you cannot pay me back because you do not have two
dollars. You tell me that you have one dollar in RRSPs but you do not want me to use them. You want the RRSP it to
be excluded from the repayment of that debt.
If you follow that concept, you are saying that you want to protect a certain lifestyle. I appreciate the policy decision
of the government that we should encourage savings. However, as a creditor, I would be subsidizing your future
income and I am not sure that I should be doing so. I can appreciate maybe the government should have social
programs to give you that minimum income. However, why would I subsidize your future lifestyle?
Ms. Houle: I should like to say that we did not approach it from that point of view. We approached it from the point
of view that there was an injustice in the sense that if you so happen to be working for a company that had a pension
plan, although you did not make any contributions, your pension plan is cannot be seized.
On the other hand, the ordinary worker, who does not have any financial guidance or advice, saves $100 per year or
per month in his RRSP. However, because he does not have the money or the knowledge to seek advice from someone
who will advise him what kind of RRSP would be protected from bankruptcy, there is an imbalance in the system.
That is how we arrived at this point. Obviously, some RRSPs are not seizable as the law currently stands.
There were four or five groups of creditors on the committee. It was clear, from the generality of the loans they
make to consumers, that most of them do not lend on the strength that you have an RRSP. They lend on the strength
of other assets that you may have or on the potential that you are a moral, upstanding person who is unlikely to go
bankrupt and who will repay the loan. That is how all the creditors on the task force expressed it. There were cases
when someone went bankrupt and had an RRSP of $5,000 or $10,000 that was protected, but they never complained
about it. There was never any discussion.
Mr. Schwartz mentioned that few of our bankrupts — one in 10 — would come in with an RRSP. I only do personal
bankruptcies and I rarely come across people with large RRSPs of $100,000 and more. That combination does not
exist in my practice. People who come to me have small RRSPs, which they have saved by the sweat of their work and
then they lose it in a case of bankruptcy. Those people would not have been advised correctly.
Senator Massicotte: I understand the issue of fairness but two wrongs do not make a right. I will go to the other
issue. Obviously, banks want certainty. I have someone working for me who told me last week that the bank lent him
money to invest in an RRSP; he takes back 30 per cent and repays the loan. Banks will adjust to the rules, in other
I suspect if you exclude a number of items from collateral security, the banks will lend less money and there will be
less credit in our society. One could argue that as being good, given that consumer debts are high but credit facilities
are important to an economy. Has that been considered — how these proposed exclusions would affect the economy?
Mr. Schwartz: We did not get the impression that banks were using the RRSPs as collateral for loans. Therefore,
their exemption would not substantially reduce the amount of credit being made available. The general issue of
ensuring that there was enough good credit and that we need credit to keep the economy functioning was raised, and
we agreed that it was important to protect.
Ms. Houle: One of the reasons for the clawback was precisely that. If you have borrowed for your RRSP, in most
cases, you have probably repaid it within a period of three years. However, if it has been under three years, you have
probably not repaid the amount that you borrowed for your RRSPs. That story is common and it is my understanding
that most banks do it that way. They lend 30 per cent, which is paid back, and then the balance is paid back on a
monthly basis over a period of X-number of months.
Senator Hervieux-Payette: Nobody can afford to go bankrupt. However, take the example of a student who has just
finished five years of studies. He is 30 years old, married, with two children, rent of $2,000 a month, a car and a
$100,000 debt. How much would it cost him to declare bankruptcy? We often hear the sentence
"people cannot always
afford to go bankrupt," or that the cost of bankruptcy is too high. What do you think of this belief?
Ms. Houle: This belief is not as well-founded as people seem to think. In my community, I know several trustees who
would never refuse a debtor. It is a business. Like any professional, of course, trustees like to get paid. However, none
of us would refuse a file.
The professional fees in a personal bankruptcy are not that high. It is presumed that the person who is declaring
bankruptcy owns no seizable property nor anything that could be added to his estate. As for the fees, the person must
make monthly payments over a nine-month period. The person's personal circumstances are taken into consideration,
such as the fact that he has two children, a car and other expenses. In a case like this one, my fees could vary between
$1,200 and $1,500 to be paid monthly over a nine-month period. An initial payment would cover my file-related
expenses. The GST will probably be refunded to the trustee. The overall amount would thus cover my fees and
expenditures related to the file. The real cost to the debtor would be approximately $1,100, and the difference would
come from the GST reimbursement or an income tax refund should there be one.
Senator Hervieux-Payette: My second question relates to a frequent problem. Generally, the trustee is responsible
for liquidating the estate and distributing the money among the creditors. Let's take the example of an apartment
building for which the bank is the main creditor. Since the owner can no longer meet his obligations, the apartment
building must be liquidated. Suppose the cost of each apartment is $100,000. An individual may purchase the building
for a million dollars, whereas several people might be prepared to pay, for instance, $150,000 for each unit. What are
the rules that would apply in such a case?
