Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - November 17, 2010
OTTAWA, Wednesday, November 17, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:20 p.m. to study Bill S-216, An Act to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act in order to protect beneficiaries of long term disability benefits plans.
Senator Céline Hervieux-Payette (Deputy Chair) in the chair.
[Translation]
The Deputy Chair: I call the meeting to order. I would like to welcome my colleagues, our guest today and those who will appear before us later.
I would first like to introduce my colleagues: Senator Ringuette from New Brunswick, Senator Harb from Ontario, Senator Moore from Nova Scotia, Senator Merchant from Saskatchewan, Senator Kochhar from Ontario, Senator Gerstein from Ontario, Senator Greene from Nova Scotia and Senator Massicotte from Quebec.
We are starting the study of Bill S-216, An Act to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act in order to protect beneficiaries of long term disability benefits plans.
[English]
As our first witness, we have today Senator Eggleton, the sponsor of the bill, a senator from Ontario.
Welcome and please proceed.
Hon. Art Eggleton, sponsor of the bill: Thank you very much. This is a little unusual for me. I usually sit at the other end of the table in another committee that usually meets down the hall at this very same time, but I am delighted to be able to speak to you today.
I want to note the presence of Judy Sgro, the Member of Parliament for York West, who has been very active on this and other pension matters in the House of Commons.
Today I come to speak on the bill I have sponsored, Bill S-216, an act to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act in order to protect the beneficiaries of long-term disability benefit plans, LTDs.
Honourable senators, before I tell you what is in this bill and what it does, let me tell you what it does not do. I think this is important. First, it is not about pensions. That is a different issue. It is about long-term disability and that only. Second, the bill is not just about Nortel, although that situation precipitated this bill. It is about employees now and in the future who find themselves in similar circumstances with respect to LTD plans.
The purpose of this bill is straightforward: to protect employees on long-term disability. While its focus is narrow, it speaks to larger issues of fairness, justice and respect. Its aim is to correct a situation that leaves the most vulnerable of our workers in the most desperate of straits, and it reaffirms the simple principle that people who pay their dues and play by the rules have the right to expect that they will receive what was promised them.
At the moment, approximately 1 million employees in Canada have disability benefits that are self-insured by their employers. If a company with self-funded long-term disability benefits goes bankrupt, its employees who depend on these benefits are given the same standing as an unsecured creditor.
In 2001, Amy Stahlke wrote in Benefits Canada magazine about the impending problem. She said:
In Canada, there has been little regulation of self-insured plans. There is no requirement that employers set aside adequate reserves to cover future liabilities arising from these plans. If reserves are set aside, there is no restriction on how those funds are invested. There is also no obligation to keep funds in trust to protect them from creditors. This means that a bankruptcy could spell the end of the benefits plan, including benefits for individuals already on disability.
Honourable senators, employees who are disabled, who cannot work, should not be shunted aside. Their needs are not over when their employer goes under. They still need medication, treatment and rehabilitation. They still need all the things that their long-term disability would have helped to provide.
The bill proposes to protect beneficiaries under long-term disability plans by granting them preferred status. By bringing LTD claimants to preferred status, employees are more likely to get their benefit coverage up to age 65. They will be able to pay their medical bills and continue to live outside of poverty.
Some may have concerns about the cost and the impact on credit markets and about our overall competitiveness. I have heard about this, but when we look at the evidence we see that not only can this be done but that many countries around the world are already doing it, or doing even more.
Thirty-four of 54 countries studied by the OECD and the World Bank, some of them our major trading partners, already have either super-priority or preferred status for employee claims in their bankruptcy laws, and that is for all pension claims, not just long-term disability. These countries have properly functioning credit markets and remain competitive. The two are not incompatible. We can protect our most vulnerable employees and retain dynamic credit markets and stay competitive.
Also, at least 12 countries, including Germany and the United Kingdom, require the payment of insurance premiums by their corporations to fund their public pension plan and disability income guarantee insurance programs. We do not do that, but at least 12 of our major trading partners do.
The United Kingdom's system goes even further. In 2004, they enacted the Pension Protection Fund that states that if an insolvent company has underfunded its long-term disability plan, the government will compensate the scheme to protect employees. They are, therefore, protected from an employer that goes bankrupt, because the government requires the company to fund LTD funds. If there is a shortfall, the government will step in to cover it. In essence, the most vulnerable will be protected.
In the United States, LTD employees have disability protection for pensions through the Pension Benefit Guarantee Corporation. Also, employees have legal recourse to go after LTD benefits after bankruptcy provided by their Federal Employee Retirement Income Security Act legislation. There is no such avenue available to Canadians. In the United States, they also have a more generous Social Security Disability Insurance Program. It pays more than twice what the Canada Pension Plan Disability Benefits pays for the disabled in Canada. That is our major trading partner.
Honourable senators, nowhere is the inequity of the present situation more starkly illustrated than in the case of Nortel workers. As that company goes about the business of divvying up its assets, over 400 of its employees on long- term disability are being cast aside. The assets, by the way, are valued at over $6 billion.
Currently, the bankruptcy court has accepted an agreement for the dissolution of Nortel Health and Welfare Trust. This trust was set up to fund life insurance, LTD and other benefits for the 18,000 Nortel workers. This fund has been underfunded for years and holds only about 35 per cent of the assets necessary to fund its obligations to all employees. This is a dire situation for Nortel's LTD employees whose average age is 54 years and who may need benefits for many more years to come.
Those employees will turn increasingly to social assistance and make greater use of social services if that company does not live up to its obligations. They will have to make the heart-wrenching decision of whether to buy medication or food for their families, to get treatment for their illness or pay the mortgage or the rent.
Effectively, Nortel will have downloaded these costs onto taxpayers. Taxpayers will have to pick it up because these people will go to the social welfare system. Meanwhile, the company has $6 billion in assets and only a year ago paid some $8 million in bonuses to its seven top executives. This company will just walk away from its responsibilities.
I have put a document on the table. It has not been formally translated, so you will not have it in front of you. It is in both English and French, but it is in the original language of the people who have written it. In it are contained 28 impact statements by these people. Have a read through this and you will see what kind of a desperate situation these people are in. One person talks about trying to commit suicide. Please read that document and you will get an idea of the situation. You will hear from a couple of them here at the committee as well.
Honourable senators, Nortel employees are not alone. LTD workers from the Pacific Newspaper Group, which is owned by CanWest, faced this uncertainty earlier this year. Thank goodness that CanWest survived through bankruptcy proceedings. However, if the situation led to liquidation, like in Nortel's case, those employees could have seen their benefits cut off as well. Nor is this problem new. We have seen this kind of thing play out before. In 1988, when Massey Combines Corporation went into receivership, 350 employees saw their disability payments vanish. Ten years later, the bankruptcy of Eaton's resulted in hundreds more being left without benefits.
Honourable senators, long-term disability is based on a simple bargain. If you pay your fees, you will be covered should anything happen that makes it impossible for you to work. In the case of Nortel and others that bargain has been broken. In the future, if no action is taken, similar bargains can be broken again, and the taxpayers, again, will pick up the costs.
The bill before you today represents an attempt to end that practice. It declares in no uncertain terms that promising long-term support and then making short-term decisions that leave those promises in tatters is just not a matter of liabilities that are unfunded, it is a matter of practices that are unfair, unjust and unacceptable.
This bill will not only bring a greater degree of fairness in the bankruptcy process but will help protect some of our more vulnerable citizens now and in future. Thank you very much.
Senator Massicotte: Thank you, Senator Eggleton, for your presentation.
I think I understand the proposed amendments to the act. I have read other presentations. I am trying to gather information.
If the long-term disability employee contributions are not insured, they go into the company coffers. Those contributions are not in trust. In law, the employee deductions for income tax, et cetera, are trust monies. Therefore, the board of directors would be legally liable if they were to use the trust monies for any other purpose than that for which they were intended. As I understand it, this case is different and there no particular treatment given to the employee contributions for disability insurance. Is that correct?
Senator Eggleton: A health and welfare trust was set up in the case of Nortel and it is set up in the case of other companies, but there is no requirement for them to do that. However, if they do that, there is no requirement as to how much they put into it or how the money is invested. In this particular case, they have underfunded it. They did not put in enough money to meet their liabilities.
Senator Massicotte: The contribution by the employee by way of the deduction made from his paycheque does not need to be trust money in a legal sense?
Senator Eggleton: That money was put into a trust.
Senator Massicotte: If it was not set up in a separate account, it was not automatically deemed to be trust funds? It is not the company's money; it is the employee's money.
Senator Eggleton: I do not think there are requirements for that money to be designated as employee money. The company puts in its own money as well.
Senator Massicotte: I suspect it is trust monies, but it does not mean that the employer is making his share. Sometimes the employer pays more. If the employer does not make the contribution, then you have a problem of underfunding.
Senator Eggleton: I do not know that there is any question of the employee money, per se. As far as I know, that has gone into the health and welfare trust. The problem is that the company has underfunded its contribution.
Senator Massicotte: I do not know the statistics, but, with the exception of some large companies that you mentioned, I suspect that 90 per cent of the bankruptcies in this country occur once the secured creditor took his assets. There is never anything left for the unsecured creditors. If my numbers are accurate, while I support the proposed amendments, I am concerned that they will not resolve very much except for the Nortels of this world because most often, for SMEs, once the secured creditors are finished there is nothing for the unsecured creditors.
