45 Elizabeth II, A.D. 1997, Canada

Journals of the Senate

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Issue 66 - Appendix B

Tuesday, February 4, 1997
2:00 p.m.

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Bill C-5
An Act to amend the Bankruptcy and Insolvency Act,
the Companies' Creditors Arrangement Act
and the Income Tax Act.

Twelfth Report of the Standing Senate Committee on Banking, Trade and Commerce

Chairman
The Honourable Michael Kirby

Deputy Chairman
The Honourable W. David Angus

February 1997

TUESDAY, February 4, 1997

The Standing Committee on Banking, Trade and Commerce has the honour to present its

TWELFTH REPORT

Your Committee, to which was referred Bill C-5, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act has examined the said bill in obedience to its Order of Reference dated Thursday, October 31, 1996, and now reports the same with the following amendments:

1. Page 4, clause 2: Strike out line 8 and substitute the following:

"person occurs at the time or date".

2. Page 21, clause 30:

(a) Strike out line 4 and substitute the following:

"be just and equitable in the circumstances."

(b) Add the following after line 14:

"(18) Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this section.".

3. Page 30, clause 53: Strike out lines 7 to 9 and substitute the following:

"consumer debtor's circumstances that leads the administrator to conclude, after consultation with the debtor where practicable, that such change could jeopardize the consumer debtor's ability to meet the terms of the proposal, in writing, ".

4. Page 38, clause 65: Add after line 40 the following:

"(3) Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this section.".

5. Page 75, clause 118: Strike out line 27 and substitute the following:

"(C) for the firm's own account,".

6. Page 76, clause 118: Strike out line 6 and substitute the following:

"count, and

(iii) any investments of the securities firm in its subsidiaries that are not referred to in subparagraph (i) or (ii); and".

7. Page 84, clause 121: Strike out lines 1 to 4 and substitute the following:

"3. (1) This Act applies in respect of a debtor company or affiliated debtor companies where the total of claims, within the meaning of section 12, against the debtor company or affiliated debtor companies exceeds five million dollars.

(2) For the purposes of this Act,

(a) companies are affiliated companies if one of them is the subsidiary of the other or both are subsidiaries of the same company or each of them is controlled by the same person; and

(b) two companies affiliated with the same company at the same time are deemed to be affiliated with each other.

(3) For the purposes of this Act, a company is controlled by a person or by two or more companies if

(a) securities of the company to which are attached more than fifty per cent of the votes that may be cast to elect directors of the company are held, other than by way of security only, by or for the benefit of that person or by or for the benefit of those companies; and

(b) the votes attached to those securities are sufficient, if exercised, to elect a majority of the directors of the company.

(4) For the purposes of this Act, a company is a subsidiary of another company if

(a) it is controlled by
(i) that other company,

(ii) that other company and one or more companies each of which is controlled by that other company, or

(iii) two or more companies each of which is controlled by that other company; or

(b) it is a subsidiary of a company that is a subsidiary of that other company.".

8. Page 84, clause 122: Add after line 28 the following:

"(4) Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the debtor company shall be deemed to be a director for the purposes of this section.".

9. Page 86, clause 124: Strike out lines 21 to 30 and substitute the following:

"(4), the applicant also satisfies the court that the applicant has acted, and is acting, in good faith and with due diligence.".

10 Page 90, clause 124: Add after line 10 the following:

"(3) Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the company shall be deemed to be a director for the purposes of this section.".

11. Page 91, clause 124:

(a) Add after line 21 the following:

"(4) Where the monitor acts in good faith and takes reasonable care in preparing the report referred to in paragraph (3)(b), the monitor is not liable for loss or damage to any person resulting from that person's reliance on the report.".

(b) Strike out line 22 and substitute the following:

"(5) The debtor company shall".

Attached as an appendix to this Report are the observations and recommendations of your Committee on Bill C-5.

Respectfully submitted,

Michael J.L. Kirby
Chairman

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MEMBERSHIP

The Honourable Michael Kirby, Chairman

The Honourable W. David Angus, Deputy Chairman

and

The Honourable Senators:

*Ex Officio Members

Note: The Honourable Senator Taylor was present at meetings at various stages during the course of this study.

Staff from the Research Branch of the Library of Parliament:

Mr. Gerald Goldstein, Director, Economics Division and
Ms. Margaret Smith, Research Officer, Law and Government Division.

Staff from the Committees and Private Legislation Directorate:

Ms. Lise Bouchard, Administrative Assistant.