One often gets the feeling that people take advantage of these liquidation sales. Are there provisions in the bill that
would allow the trustee to maximize income for the creditor? The banks are financially more comfortable and are often
ready to accept a lesser amount. Thus, certain individuals are frustrated because they cannot purchase these assets even
though their offer was higher than the asking price. What part of the law explains this strange phenomenon that allows
people to get around the highest bid rule?
Ms. Houle: If the trustee is in charge of the sale, he must meet certain obligations. Pursuant to certain sections of the
law, the trustee cannot sell an asset for less than its market value. Our role as trustees is thus to obtain market value for
the assets being liquidated. A frequent scenario which illustrates the type of difficulty you referred to is one where the
mortgage-holding creditor who is owed a large sum of money does not wait to send his notices and becomes the new
owner as soon as bankruptcy is declared.
In Quebec there has to be, among other things, a 60-day notice and an advance notice of any mortgage-related
activity. Thus, the mortgage-holding creditor can become the new owner in a brief period of time. Pursuant to section
67, the trustee has the right to interrupt procedures, but he cannot do so for a very long time. To do this, the trustee
must be able to present certain documents as evidence to the court. That is why the mortgage-holding creditor is often
the one who makes a profit on assets in this type of scenario, not the trustee.
Ostensibly, the trustee seems to make a profit in bankruptcy cases where the building is sold. However, when you
take a closer look at the situation you can see that the mortgage creditor, be it a bank or some other financial
institution, is the one that in fact makes the profit.
Senator Hervieux-Payette: There are often more than one creditor and the distribution of profits is not always
equitable among them.
If a property is sold for a million dollars rather than a million and a half, the money will be distributed among the
creditors. Whether the main creditor is a bank or some other entity, the other creditors will see their share reduced
because the property was sold for a lesser amount.
It seems strange that one creditor has more rights than the others.
Ms. Houle: The Bankruptcy Act provides that the creditor theoretically is not affected by the law if he holds one or
more specific assets that are guaranteed. If the guarantee is valid, that creditor can in theory do practically whatever he
likes. The creditor protected himself when he made the loan by taking certain specific assets as security.
The law offers the trustee or the bankrupt's estate a certain protection and a certain flexibility. However, that
flexibility is not eternal. The trustee should be able to submit an offer sufficient to pay the mortgage creditor with a
balance to be distributed among the group of remaining ordinary creditors.
Senator Biron: In Quebec there is the Legal Aid Act. Should there also be an act to help bankrupts? Thus, like
lawyers, trustees could benefit from a certain support.
Ms. Houle: Such a situation would be ideal, but make no mistake. In my opinion, and according to my experience,
access is not an issue. You can always find a trustee who accepts cases for a modest fee. Trustees, like lawyers, also
occasionally take on cases pro bono. This reality is part of our kind of work.
Senator Biron: A prudent person who is considering bankruptcy can always convert his or her RRSP into a lifetime
annuity and thus avoid seizure.
Ms. Houle: In such situations, the trustee may use certain provisions of the act allowing him to oppose reviewable
transactions, preferential payments and such changes made shortly before bankruptcy was filed. Such transactions are
generally illegal and we must initiate procedures and obtain court decisions to that effect.
Of course, if the debtor makes such a transaction a week before filing for bankruptcy, his intention is clear. In such
circumstances, creditors are protected. The transaction will be reviewed and reversed. These sums that should have
been part of the estate in bankruptcy will be put into the estate, in accordance with the court's order.
The Chairman: You said that the RRSPs must be locked into an annuity or a locked-in RRSP. You also made a
general statement that you had an eye to practicality in ensuring that what you recommended worked.
We had a submission from the Alberta Law Reform Commission based on a report that they are about to publish.
They said they wanted to be practical and they came to the conclusion that the supervision or mechanism to assure that
RRSPs were locked in and stayed locked in was something that, in their conclusion, was not practical or workable.
You seem to have both taken a practical approach and come up with different conclusions. Do you have any
comment on that?
Mr. Schwartz: My comment is based on some reaction by one of the task force members to that testimony before
this committee. His comment was that he does not see why that is true. He says, for example, our own proposal
requires no checking because the issue is closed once the RRSP is locked in. He also commented that there are some
complications in making sure that all these things happen as we envision them. It is not clear that the alternative
proposal put forward does not suffer from that same administrative burden.
Our proposal is as practical as it can be. It may not be a walk in the park to administer this, but it is as good as it can
The Chairman: If there are no other questions, I thank you very much. As we have said, we have your report, we
have easy reference to your chair and we are sure you are available as well to pursue for more detail. Thank you for all
the work that you and your colleagues on this task force have put into this project.