Senator Eggleton: Most companies take out an insurance plan. For about 90 per cent of employees that are covered on a company long-term disability plan, these companies do buy insurance. Approximately 10 per cent of the cases, which includes about 1 million people, are self-funded. In most of the cases that we know about, major companies feel that they have sufficient wherewithal to do this themselves. That is fine, except you get to the point where they are underfunding it and they go into bankruptcy. It is then the employees who are left holding the bag. We are trying to protect those people by this legislation.
In this particular example, and in some of the other examples of the past, there were substantial assets — not necessarily in the current assets but in the fixed assets. If you are going to liquidate, then those assets come into play, and they should.
Senator Massicotte: There is a submission by the life insurance companies saying that if you work with us, you will not have any problems. However, I understand from their submission that if you use the word "insured," it is not really insured. The money is set aside with the insurance companies and the insurance companies are responsible to invest the funds. If there are insufficient funds in those accounts, there is also a shortfall to the employees. Is my understanding accurate? We use the word "insure" but it is not really insured. Segregation of funds is probably what is actually occurring when they use the word "insured."
Senator Eggleton: In the 90 per cent of cases where they deal with insurance companies, they would have agreements as to how they would pay to ensure that they are keeping their end of the bargain. That would be covered by the agreements with the insurance company. In the cases of "self-insured," that insurance company could also appear on the scene and has in this particular case, but they are there just to administer. It is the money of the company. They are just there administering it, and it creates the false impression for the employee that there is an insurance company behind all of this doing more than just administering.
In fact, the Nortel employees were unaware of that for many years; that is, they did not have the insurance company fully funded to deal with the plan. The insurance company was only administering the plan.
Senator Massicotte: I do not see any problems. We have other presentations coming up. Some people mentioned there would be some funding problems. I have been involved in business for a long time. I appreciate there will be some small trickle of funding problems. I do not think it is a serious issue. I think what you are proposing has immense merit. If I have any reservation, I am scared that it will not attend to most of the problems that occur. In other words, maybe there should be an issue about forcing companies like they do with other deductions in a segregation account, but your bill does not deal with that. I think your proposed legislation has much merit. For future legislation, maybe more should be done because I am scared that it will not resolve anything for the SMEs 80 per cent of the time. For the big ones, yes; but it is a good first step.
Senator Eggleton: I agree 100 per cent that it is a first step. More needs to be done. I pointed out that other countries do indeed do more. The United States, the United Kingdom, Germany, many of these other countries that are major trading partners, have done more in many respects. Even on the bankruptcy level, 34 out of those 54 countries have a higher status than what we do. We have unsecured creditors. They have at least preferred. Many of them have super- priority.
Senator Massicotte: Ahead of the secured creditors?
Senator Eggleton: Yes; some of them do. I am not even suggesting that in this proposed legislation.
Senator Massicotte: I appreciate that.
[Translation]
The Deputy Chair: You could suggest an amendment if you do not think it will be protected.
[English]
Senator Kochhar: Can this fund be made a secure, insurable segregated fund and be imposed on the company. Is there no mechanism to impose on the company to segregate that fund so that when the time comes then these funds are available?
Senator Eggleton: It does in the case of my bill. In the case of a bankruptcy proceeding or a proceeding under the Companies' Creditors Arrangement Act, it provides for that kind of a fund to be put in place.
Senator Kochhar: Is that before bankruptcy?
Senator Eggleton: The CCAA provides for that. If you mean as a regular operating business, no, and I think we need to do that kind of thing.
Senator Kochhar: If you do that, your bill becomes redundant; you do not need the proposed amendments in the bill.
Senator Eggleton: It would not help any of the Nortel people. If you want to help the Nortel people, this is the way to go.
Senator Greene: In the settlement agreement, I believe there is a clause that insulates the agreement from changes to bankruptcy laws and so forth. If that is the case, how does your bill get around the settlement agreement?
Senator Eggleton: The bill has clause 8. Clause 8 is a transitional clause and it reads:
For greater certainty, this Act applies to a debtor in respect of whom proceedings under the Bankruptcy and Insolvency Act or under the Companies' Creditors Arrangement Act have commenced before the coming into force of this section.
Nortel finds itself in that condition.
Senator Greene: Yes, but that does not necessarily help anyone in Nortel, because there must be a subsequent ruling that would enable your bill to affect the settlement agreement.
Senator Eggleton: When the bill was drafted, yes.
Senator Greene: It would be by a court or some other body.
Senator Eggleton: When the bill was drafted, this was considered to be sufficient to cover the situation. The bill was drafted in the spring. Since then, the decision in the court in terms of the settlement matter has been put in place. That leaves open some questions about the effectiveness of this particular section. It can still be argued that it is quite effective. If you ask different lawyers, you will get different opinions.
I suggest a few additional words would cover off what has happened between the drafting and introduction of the bill and where we are today. Those additional words would be: "notwithstanding any judgment or order by any court during those proceedings."
That would make it abundantly clear. I think what is in there now covers it, but if we want to make it abundantly clear that it covers the judgment that has come down since, I would propose the addition of those additional words.
Senator Greene: It is likely that even with those additional words you would end up in court.
Senator Eggleton: That is a clear instruction from the Parliament of Canada. It covers the condition that the Nortel people find themselves in, and it does cover the current proceedings. Even with those few additional words to make it absolutely clear, I think it would be helpful.
Senator Greene: Perhaps, but it still might not work.
Senator Gerstein: As a supplementary to Senator Greene's question, Senator Eggleton, as I understand it, I do not know if your bill would change the legal entitlements of former Nortel employees.
Let me start by saying we all sympathize with Nortel employees. If your bill were passed, could it not result in litigation? You said yourself that different lawyers have different opinions that could tie up the court-ordered settlements of former Nortel employees for years. In fact, is there not the possibility that your bill might actually make matters worse for the very people that you are trying to help?
Senator Eggleton: No, I do not believe that at all. In this country, I suppose anyone can try to litigate anything, but we have talked with lawyers who are experts in this area. The wording that is in the original bill is the wording that we were advised would work. Since there has been some advancement of this whole issue since the bill was introduced, I believe those additional words would create greater certainty.
Senator Gerstein: However, you are not suggesting there might not be litigation.
Senator Eggleton: There is always that possibility.
Senator Gerstein: Litigation could tie it up for years.
Senator Eggleton: I do not believe so, but I know one thing for sure. What you are talking about is maybe this and maybe that, and we know that in a legal context, people can easily use those kinds of arguments, but one thing we know for sure is that time is running out for these people. If they do not get this by the end of the year, then they are in very deep trouble.
Senator Gerstein: I understand, but I want to pursue this for a moment. Are you not acknowledging that it may be that and it may be this, and in fact it could put the whole settlement into litigation, which could tie up payments to former Nortel employees for years and years?
Senator Eggleton: No, I do not believe so.
Senator Gerstein: That is including those not on long-term disability.
Senator Eggleton: No, I do not believe so. This only deals with long-term disability.
Senator Gerstein: Yes, but if you are opening up the fact that the government is legislating something new, people are not just going to say, "Okay, that is what it is, we will pay it." Someone will litigate it, and it will not be paid until the litigation runs out its term, I would assume. I am not a lawyer. I am asking the question, and I have to ask whether it could put the people that we are trying to help in a worse position than they are in today.
Senator Eggleton: No, I do not believe so. They cannot be in a worse position than they are in today. It is all running out by the end of the year.
If you are concerned about the condition of these people now and if you do not think this is the best solution, what is your solution?
Senator Gerstein: That is what we are trying to deal with.
Senator Massicotte: What is the effective date of the proposed amendment to the legislation?
Senator Eggleton: It would be effective upon passage or whenever the normal Royal Assent is given. However, clause 8, the transitional provision, deals with anything that is before the courts, which includes the Nortel matter. It has a retroactivity provision in it, which is not unusual. We have passed a number of other bills in the last few years with retroactivity provisions. The world has not come apart as a result of those. I do not think it would here either.
Senator Massicotte: With the CCAA, the judge only has the discretion to deal with general creditors. You are saying that before there was a decision made by the judge, with the kind of arrangement that he accepted, and it always dealt with the general creditors. Passing this law with clause 8 automatically takes away the judge's discretion to deal with the liabilities because then the act will apply to liabilities and it takes away the authority of the judge to say, "My previous treatment of those liabilities is not affected." I think it resolves the issue, but it is complicated.
Senator Eggleton: I think it does. I point out that the judge can only make a decision based on information before him or her.
If that judgment comes into effect at the end of this year, first they will be cut off their medical benefits. On average, I am told it is about $12,000 a year. This is over and above medicare; this is $12,000 a year because of prescription drugs and many other things. These people have cancers, heart problems, a wide range of disabilities. They require a fair bit of medication and rehabilitation. They will get cut off that; that ends at the end of the year. Because there is so little money in the health and welfare trust, their income will be cut substantially, some of them down to 20 per cent of what they are getting now. Remember, what they are getting now is one-half of what they got as employees, because most of those disability plans were at the 50 per cent mark. Some of them did pay for more and got a 70 per cent provision. They are already getting one-half of what they got as an employee; now they will get less than one-half of the half. They will not be able to cope with that situation.
The stress they are under as a result of all of this is enormous. We are marching toward this deadline at the end of the year and these people are sick and they are getting sicker.