Paul Benoit
Clerk of the Committee

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ORDER OF REFERENCE

Extract from the Journals of the Senate, Thursday, October 31, 1996:

"Resuming debate on the motion of the Honourable Senator Kirby, seconded by the Honourable Senator Stewart, for the Second reading of C-5, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act.

After debate,

The question being put on the motion, it was adopted.

The Bill was then read the second time.

The Honourable Senator Graham moved, seconded by the Honourable Senator Robichaud, P.C., that the Bill be referred to the Standing Senate Committee on Banking, Trade and Commerce.

The question being put on the motion, it was adopted."

 

Paul Bélisle
Clerk of the Senate

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TABLE OF CONTENTS

INTRODUCTION

GOALS OF BANKRUPTCY LAWS

OBSERVATIONS AND RECOMMENDATIONS

1. Consumer Bankruptcies

2. Spousal and Child Support Claims

3. Eligibility Threshold for the Companies' Creditors Arrangement Act (CCAA)

4. Debtor's Auditor as Monitor under the CCAA

5. Burden of Proof on an Application for an Extension of an Initial StayOrder under the CCAA

6 Liability of Directors and Stays of Action against Directors during Reorganizations

7 Liability for Environmental Clean-up Costs

8 Workers' Compensation Board Claims

9 Wage Assignments

10 Treatment of Retirement Savings Plans in a Bankruptcy

11 Unpaid Suppliers

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INTRODUCTION

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Bill C-5 was introduced in the House of Commons on 4 March 1996, It was referred to the House of Commons Standing Committee on Industry in May and was passed by the House of Commons on 23 October 1996. The bill was introduced in the Senate in October 1996 and was referred on 31 October 1996 to the Standing Senate Committee on Banking, Trade and Commerce.

The Committee held hearings on the bill in Ottawa during November and early December 1996.

Bill C-5 would make important amendments to the Bankruptcy and Insolvency Act (the ìBIAî or the ìActî) and the Companies' Creditors Arrangement Act (the ìCCAAî), as well as a minor amendment to the Income Tax Act.

The bill proposes amendments to the BIA in a number of areas, including:

° the licensing and regulation of bankruptcy trustees;

° liability of trustees for environmental damage and claims;

° liability of directors and stays of action against directors during reorganizations;

° compensation for landlords where leases are disclaimed in a reorganization proposal;

° procedures in consumer proposals;

° consumer bankruptcies;

° the dischargeability of student loan debts;

° workers' compensation board claims;

° international insolvencies;

° securities firm insolvencies; and

° technical matters.

The bill would also make a number of important amendments to the CCAA to align provisions of that Act more closely with those of the BIA.

Bill C-5 continues the process of bankruptcy reform that began in the 1970s with studies and proposals for change and culminated in the 1992 amendments (Bill C-22) that have been in force for some four years.

Over the last two decades there have been numerous attempts to amend Canada's bankruptcy laws. Six omnibus reform bills were introduced in Parliament between 1975 and 1984, none of which became law; as well, no fewer than three different advisory committees have made proposals for change.

As a result of the repeated failure to enact a completely new bankruptcy and insolvency statute containing far-reaching reforms, the concept of an omnibus bill was abandoned in favour of developing amendments in selected areas.

These long-awaited amendments were introduced in the House of Commons on 13 June 1991. Bill C-22 focused on six principal areas of reform:

° commercial reorganizations;

° consumer arrangements and bankruptcy;

° secured creditors and receivers;

° Crown claims and priorities;

° protection for unpaid suppliers; and

° technical amendments.

Bill C-22 came into force in 1992. Section 92 of Bill C-22 provided that the BIA would be reviewed by a parliamentary committee three years after the section came into force.

In anticipation of the review, the former Department of Consumer and Corporate Affairs (now Industry Canada) established the Bankruptcy and Insolvency Advisory Committee (BIAC) to provide a forum in which priorities for bankruptcy and insolvency reform could be discussed and determined and an attempt could be made to reach a consensus on policy recommendations. Several working groups and task forces were established under the BIAC to consider a host of bankruptcy-related issues. Many of the amendments proposed in Bill C-5 result from the work of BIAC.

Overall, the reaction to Bill C-5 has been positive. Even so, some of the proposed changes have generated considerable discussion. Of particular note are the provisions dealing with the priority claim for environmental clean-up costs, the non-dischargeability of student loan debts, and the introduction of criteria which would have to be met before a debtor could obtain an extension of the initial stay order under the Companies' Creditors Arrangement Act .