Senator Merchant: I congratulate you for bringing this bill forward. I was just reading something from the June 4 edition of the Ottawa Sun. In that edition, Scott Taylor quoted independent financial analyst Diane Urquhart's comment on Bill S-216:
If adopted by the Conservative government, it would cover the Nortel disabled.
I believe Ms. Urquhart is appearing before us tomorrow.
We desire this outcome. I think the few extra words that you suggested that you might add to clause 8 would make it almost absolutely certain. Now, it could be 50-50, but it would put certainty to it and make it more specific. I support that change; that would be a very good change to make but, generally, I support your bill.
Senator Eggleton: Thank you. For greater certainty and clarity, I think those few extra words would be helpful in clause 8 because we want this legislation to apply to the Nortel people. We want it to apply in other cases, but I hope that before long we will have some action in some other areas as well.
I hope that we have some other action as happens in many other countries. I hope we have something that prevents an issue from going to the Bankruptcy Act or the CCAA and that it can be dealt with beforehand by some sort of regulation and paying into a fund. They do that in many other countries. The U.K. does it. The U.S. has different provisions that protect people. We do not have anything. They are listed as unsecured creditors; they are down there with the junk bond holders. These people are employees.
The government brought the Wage-Earners Protection Act in 2007. That act deals with current assets, which are liquid assets. It recognizes that pension funds and wages should go up into super-priority status.
This is a government bill, the Wage-Earners Protection Act of 2007. It already has moved protection of pension plans and wages up into a super-priority category. I have to quickly emphasize here this is relevant to current assets as opposed to all assets.
However, the government has recognized that what employees should get should be moved up in status. That is an even higher status than what I am suggesting here — it is super-priority. That is up there with the government, the CRA and everyone else in government.
All I am suggesting here is that this is advanced a little further. There will be a final disposition of the $6 billion of assets of Nortel. In the spirit of what the government already produced in that act in 2007, I think this is the way to go at this point; but come in with some other things later that will protect people in future so it will not get to this point.
However, this is the only way. With the addition of those additional words, Senator Merchant, I think we can protect Nortel people and any other company that might be in this immediate situation before anything else is brought in.
Senator Ringuette: I would like to make a comment concerning the issue of litigation. Yesterday in the Finance Committee, we were studying the second budget bill, Bill C-47. The witnesses before us from the Department of Finance indicated to us that part of the legislation that they wanted to pass was to contravene a piece of litigation against the Income Tax Act. Bill C-47 asks the Senate of Canada to remove that litigation from going further.
Concerning clarification, I agree that maybe an amendment to the current bill would make it definite — no grey area at all — concerning where the funds should go.
In order for this committee to understand clearly, what is the deadline for Parliament to pass this bill so the funds would be allotted in the bankruptcy proceedings?
Senator Eggleton: The end of this year. When we talk about Parliament, I am talking about both houses of Parliament. We are still in the house of first consideration and we have not yet gone back to the Senate with a bill for third reading. Then there is the House of Commons. I know some members of the government have expressed some scepticism about the bill in some respects, but to my knowledge, they have not taken a definitive position on this proposed legislation. I hope they will take a position. If they decide to support it, it could be moved through the House of Commons rather quickly.
When I say the end of the year, the house does not meet past the middle of December, and here we are at November 17. There is not much time in a practical sense to get this done. I appeal to all members of the Senate and to the government to help move this through expeditiously.
Senator Ringuette: Absolutely. I totally agree with you that it has been held for too long already concerning the daily anxieties that the people are going through.
Senator Eggleton: I introduced this bill on March 25, and it got second reading on June 17. Here we are on November 17, having first consideration at a committee.
Senator Ringuette: The taxpayers of Canada, through the current government, have bought Nortel's assets, a building here in Ottawa, to the tune of $216 million, I think.
Senator Eggleton: I do not have the figure before me, but I think it was somewhere around that neighbourhood, yes.
Senator Ringuette: If we do not pass this bill, how much of that cash will go to the disabled?
Senator Eggleton: I do not know that any of it will. I think Judy Sgro asked the government to take some of the money it is paying to Nortel and have Nortel make an agreement with respect to some of that money being put into the health and welfare trust. However, to my knowledge, that has not been done.
Senator Ringuette: So there has been no movement in that direction from the government.
Senator Eggleton: As far as I know, it was just a straight purchase of property.
Senator Ringuette: For a company that is bankrupt to have paid seven of its top executives $8 million — in bonuses only, never mind salaries — are they living in la-la land?
Senator Harb: They were running the company into the ground.
Senator Ringuette: They were running the company into the ground, while providing security for themselves. That security should have gone to the employees. They were also paying themselves bonuses.
Enough is enough. If I were a court judge looking at this bankruptcy issue, and seeing that the top executives were paying themselves $8 million in bonuses while there are people that need medication, and do not know one day from the other if they will be able to buy it, it is just — anyway, enough is enough.
Senator Eggleton: May I make a comment?
Senator Ringuette: I certainly have an opinion on the matter.
Senator Eggleton: I cannot resist a slight comment. I find that absolutely disgusting myself, and it is a characteristic of what we have seen in the last few years in terms of the financial meltdown, particularly south of the border.
To have people suffering when these kinds of bonuses are paid out, surely, we have to hold the company to account. Why would we now say, "Not only will you get away with that, but, at the same time, we will put taxpayers' money in to support these people through the social welfare system as opposed to holding you responsible"? We need to hold them responsible. This bill does not cost the taxpayer money.
Senator Ringuette: Thank you for caring, first of all, and having the patience to carry through with this bill.
Senator Moore: Thank you senator, for being here and for your initiative to try to make the act better for all people caught in this, including the Nortel employees.
In answer to one of the questions, you mentioned earlier that Nortel has assets totalling $6 billion. Do you have a copy of the brief from the Library of Parliament? Do you have a copy of that? Could you go to page 3, please?
Senator Eggleton: Yes, I have it here.
Senator Moore: On the second paragraph, senator, it says, with respect to the health and welfare trust assets that, in 2009, the value of all cash and investments within that health and welfare trust was calculated to be $80 million. The present value of the benefits owed by Nortel Networks to its employees as of December 31, 2010 is calculated to be $548.2 million, with $112.5 million owed to long-term disability beneficiaries.
Do you have any information in terms of your research and your work with the Nortel employees as to what those numbers are? Are those numbers accurate?
Senator Eggleton: I think they are fairly accurate — $80 million, $78 million, that is very close. I think the numbers are relatively close in terms of the trust.
As you point out, the $548.2 million includes pensions; that includes all obligation they have. What pertains to Bill S-216 is the $112.5 million. Some of that $80 million you see there is already allocated through the court judgment to go for LTD purposes, but that amounts to $26 million, so there is at least another $68 million, by my calculation. That would be a little bit more, according to the calculation by these researchers, but not an awful lot more, so to be able to acquit itself of its obligations to carry LTD benefits for employees through to age 65 years.
The Deputy Chair: The $112.5 million, if it was set aside in a trust fund, would it cover just the health benefit?
Senator Eggleton: No, it would cover just long-term disability obligations. It would include their health benefits to the LTD.
The Deputy Chair: When the $6 billion has been collected and the assets have been sold, would the $112 million come from that pot of $6 billion?
Senator Eggleton: Yes.
The Deputy Chair: That is relatively a small percentage.
Senator Eggleton: It does not need that much, because there is already $26 million in the current trust that is allocated for LTD purposes. You could take the $112.5 million, subtract the $26 million, and $86 million is needed out of the $6 billion.
The Deputy Chair: It is important that we know the scope of what we are talking about.
Senator Eggleton: When you compare the two numbers, it seems like it is not a horrendous amount, but it is a world of difference to those people who are suffering.
The Deputy Chair: For the individuals, I agree with you. The problem is when we compare the assets that will have to be realized. At the same time, I agree with my colleagues that if we secure the bill, we ensure that this will be clear enough.
Have you consulted a legal adviser inside and outside of Parliament?
Senator Eggleton: Yes, we started with legal advice from outside, people that are knowledgeable and expert in the field. The final drafting of the bill was done with our in-house lawyers in the Library of Parliament.
Senator Moore: I will raise one other issue because it will probably be raised sometime over the next few days, either today or tomorrow, and that is the possibility of retroactivity. Do you have anything to say about that with regard to how it may or may not be impacted under Bill S-216?
Senator Eggleton: The only retroactivity would be on proceedings that are still in front of the court, namely, proceedings that have not been finalized. This bill would not go back and catch the Massey Combines Corporation of 1988 or anyone like that. The wording of it is such that it could deal only with matters that are still in front of the court, that have not been finalized.
There has been a judgment made with respect to the welfare trust fund in this case. That is the judgment we have referred to, but all matters relevant to the bankruptcy proceedings and the liquidation are not yet finished.
It is still in a state of processing, and that is what is caught by this proposed legislation. That is the only nature of the retroactivity, and as far as I know, it is only Nortel that clause 8 would cover.
Senator Greene: Retroactivity continues to trouble me because, as you say, it might be the only retroactivity. However, the agreement itself says no to retroactivity.
Senator Eggleton: Which agreement is that?
Senator Greene: The agreement, the —
The Deputy Chair: [inaudible]
Senator Greene: That spells trouble for your bill because they have taken into account that there might be in future a bill like yours, and they have all agreed that it should not apply.
Senator Eggleton: No, I am sorry, that is not the case. Parliament is supreme, and if Parliament passes this legislation, just as we have done in Bill C-37, which was a Citizenship Act amendment that was passed a couple of years ago, and in Bill C-33, the War Veterans Allowance Act. We allowed much longer retroactivity there. With Bill S-7, there is retroactivity, and it was something just dealt with in the spring. There are retroactive provisions in other bills.
Senator Greene: There are, but in this case, I am sure where there are large amounts of money at stake and major financial institutions at play, we will wind up in the courts over your bill.
Senator Eggleton: It is possible to wind up in the courts on anything you do these days, but I do not think so. As I just illustrated a few minutes ago, it is not a large sum of money.
Senator Greene: It will tie up all the other money.
Senator Eggleton: No, it does not need to do that. It would not take long for the provisions of this bill to be implemented by the trustee to put it into effect. It would not do that. It would have very little impact. Studies done here and studies done in Australia have indicated that the impacts on the markets, for example, are minute. They are less than one-half of 1 per cent in any given case. It will not have a major impact on anything other than these people. It will give them more justice.
Though I have not found one, if there is a better idea that will help the Nortel people in the short run, and help other people in the long run, then I would love to know about it. However, I have gone over this with lawyers and I believe it can work. If you ask other lawyers' opinions, though, you might get different opinions.
The Deputy Chair: You might provide us with some jurisprudence saying that a court order is superseding a piece of legislation for Parliament, but I have no knowledge of that in my province. It might be elsewhere. However, we are ready to receive documentation.
Senator Greene: [inaudible]
The Deputy Chair: Sorry.
Senator Harb: Thank you very much, Senator Eggleton, for taking up this issue.
You indicated that the actual amount is really not that much because it is the difference between the $80 million and the $112 million. You stressed the importance at this committee that the Senate should pass this bill as quickly as possible so Parliament can deal with it before the deadlines. A court issue dealt with the agreement but, nonetheless, the people who are on long-term disability came out on the short end of the stick.
Nortel used to fund these activities through their day-to-day operations. Somehow, for whatever reason, they changed and started to fund it through the health and welfare trust.
I have a couple of questions for you. First, let us say that tomorrow the administration or the management of Nortel want to make a wise decision and they want to set aside that shortfall. In your view, do they have the necessary resources now to do it out of the $6 billion in assets?
Senator Eggleton: The financial resources are there. I doubt the capability for them to do is there. They are under court action with respect to the Companies' Creditors Arrangement Act. They are before the court, so they are not free to just do anything they want. It has to be settled within the court's jurisdiction.
Senator Harb: However, the management itself has not pronounced itself one way or the other on the issue of funding, has it?
Senator Ringuette: Only on the issue of bonuses.
Senator Eggleton: I have not heard.
Senator Harb: Bonuses. Okay.
Do you have wording for the amendment you have suggested that you could table?
Senator Eggleton: Yes, I will table it. The wording you see there in the bill now would be left in. You would just add at the end the following few words "and notwithstanding any judgment or order by any court during those proceedings." That makes it abundantly clear.
Senator Harb: Thank you.
Senator Eggleton: I will circulate that, but I will do it slowly if you wish to write it down.
Simply put a comma after the last word in there now and then put in the words "and notwithstanding any judgment or order by any court during those proceedings."
Senator Ringuette: Could you please put those words into a formal amendment?
Senator Eggleton: Yes, I will do that. When I am finished here, I have the great honour to move over there, wherever there is a seat, because I will be a substitute member of the committee today and tomorrow.
Senator Ringuette: Thank you.
Senator Harb: Thank you very much. You mentioned something quite interesting. Either you pay through the fund that is available now and/or you have to pay through the social welfare system now.
Senator Ringuette: Absolutely.
Senator Harb: It is to the net benefit of the government, Parliament and the people of Canada to see this issue being settled through the existing fund that is already on the table.
Senator Eggleton: The existing fund does not have sufficient funds in it to cover this.
Senator Harb: I mean the $6 billion fund.
Senator Eggleton: Right. However, there are sufficient assets, and the assets are to be liquidated. Therefore, there are sufficient assets to be able to put the amount of money needed to be able to pay for the benefits for these people until age 65. That is what my bill provides for them. However, they need the legislative mechanism to get there, and that is what this bill does.
Senator Harb: Thank you.
The Deputy Chair: I should make a small remark about the system in Quebec to receive welfare. Normally they will take into account your personal assets, your car, your house and everything, and you have to become poor before you receive it. Therefore, you will effectively have to sell your house and you have to dispose of your car and everything before you get to the point to say that it might take some time but you will get there, especially if you are 55. You will not have enough income, anyway, to last until you receive your pension.
In Quebec we have invalidity pension that you can start receiving at 60, and even earlier if you are totally disabled. Therefore, there is the welfare side of it and the disability pension. I do not know the system in the rest of the country because it is a different system in every province.
Senator Ringuette: It works the same.
The Deputy Chair: However, everything is administered at the local level. We do not have any witnesses from the provinces but it is not only the federal government; it is mostly the provincial governments that would have to take the bill for these individuals.
It is important that we clarify that we would just discharge our responsibility and send it to the provinces. That is where I have some problems.
Senator Eggleton: We should also bear in mind, though, that we do pick up a big chunk of the social welfare system and the Canada pension disability plan through the transfer payments to the provinces. There is a lot of federal money that would still be required. However, the condition you say exists in the Province of Quebec is very similar in Ontario and very similar in most places across the country.
If you read these impact statements, many of these people own their own properties and they are talking about the fact that they will have to sell them. Who wants to go on welfare? Who wants to have to get rid of all their assets and use the social assistance system? Yet that is what they are faced with if we do not do something now and do it by the end of the year; time is running out.
The Deputy Chair: I have two minutes for you, Senator Massicotte. I know you are always short.
Senator Massicotte: Very short.
While you are debating what amendment you want to make to clause 8, you may want to consider the fact that, if you look at the existing wording, it says "for greater certainty it applies to any proceedings which have commenced." "Commenced" means last [inaudible] years. I would be worried the judge will say it is too unclear. "Commenced" means millions and millions of CCAAs, and they will say, "It is unclear — to hell with it, we will not pass the amendment."
I think you have to propose an amendment that says "commenced" and say the words you said earlier: Still in delivery. Do not use process because this thing has been processed, but I think you will have to come up with wording to make it very clear, such as "commenced and still outstanding" of sorts. Otherwise, even if it is finalized, it is still "commenced."
Senator Eggleton: I am not a lawyer and I took these words from both the lawyer outside as well as our inside lawyers. I am open to any amendment that would make it absolutely clear that this applies to the proceedings now ongoing with respect to Nortel.
However, I am not a lawyer and I think the advice of legal counsel is what is important here. I am certainly told by legal counsel in the know that this is the wording that would apply.
Senator Massicotte: Bankruptcy laws?
Senator Eggleton: Yes, absolutely.
Senator Massicotte: Well, if you are confident.
Senator Eggleton: As best I can be. I am not a lawyer.
Senator Massicotte: I would hate to see this passed and that it never resolved anything.
Senator Eggleton: Some of the experts who are coming might be lawyers. You could ask them.
[Translation]
The Deputy Chair: Thank you, Senator Eggleton. You have done very important work. I think all of my colleagues have shown that they are interested in helping these individuals who had the misfortune, first of all, of falling ill, of becoming disabled, and then of working for a company that goes under. This is a lot for one person to bear. We are confident that we will find a solution by the time we wrap up our work. Between now and tomorrow, we will have an opportunity to consult with our experts and come up with some amendments to the wording so as to address any uncertainty in the bill.
[English]
Bill Randle, Assistant General Counsel and Foreign Bank Secretary, Canadian Bankers Association: Good afternoon. My name is Bill Randle, and I am the Assistant General Counsel at the Canadian Bankers Association. With me today is Bill Kennedy, Vice President, Special Loans with the National Bank of Canada. We appreciate the opportunity to appear before the committee today to discuss Bill S-216.
We recognize and sympathize with the problems created for individuals who may lose benefits, such as long-term disability payments, when their employer becomes bankrupt. This is a serious problem. We applaud the parliamentarians who are championing the efforts to find solutions, including Senator Eggleton.
We are here today to offer our views on Bill S-216 from the perspective of participants in the financial marketplace and to provide, for your consideration, our thoughts on what impacts Bill S-216 could have on the economy in the future.
As you know, Bill S-216 aims to ensure that long-term disability benefits are available by granting preferred status in bankruptcy to such benefits by placing them before other unsecured creditors. We understand the motivation behind this bill and appreciate the efforts that have been made to find a solution to the problem. Our concern, however, is that the solution that has been proposed might very well prove to be ineffective in providing relief to beneficiaries, and it might have serious negative consequences to the broader economy. In effect, the bill uses bankruptcy legislation to address a benefits funding issue. It is our view that this approach will cause more problems than it will solve.
A delicate balance has been achieved over the years in the orders of priority in bankruptcy legislation. This delicate balance aims to ensure that the rights of various creditors can be met to the degree possible while also ensuring that Canadian businesses are able to have access to affordable credit in the future. Changes to the order or priority in bankruptcy threaten to undermine this delicate balance with ripple effects across the economy.
This bill would have the result of reducing the amount that some creditors would otherwise hope to recover in a bankruptcy. In the case of investors in a Canadian business who purchase unsecured financial instruments, such as bonds, a change in the order of priority increases the risk that they will not recoup their investment in the event of a company's failure. This increased risk means that investors will be more reluctant to buy a company's bonds, in our view, depriving it of financing, or will do so only if there was a higher risk premium on the bonds, making financing more expensive for the company. In effect, higher risk means increased financing costs that in turn will inhibit some businesses from effectively financing their operations or expansions. Ultimately, this leads to reduced economic growth and job creation.
Beyond financial markets and the cost to businesses of raising funds, granting a preferred claim status would have other consequences, including the following: Companies that offer long-term disability insurance benefits would find themselves at a competitive disadvantage to companies without such benefits or possibly to international competitors in other jurisdictions. If the costs are prohibitive, those employees may choose to stop offering those benefits to employees.
Other unsecured creditors such as suppliers, many of them small businesses, would also be faced with a reduced likelihood of recovering any amounts they are due, which may put pressure on their own finances.
Finally, by disrupting the bond market, this measure could have a detrimental effect on the investments and retirement savings of millions of Canadians. Corporate bonds are widely held by individual investors, private pension plans and institutional investors.
I have mentioned "balance" a few times in these remarks, and of course, the question is how to find the appropriate balance in addressing the problem of unfunded LTD benefits without damaging the ability of companies from raising funds in the future. In our view, amendments to bankruptcy and insolvency statutes are not appropriate solutions and will achieve unbalanced results that will negatively impact the economy in the future. We urge this committee, parliamentarians and the government to seek alternative approaches to the problem of unfunded LTD benefits, and we would be interested in helping to find that solution.
John P. Farrell, Executive Director, Federally Regulated Employers — Transportation and Communication (FETCO): I appreciate the opportunity to meet with the committee today.
FETCO consists of most of the major employers in the transportation and communications sectors coming under federal jurisdiction. We employ approximately 600,000 workers.
First, I wish to acknowledge that the Nortel bankruptcy is an extremely sad affair, leaving disabled employees without long-term disability benefits and certain health care benefits. This is very unfortunate indeed.
I also wish to recognize the intentions of the Honourable Senator Eggleton for advancing a legislative proposal to mitigate the hardship for disabled employees who may suffer a loss of employer sponsored long-term disability health care or health care benefits in the unfortunate event of a bankruptcy of a corporation.
The concerns of employers, however, and the perspective that I want to convey to the senators today, is that this approach proposed by Senator Eggleton in Bill S-216 will do more harm in the aggregate than good.
There is little doubt that the genesis of this proposed legislation emanates from the extremely effective lobby of the Nortel employees. In a sense, a bill is being proposed that will purport to assist the Nortel employees, but is not necessarily the kind of legislation that will be beneficial to all employees in Canada.
Employers believe the proposed legislation is flawed. It attempts to prescribe a remedy through amendments to the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act that will have some significant harmful side effects. Long-term disability benefits are discretionary programs provided by employers to employees or negotiated bilaterally with the unions representing employees.
There are a wide variety of plans that may be adopted by different employers and employee representatives and there are many differences in the structure of plans. There are differences in terms of the definition of disability and differences in terms of the percentage of wages that are covered by a long-term disability plan. They may be a percentage or a fixed amount. The length of the benefit period could vary from two years to age 65, so there is a whole array of options and some LTD plans are integrated with other disability benefits. As well, the qualifying periods under which employees will qualify for benefits differ.
Accordingly, there are a wide variety of plan design possibilities and not just one standard formula to age 65. This seems to have been misunderstood by those who have drafted Bill S-216. LTD benefits are relatively costly because they provide a portion of employment income replacement in the event of disability and potentially for long periods of time, sometimes as long as to age 65 years.
While it must be noted that there are a variety of LTD formulas, LTD plans are risky and therefore costly to insure. The cost of the benefit in the event of a claim is high, and the costs of administering the plans over long periods of time are also very costly relative to other benefits.
The majority of plans are insured by insurance carries, however, some plans are self-insured by sponsoring employers. In such cases insurance companies are often hired to administer the plan because they have the expertise to do so. Self- insured long-term disability plans permit substantial cost savings to sponsors because they are not required to provide risk premium to insurance companies, nor are they required to put aside reserves that are also included as part of the insurance arrangement.
There is an underlying assumption, however, in the case of self-insured long-term disability plans that the corporation will continue to be a going concern. This was unfortunately not the case at Nortel. In bankruptcy, wages and other employee benefits, including self-insured long-term disability plans, stop once the company ceases to exist. They are treated like other benefits in the case of self-insured plans.
If Nortel had not clearly communicated to employees that their plan was self-insured, it is indeed most unfortunate. It should not have been a surprise to the employees that if the company went bankrupt the self-insured portion of the long-term disability provisions would not be provided.
In any given industry, not all companies provide LTD or related health care benefits. Consequently, the additional costs that would be imposed by Bill S-216 on employers to provide company paid, self-insured long-term disability and health benefits, as contrasted with those companies that do not provide LTD benefits, would be unfair. Bill S-216 would create an additional government imposed cost on certain employers to provide LTD coverage for their employees, while other competitors in the same industry would not incur those same costs.
Trying to resolve the problems the disabled Nortel employees face is made exponentially more difficult with the solution that encompasses changes to the Bankruptcy and Insolvency Act and the CCAA. The approach of creating a fund derived from assets that would otherwise be available to creditors would have negative implications for existing creditors. This is obvious. More important, it would create an adverse impact on companies that are trying to raise capital needed for restructuring, needed to keep operating, needed to emerge from CCAA, needed to avoid bankruptcy, needed to live to see another day, and also needed to provide employment on an ongoing basis.
The approach offered by Bill S-216 would also slow down, complicate and frustrate the restructuring process under the CCAA, imposing additional time delays for companies to emerge from CCAA, longer delays creating more uncertainty, and more uncertainty leads to higher costs and potentially more bankruptcies.
I wish to refer the Senate committee to a paper prepared by the Canadian Association of Insolvency and Restructuring Professionals, published on June 25 in respect of Bill S-216 and other bills currently before Parliament. I will not get into the detail of this report. This report has been tabled with this Senate committee.
I would defer further comments with respect to the effects of this matter on credit markets and so on to the remarks made by Bill Randle, but I implore you to read the document prepared by CAIRP.
I now want to talk about the effects of Bill S-216. In the case of Nortel, it is clear that fixing the hardships created by the loss in LTD benefits and certain health care benefits is rare. However, these problems should not be resolved through amendments to the BIA or the CCAA. The solution is too complicated and too costly, and causes a lot of collateral damage for other stakeholders in bankruptcy proceedings. Loss of confidence in insolvency, restructuring and bankruptcy matters will lead to more liquidations and fewer jobs.
LTD is an expensive benefit, usually only provided to employers with employee populations in excess of 1,000 employees. Many employers do not have LTD plans and it is not universally applied by all competitors in the same industry.
The harsh reality is that if employers currently providing self-insured long-term disability benefits to their employees on a voluntary basis face the prospect of significant increases in cost or increased risks associated with a decrease in the availability of credit and the ability to restructure when economic times are difficult, those companies will have to take a hard look at whether they will continue to provide long-term disability benefits in their present form. I cannot predict what any individual company would do or how they would do it, but the potential outcomes will include reductions in the current benefit formula and conversion to 100 per cent employee paid plans and termination of LTD coverage for employees who are not currently disabled.
In other words, with this bill, you are changing the structure of the long-term disability plans, and once do you that, whether we like it or not, employers will have to look at the structure of the plans they are providing to their existing employees, and many of them will decide to make changes. Additionally, certain companies that have never provided long-term disability coverage but may be considering doing so will look at the increased risks and probably not go in that direction.
There is another issue that I think I should raise with this committee. I am not sure that enough research has been done with respect to the effect of this bill on other employers in Canada. I am here representing companies in the federal jurisdiction, but I believe that there are very few employers across the country that know anything about this hearing or this issue, and they should be consulted about the effect of this issue on their corporations before a decision is taken to advance this bill.
Do senators really know what the potential total liability and impact would be for employers with self-insured LTD plans? Do you know what employers might do if faced with increased costs associated with LTD benefits that are already relatively expensive? Do you know approximately how many employees will have their current LTD benefits terminated as a result of Bill S-216? If the risks associated with LTD coverage increase when Bill S-216 becomes law, how many employees will refuse to consider LTD as a voluntary employee-paid benefit in the future?
Certainly it is important for employers and employees covered by self-insured plans to know that such plans remain in place so long as the company continues to operate as a going concern. Sadly, that was not the case for Nortel. Dealing with this type of important issue is normally considered under the employment standards legislation. This would be a much more practical approach.
Patrick Shea, Lawyer, as an individual: I would like to thank you for having me here, and I would like to say that I echo my friends on comments in terms of how tragic the Nortel situation is. I will keep my comments extremely short.
I think it is important that senators recognize that in an insolvency situation, by definition, there is not enough money to go around. Difficult discussions and policy decisions are made as to how that money will be allocated among the creditors. People make credit decisions and other decisions when they are doing business with a company based in part on the insolvency regime. For example, banks lend money to companies on the basis of where they will rank relative to other creditors. Unsecured creditors extend trade credit to companies based on where they will rank relative to other creditors.
What this piece of legislation effectively does is retroactively change the landscape for creditors that dealt with Nortel. I think a lot of people are frustrated with the management's decision in Nortel, and as I heard from one senator today, many people are frustrated with the bonuses paid to management. It is important to recognize that this bill will not hurt management and it will not claw back the money from them. What this bill will do is reallocate money to employees that would otherwise be paid to trade creditors who may themselves have employees and may themselves be in dire straits. It will be reallocated to employees that certainly need the money, but it effectively amounts to a retroactive change in the landscape.
I also have concerns that the provisions of the legislation will not actually be effective to produce the results that are intended. With the way the legislation is currently drafted, the retroactive provisions will certainly lead to some litigation, I would predict, but more importantly, other provisions of the legislation may not produce the intended result.
For example, Nortel is currently subject to proceedings under the Companies' Creditors Arrangement Act. The provisions of this bill that provide for benefits to be paid under the Companies' Creditors Arrangement Act contemplate that it be as part of a plan. It is highly unlikely that Nortel will be filing a plan. If Nortel does not file a plan, this bill will not help those employees. It is important to recognize that.
If someone were to ask me what the solution would be, I think the solution might be something along the lines of a piece of legislation that I remember learning about as a young articling student called the Abitibi Power and Paper Company Restructuring Act, a specific piece of legislation designed to deal with a specific problem and a specific company, as opposed to passing a piece of legislation of general application that is effectively aimed at a specific problem but may not solve that problem.
I am sorry to be so short and so blunt, but those are my submissions, subject to any questions.
Senator Moore: I would like to clear the decks on one issue. Thank you all for being here today. Do any of you have any relationship or have you had a relationship with Nortel Networks?
Mr. Farrell: I had a relationship with Nortel Networks several years ago.
Senator Moore: What was your relationship, Mr. Farrell?
Mr. Farrell: I coordinate collective bargaining for various companies in Eastern Canada, and I have an organization that is not operating anymore, but we used to meet with companies represented by the Communications, Energy and Paperworkers Union. The role of that group was to bring those companies together to exchange information about their relationship with the union and what bargaining issues they had.
Senator Moore: You organized for employees?
Mr. Farrell: I organized for employers. My role was to bring employers together to talk about matters of mutual interest on labour relations matters.
Senator Moore: When did you cease doing that with Nortel?
Mr. Farrell: It was before they filed for bankruptcy. I would say probably 14 years ago or so.
Senator Moore: Mr. Shea, you wanted to say something?
Mr. Shea: Yes. I own Nortel shares, and I would be happy to sell them to any of you who want them right now in order to get rid of my conflict. In seriousness, I act for a number of unsecured creditors of Nortel in the CCAA proceedings.
Senator Moore: As legal counsel?
Mr. Shea: As legal counsel.
Senator Moore: Who would be competing against these people if this bill went through?
Mr. Shea: In terms of the impact on my clients of this bill going through, given the money involved, it would not be significant. I do act for creditors who would compete with these people that right now, outside of this bill, are on an equal playing field with them. If the bill is passed, my clients would be subordinated to them.
Senator Moore: Mr. Randle and Mr. Kennedy, you have no interest with Nortel Networks?
Bill Kennedy, Vice President, Special Loans, Canadian Bankers Association: To my knowledge, no. There is no claim that has come across my desk for Nortel.
Senator Ringuette: I think you were here earlier when it was indicated that there are quite a few countries, 34 out of 54, that provide protection with regard to employee benefits in the case of bankruptcy, whether it is through LTD insurance or through pension funds.
Both of your comments respecting competitiveness are actually irrelevant in this situation. Take for example one of the 34 countries; the U.S. receives 80 per cent of our exports. The United States has an order that their government must guarantee against bankruptcy with LTD plans and pension funds. The United States is our neighbour and a big competitor. I think many of the Canadian banks have financial institutions in the United Kingdom, recently bought. The U.K. also has plans that guarantee in case of bankruptcy. The argument that both of you have put forth concerning the competitiveness is, from my perspective, not relevant to this bill.
One of the big questions I have is in regard to assessing risk. Mr. Randle and Mr. Kennedy you brought forward the issue of assessing risk concerning the bond market and so forth. We have seen in the last few years quite a lot of junk bonds, and I do not know how the Canadian banks assess them. Nevertheless, in your risk assessment, what is the ranking for corporate governance and corporate management?
Mr. Kennedy: Thank you for the question. I work in the risk management business. As you know, all banks are very concerned about risks and they pay great attention to this.
Senator Ringuette: They pay a lot of attention to interest also.
Mr. Kennedy: Right.
Senator Ringuette: Yes.
Mr. Kennedy: Let us take commercial paper, for instance, where a large corporation wants to issue commercial paper to finance short-term working capital needs for 30-day periods. In order to go to the market to sell that debt, the corporation will need a bank to provide a liquidity line, essentially, probably dollar for dollar. If the corporation needs to raise $1 billion or $100 million of short-term money, it will go to a broker and issue a prospectus, but it will need the bank to provide a short-term analysis.
To get that commercial paper, they get the paper rated; however, to get the bank line, the backup liquidity line, the bank will conduct its own risk analysis. The $100 million that they want to issue will be unsecured on the balance sheet, and if it gets drawn on, that is where the bank would be; it would be $100 million unsecured. They will do the analysis of where that ranks in relation to all the other creditors. All the unsecured creditors, in essence, except for the priorities that exist under the Bankruptcy and Insolvency Act today, if there were no secured debt, we would all rank equally, or pari passu, as we say.
If we are now making a preferred creditor status of some of those unsecured creditors, where we rank equally — we shared in the pot before, but now they will take priority by being a preferred creditor — that changes the risk analysis. Depending on the risk analysis that you do, banks may not want to lend as much money, or bondholders may not want to issue as many bonds, or the price could go up.
Senator Ringuette: I appreciate, Mr. Kennedy, your explanation of how the system works in issuing commercial paper. However, my specific question was in regard to your risk analysis. Where does corporate governance and corporate management reside?
Mr. Kennedy: Right at the top. Any lender will tell you that when they are assessing risk, they also look at balance sheet, but they look at the capability and quality of management.
Senator Ringuette: Capability and quality of management is one of the top 10, top five.
Mr. Kennedy: Right up at the top.
Senator Ringuette: It is the number one issue in regard to the issuing of commercial papers.
Senator Oliver: Plus the balance sheet.
Senator Ringuette: That is not the number one, Senator Oliver. Number one is corporate governance and management.
Mr. Kennedy: We have an old saying. It is the three Cs: collateral, capacity, and the overall management quality.
Senator Ringuette: In your experience in assessing risk and in the issuing of commercial papers, how many bonds could a company sell if its corporate governance and its corporate management are in the low percentile in your risk analysis? Where does the bankruptcy risk factor into the top ranking?
Nevertheless, my basic question is the following: In regard to bankruptcy risk — which is, I hope, in the top five of your risk analysis items; and your number one, you have already said, is corporate management and corporate governance — in your experience, a corporation that has these two extremely low values, in regard to your assessment, how could they ever get out and have bonds issued?
Mr. Kennedy: That is a good question, but each file is fact specific. Without the absolute facts, I cannot give you a definitive answer.
Senator Ringuette: Exactly what I thought, Mr. Kennedy. Concerning the Canadian Bankers Association comments, securing the LTD benefits and the pension plans of corporations is not a higher risk factor concerning the interest rate that they will be paying on loans, nor is it a major factor concerning the issuance of bonds for their cash flow. Thank you very much.
Senator Harb: That was not a question.
Senator Massicotte: I will make this comment, but I am trying to figure out the importance of this issue. There is no question, when you deal with bankruptcy law, that you are basically taking a set quantum of monies and saying that most fairly we will allocate it. Someone will be short, because obviously that is why you are in bankruptcy. I appreciate your comments. It is a difficult business, because basically you are favouring someone and disfavouring someone else. It is harsh. I think we, as legislators, take that responsibility seriously, and we intend to do so. That is why we are here today.
I will also make this comment: I have been a senator for seven or eight years and I have dealt with the bankruptcy act. We have amended that act five or six times. I must say that every time, we hear a speech about the world will fall apart if we make the amendment. I will not be intimidated by your comments, although I know you are sincere about them. Every time it is a major disaster, and Canada is still one of the richest countries in the world, despite our having made significant amendments. We do not want to do something that hampers our country and the wellness of our citizens.
If we make this amendment, how will it impair the fairness issue and the economic growth? How big is this one? I can appreciate that you are taking unsecured creditors and placing them higher. You are favouring someone. We all rationalize, but there has been a world trend, including in Canada, where, if you look at the last 20 years, employees and their claims have become favourites. We have moved up around the world to give them priority and to give them a bit more special attention. We have done so with legislation. There is that movement.
Will this impair the creation of jobs or impair economic growth? That is important. We are talking about some employees getting shafted, but I would care if this impeded significantly the creation of new jobs, because that is equally worrisome.
Maybe someone can help me in that regard. On this issue, when you look at the liabilities — and let us talk about Nortel — can you give me a sense of how much is the unsecured claim of the disability claim? What is that number versus the number of the total unsecured claims and the total debts of the company? In other words, if it is 50 per cent, I will agree with you. If you start changing that percentage, though, you may start affecting the credit markets. Can anyone help me? Do you know the answer? What is the amount of the unsecured liability claims as a quantum versus the amount of the total claims of Nortel?
Mr. Shea: I do not know the specific answer to your question, but I do not think that changing the situation for Nortel, for example giving in to the specific Nortel situation, passing some legislation to provide priority or somehow facilitating a negotiated agreement where priority would be provided, is necessarily the issue. The issue is, first, the retroactive nature to do it; and, second, the go-forward effect of this on other companies.
I am not a big proponent of making arguments that this will cause our credit markets to collapse. The practical reality is that the changes you make to the insolvency regime will cause people to make different decisions. It will not cause the whole system to collapse.
For example, if a bank is looking at a situation, and I will speculate, where this legislation is passed, it will look at companies with self-funded long-term disability plans a bit differently than looking at companies that have insured long-term disability plans.
I will give you a real example that I have encountered where, when you have the priority that was created under the Wage Earner Protection Program type legislation, banks will now take out the $2,000 per employee from the borrowing base. Companies will not be able to borrow what they could borrow in the past. That may cause some companies to not be able to continue to carry on business, but maybe they should not be in business in the first place.
Senator Massicotte: I am trying to get a quantum of that. I have this legislation and, as a bank, I have to ask: How big is that number? If I were to guess — and if I remember correctly, I have employed many people in my life — it is probably 1 per cent to 2 per cent of total salaries. Depending on which business, it could be 40 per cent of revenues, or as high as 80 per cent if you are in the consulting business. Is it a big number? If it is 1 per cent or 2 per cent or 40 per cent, the bank will say, "I have a risk here." First, most banks are secured. I suspect that in your case, 80 per cent to 90 per cent of your claimants of bankruptcies are in a secured position. They are probably not unsecured. Is that accurate?
Mr. Kennedy: You are talking about two different markets, commercial versus the corporate market where you are doing unsecured commercial paper. The commercial market, where you are doing small- and medium- sized businesses, generally is secured, as you know.
Senator Massicotte: Only in the large ones is the bondholder unsecured. In my experience, most trade creditors do business with someone. They do not say, "I want to check your balance sheet. I specifically want to know the status of your disability fund." That rarely happens. Maybe large public companies and then the bondholder may worry about it if you are getting it rated; I can appreciate that aspect. However, is it a big enough issue that it will affect the ability to raise bonds and the ability for companies to be created and cause jobs? I suspect not, but I do not have the quantum.
Mr. Shea: One correction, Senator Massicotte. While the bill creates a preferred claim in the case of bankruptcy, it effectively creates a secured claim in reorganizations that would have priority over secured creditors.
Senator Massicotte: Explain that, please?
Mr. Shea: The bill contemplates that if you want to restructure, no matter where this claim would normally rank, you have to pay it. It is not a preferred claim; it becomes a priority.
Senator Massicotte: Even ahead of the secureds?
Mr. Shea: You have to pay it. You cannot restructure unless you pay this quantum.
Senator Massicotte: Is that the case?
Mr. Randle: If you look at the bill, senator, you will see that for a proposal under the BIA, or a plan, or an arrangement under the CCAA, the way we have read it — and fortunately Senator Eggleton is here —
Senator Oliver: What is the clause?
Mr. Shea: It is clause 6 of the bill, on page 3. That is the Companies' Creditors Arrangement Act.
Mr. Randle: Look at clause 3, which deals with section 60 of the BIA. You have a proposal. The court can only accept a proposal if it is satisfied that the employer can and will make payments as required under the defined basis of a disability plan.
Senator Massicotte: The CCAA, yes, but you can do a proposal under the BIA also.
Mr. Randle: Under the BIA, yes.
Mr. Shea: Under BIA proposals or the CCAA reorganizations, it becomes a super-priority claim effectively.
Senator Massicotte: I am not sure about that, but my understanding is that a proposal only deals with unsecured claims. The legislation does not allow the judge to start affecting the secureds, right? The court cannot say, "Your secureds have not been amended." It is a contractual right that they do not have the authority to do so. You can argue that they do not have the authority to deal with the disability so they have to deal with it anyway, like a secured claimant.
Mr. Randle: Mr. Shea and I are saying is that it is not clear on the wording of the bill that in a proposal situation, the court would be able to approve the proposal unless, as part of the proposal, all of the outstanding liabilities on the disability plan would be paid.
Senator Massicotte: To be specific, is that not the case for all claimants other than the unsecured? In other words, you get a list.
Mr. Randle: We are saying that the bill claims to be giving it a preferred creditor status. It has not been tested in actual action — and this is Mr. Shea's area of expertise — but I share his concern that it appears that the wording means a court can only approve a proposal if, as part of that proposal, there is full LTD.
Senator Massicotte: That is okay.
Mr. Randle: You are moving it up so that instead of getting part, they get the whole amount. Is that how you read it?
Mr. Shea: That is correct.
Senator Massicotte: That is the case for all claimants other than the unsecureds because the proposal under the BIA or the CCAA only deals with a realignment of the unsecured claims. If you take them away and put them among the 10 super-priorities or other priorities, of course you have to deal with them.
Mr. Shea: Except, in every other case where you deal with provisions like that, you are talking about amounts owing as at the date of the filing. Wage claims have to be paid in priority in a proposal, and certain pension claims, although there is an out for the pension claims. That is, amounts owing as at the filing date. This talks about future obligations that must be paid presently in order to restructure.
Senator Massicotte: Based on an actual opinion or professional opinion on what those liabilities would be?
Mr. Shea: Notwithstanding that, the company will continue on business and pay those in the ordinary course. It would be forced so the bank considering a restructuring would have to appreciate that up front someone will have to provide this company with a lot of money in order for it to restructure to carry on business.
Senator Massicotte: Obviously, you do not all share the same thing. I have tended to conclude that it will not affect the creation of new businesses because it is not such a big number relative to most companies. It will not affect materially the creation of jobs.
Mr. Shea, your argument is that this number could be big enough that it may affect successful restructurings, but how big is that number? Does anyone know the number? What are the numbers?
Mr. Randle: Mr. Shea and I are saying that it would appear on the wording of the bill that these claimants would be entitled to their total amount.
Senator Massicotte: I have no problem there. I agree with that.
Mr. Randle: However, in any proposal, all of the various creditors, including especially the unsecured creditors, make a deal so the company can continue. Clearly, it is in difficulty because its liabilities are greater than its assets, so there must be reorganization. If that goes ahead, if you are the group of long-term disability benefit claimants, there is no incentive in you to negotiate at all because if a proposal goes ahead, that proposal that appears on the wording must provide you with the full amount.
Senator Massicotte: Yes and no. It is like the pension. Whoever is representing those employees is going to say, "I have a choice. I can get fully paid disability or I can have a job." Most of the people will be interested in having a job also, so they may concede for the sake of future employment.
Mr. Shea: The statute does not allow that.
Senator Massicotte: Does anyone know the answer?
Mr. Randle: I am sorry to interrupt, senator, but the issue we have here, and again, I do not want to get into all the technicalities, is that I do not see how the wording of the bill allows that to happen because the way I read this, you cannot make that concession. There is no provision in here to allow that concession to be made.
Mr. Shea: It is different from the pension provisions, which allow the concession to be made. This bill makes it absolute. There is no ability to contract out, whereas the pension provisions that were part of the last amendments to the BIA allowed the pension provisions to contract out.
Senator Massicotte: Is that not the same for the secured creditors, though?
Mr. Shea: The secured creditors have the ability to contract out. When you talk about the notion that secured creditors cannot be impacted by the CCAA, they can be impacted by the CCAA if they agree to do it. The act does not say you have to pay secureds. It does not even say you cannot compromise them. It basically says that they have to agree to a compromise.
In this case, the bill absolutely requires the future benefits to be paid currently.
Senator Massicotte: I am trying to understand what you are saying. The secureds cannot be prejudiced in the CCAA, but they can agree for the sake of lesser monies to keep lending money or whatever.
Mr. Shea: Yes.
Senator Massicotte: Are you saying, relative to the disability fund, the liability, there is no mechanism in place that they can agree to accept lesser for the sake of future jobs?
Mr. Shea: The secured creditor can agree to fund, but the pension plan obligations, the way this bill is currently drafted, you cannot pay less than the amount. There is no provision.
Senator Massicotte: That is like the secured, but they have a decision to make. There will be negotiations with CCAA all the time. Is there a mechanism in place where they would accept less than 100 per cent for the sake of the company succeeding and surviving?
Mr. Shea: No, not in this bill.
Senator Eggleton: First, let me clarify that it is only in the Bankruptcy and Insolvency Act that this question of status comes up. It provides for preferred status, which is actually still unsecured. It is not the same as secured, but it is higher than the unsecured creditor rank.
In CCAA, the provision that was read out in the bill does force the court to ensure that the long-term disability plans are taken care of before the company can emerge from CCAA. As has been pointed out, the creditors ultimately have to get a vote on this, but the court must first impose that the company should meet its obligations. What is wrong with that? That is a natural thing to expect them to do to their employees, to acquit themselves of their obligations.
Yes, the creditors can decide not to vote for this plan, but they will look at all aspects of it. They are able to insure their losses, too. They have a bit of an advantage over the employees who are on long-term disability.
However, under CCAA there is no status suggestion, super-priority or anything else. I can understand Mr. Shea's argument. He is trying to help his clients, probably, but there is no such provision in terms of status. However, there is that provision in the bill that does force a CCAA settlement.
The banking association has made some key points: that this could affect financial markets; second, it could affect the cost of business in raising funds, i.e., interest rates. What evidence do you have that this has happened? What evidence is there to back this up? Is this just a theory, just a suspicion, just, well, anything can cost money ultimately and maybe this would too? What backs this up?
The studies I have seen indicate that this has minimal effect, a minuscule effect on markets. I have seen studies from Canada and Australia. If you added pensions, yes, you might be into a different ball game, but this is only long-term disability. I would like to know what evidence there is of this concern.
In addition, the other matter is that this could create competitive disadvantage. Senator Ringuette pointed out, and I pointed out in my remarks, that most of the OECD countries have this now. Thirty-four out of 54, that is even more than the OECD, either have preferred status or super-priority status in their bankruptcy proceedings. We have heard that countries like the United Kingdom, Germany or the United States all have different provisions, but they all have provisions that are more protective of these employees. We even hear that the current government brought in the Wage Earner Protection Program Act, in 2007. That bill deals with current assets and moved pension plans into a super- priority status.
All we are talking about is moving into the preferred status — super-priority, even above secured — into the same place as wages, for example. There are already some wages up in super-priority now and more wages in preferred. Much of this is wages for these people who are disabled. I cannot imagine what is possibly wrong with trying to move them up.
I do not understand why you would discourage other companies from getting into long-term disability plans. We are not asking them to get into the plan. We are not asking them to make commitments. What we are saying is, if you make the commitment to it, you have to do it. You should follow through.
Mr. Farrell: Can I answer the question?
Senator Eggleton: Yes, as soon as I am finished with the question. It has a lot of preamble, sorry.
I find it hard to understand why asking a company to live up to the obligations, the promises that it made, will somehow affect the markets, affect other companies wanting to get to plans like this. Where were you when the government brought in this Wage Earner Protection Program Act in 2007? Has the world fallen apart because of that?
Mr. Farrell: Every company has responsibilities to live up to its obligations. There is no doubt about that in any employer's mind. You are having this debate at the macro level about the impact of this bill on the markets and so on, but you are losing focus on what collateral damage this bill will cause in the workplaces in Canada. That means that if you are an individual employer and you are providing an array of benefits to your employees and you provide a self- insured long-term disability plan, and you see that these plans are increasing your risk as an employer, you increase costs because you may be required to insure plans that were previously self-insured. In doing so you will put at risk in a situation where you may be teetering on the edge of bankruptcy at some time and when you get into bankruptcy, dealing with these issues of sorting out who gets what and so on will take a long time. It will encumber the CCAA process.
In the total scheme of things, when you look at these issues from the employers' perspective in individual operations, they are saying our long-term disability plans may become more risky. This will make them more risky. If they become more risky, we may decide that we have to change the structure of these plans or we may never get into these plans at all if they create this amount of risk.
The practical reality is that many Canadians enjoy very handsome long-term disability benefits. If you change the risk profile of these benefits, chances are the companies will make decisions about how they deliver those benefits in the future. The net result of this will be that, in total, fewer Canadians will enjoy handsome long-term disability plans in the future than they do today.
Senator Eggleton: You are saying that companies, when they are sitting down designing these plans, say we might go into bankruptcy so we better prepare; this is not going to work very well. Wages are up there in preferred status. In fact, some wages are in super-priority claims. This is wages.
Mr. Farrell: The government enacted that legislation with respect to wages, but look at it from the standpoint of the individual corporation. If you are a corporation that provides long-term disability benefits and if your corporation is in trouble, you will look at all the ways that you can manage your affairs in an effective way. You will take a look at your array of benefits and you will decide that if certain benefits are becoming too risky, you will change the profile of those benefits. The result of that is that certain companies will change the profile of their benefits based on the increase in costs of long-term disability.
Senator Gerstein: Thank you, witnesses, for appearing before us. I would like to start by saying I am not a lawyer.
Although Bill S-216 will have general applications if passed, it is really at this moment directed specifically towards the Nortel situation and I will direct my questions on the Nortel situation.
As I understand it, Nortel and its former employees mutually agreed to a binding settlement in court. The settlement agreement, as I understand it, contains language that specifically precludes any further claims, notwithstanding any legal basis that would give their claims higher priority than claims of unsecured creditors.
In your view — and I accept the fact it may be biased, there are 101 views on this — if this bill were passed with the amendment that Senator Eggleton proposed, would it change the legal entitlements that former Nortel employees have? In addition, if this bill were passed, do you think that it could result in litigation that could tie up the court ordered entitlements of former Nortel employees?
Mr. Shea: I agree with Senator Eggleton that you can sue over anything. I also think that it would be possible to draft language that would accomplish the objective of overturning the decision of the court. I do not think Senator Eggleton's language does it, but I think it would be possible for Parliament to overturn an order of a court by passing legislation.
I do not think that would avoid litigation, and I think that litigation would end up in the Supreme Court with respect to whether the language was effective. Moreover, while this particular piece of legislation could be drafted to accomplish the objective, I do not even think it works for Nortel in the sense that Nortel is in a CCAA. There will be no plan.
The only way this legislation will work for Nortel is if someone puts the company into bankruptcy or appoints a receiver. That will take an application to the judge, and then you will get all these arguments raised as to whether the company should be put into receivership or bankrupted to trigger these rights.
I do not think Parliament has the authority to bankrupt a company, and I do not think it has the authority to appoint a receiver over a company. It can pass legislation.
Senator Gerstein: If this were challenged, which I hear in your view, biased as it is —
Mr. Shea: As biased as it is.
Senator Gerstein: In your view, you used the term that it could end up in the Supreme Court. Would it tie up the current settlement that has been made with Nortel employees?
Mr. Shea: It could, but it does not have to. I want to be fair. It would be possible to hold back sufficient funds to allow this issue to be resolved and to proceed with an interim distribution.
Senator Gerstein: That also takes time.
Mr. Shea: That would also take litigation, to be honest, because this is —
Senator Gerstein: People have different views.
Mr. Shea: Not only that, but let us be fair. The lawyers in Nortel are probably making a lot of money out of this file. No, it would not happen, senator.
Senator Moore: I was just thinking of the caution or alarm that Mr. Farrell mentioned with regard to long-term disability plans being expensive and usually only available to big companies.
On Monday of this week, Industry Canada provided a briefing document, and they say 63 per cent of the Canadian workforce, or 10.6 million workers, have some form of long-term disability coverage; that insured long-term disability plans covered 90 per cent of those with long-term disability coverage. It looks like we are well down the road.
This is the model that has been worked out, negotiated, agreed to and put in place by employers and employees — 63 per cent of the workforce. It is not like this is a brand new thing coming in that people do not know about and that could be expensive. I do not really accept all of the caution that you were expressing.
Mr. Farrell: My point, senator, is that dealing with this matter under these acts is not the appropriate place to deal with them. It could be dealt with satisfactorily through the departments of labour in the various provinces under the employment standards provisions rather than mucking up the Bankruptcy and Insolvency Act. That is the place where these issues are normally discussed and resolved to the satisfaction of companies, unions and the employees that work for companies.
Senator Oliver: All witnesses began by saying that they feel very badly for the Nortel employees who are affected, and then the Canadian Bankers Association gave the reasons why they do not like this particular piece of legislation. In the conclusion, Mr. Randle said that this bill is not the proper solution to the problem, but that his association would help us find a solution.
Mr. Randle, I am certain you have given this subject a great deal of thought. I would like to know what solution you recommend that would be appropriate in these circumstances.
Mr. Randle: I have given it some thought, but not as much as other people in our association and probably not as much as some of the senators. I think it is something that needs to be carefully looked at. As others have mentioned, although Senator Eggleton says this is not a Nortel bill and therefore it is of general application, the impact is of general application and the concerns we have raised are general concerns.
Senator Oliver: So a solution?
Mr. Randle: I think the solution is you look at the problem; you look for prevention rather than an attempted cure to address the issues that have been highlighted by these cases and others.
As others have indicated, you look at the position in the Canada Labour Code to deal with these types of plans. You could have them better regulated or insured by third parties. There are several solutions.
I am not an expert in this area. I came here because I am doing insolvency, but I am sure we could bring others, if you had hearings on this matter, to help and assist you, which is what we are trying today. We are trying to come up with a real solution that would not have the negative impact on small businesses and others that we think this bill would have.
The Deputy Chair: I must say that we appreciate that you came and gave us your opinion and honest suggestions — but not enough alternative solutions, I would say. However, I would like to tell you that we will continue on in this committee, where I am for the last 15 years.
We could bring in other legislation later. We have to deal with 350 people whose lives are almost at risk. Let us call it an emergency piece of legislation, but we will have the time afterwards.
Together with the government, we are ready to go for a long-term solution because these plans are self-insured. I do not think most of the time the employees realize the risk that have when they are under these plans. We were told that they were the exception; the rule is usually that they are financed.
I feel that we owe these people. These people have been going involved in this Nortel issue for a very long time. They have been stressed needlessly and this horrible period has had a terrible effect on many of the ex-Nortel employees. I have more than sympathy for these people. I deal with them as if they were my brothers and sisters. I do not have brothers and sisters and I feel that close to these unfortunate people.
I think we would be willing to address the question with you in 2011. At that time, we will likely find a global solution. However, in this case, we have to find a solution for these people. I congratulate my colleague for trying to address this immediate problem and find a solution for the future.
Thank you for your presence, and we will look at your testimony.
(The committee adjourned.)