Other comments have focused on the need to overhaul the consumer bankruptcy provisions of the BIA, to provide more incentives for consumers to choose a proposal over bankruptcy and to ensure that insolvent individuals who successfully carry out a proposal receive recognition for their efforts.

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GOALS OF BANKRUPTCY LAWS

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Fundamental to the working of a market economy is the expectation that parties to a transaction will honour the commitments that they have made. If party A extends credit to party B to enable party B to purchase a good or service, then party A expects party B to satisfy in full the terms under which the credit was granted. There are laws that deal with full disclosure of the cost of credit and with the actions that either party may take if the other party reneges on its commitment.

Circumstances may arise that may make it impossible for the recipient of credit to fulfil the terms of the contract agreed to. In some cases, the two parties to a transaction are able to work out a new arrangement that will satisfy both. This is the common approach when a "temporary liquidity problem" may be the cause of the difficulty.

There are situations however, when the recipient of credit faces a serious "longer-term disruption" in expected income, because of a layoff, for example, in the case of an individual, or because of a technological change making a product less valuable, for example, in the case of a firm. In these cases of a long-term deterioration in income, society has decided that honest but unfortunate debtors should be protected from being impoverished by their creditors. Bankruptcy laws are designed to afford such protection. Once an individual files for bankruptcy, all debt collection efforts by creditors must cease. These laws specify a process for ensuring that creditors have some access to the debtor's assets if any remain, but once the bankruptcy process has been completed, debtors are given a fresh start - with no crippling encumbrances impeding their efforts to rebuild their asset base.

There is a "moral hazard" problem related to bankruptcy laws, however. If the bankruptcy laws make it too easy to discharge all financial obligations, then individuals may choose the bankruptcy option as soon as they run into financial difficulty. This will create problems for those who extend credit. The latter will then make it increasingly difficult to obtain credit. On the other hand, if the bankruptcy laws make it extremely difficult to avoid full payment of obligations, regardless of individual circumstances, there will be a tendency for credit granters to extend credit relatively easily - confident that the bankruptcy laws will serve as effective bill collectors.

The task of public policy is to strike that delicate balance between protecting the rights of creditors while ensuring that those who are truly unable to discharge their debts are given the opportunity to have a "fresh start."

The general view was that, while work remains to be done, we have been making substantial progress with respect to business bankruptcy. With respect to consumer bankruptcy, the database necessary to make sound public policy simply does not exist. Industry Canada is making a modest beginning in gathering the necessary data, but much remains to be done. Unfortunately, the Committee was unable to evaluate the arguments put forth with respect to the consumer bankruptcy provisions of Bill C-5. Those arguing the merits, or lack thereof, of these provisions based their arguments on the existing inadequate data. This does not provide the basis for sound public policy debate.

Further, the Committee was not completely satisfied with the process that culminated in Bill C-5. Bill C-22 called for a review of the legislation in three years. Industry Canada set up a consultation process involving a wide range of persons virtually all of whom were very knowledgeable about bankruptcy law. Consultation papers were produced and read by these experts. The outcome of the process was Bill C-5. The Committee does not view this as a public review of the bankruptcy legislation as it was primarily a review by experts. Professor Ziegel, for example, argued that important interests were not always represented or represented adequately.

If a report on the operation of Bill C-22 had been produced with a range of proposals for public discussion, Parliamentary committees could have held public hearings which would have broadened the range of views heard. Recommendations could then have been made which would have been the result of open debate and not on the basis of "trade-offs" made among selected participants, virtually all of whom were technical experts in the field. Therefore, the Industry Canada process was not as effective as it could have been.

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OBSERVATIONS AND RECOMMENDATIONS

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In this section of the report, the Committee will focus on a number of issues which have been brought to its attention during the hearings on Bill C-5. In some cases, the Committee has made recommendations that are reflected in proposed amendments to the bill. Amendments, which are of a technical nature and serve to clarify the bill, are not discussed.

 

1. Consumer Bankruptcies

Bill C-5 contains a number of provisions designed to reduce the attractiveness of consumer bankruptcies and to encourage more insolvent debtors to opt for a consumer proposal under Part III Division 2 of the BIA. In addition, section 157.1 of the BIA provides for mandatory counselling of consumer bankrupts as a precondition to their entitlement to an automatic discharge. Further a new proposed section 170.1 introduces a mediation step through the official receiver at the time of discharge of the bankrupt. Finally, provisions of the bill would make the choice of bankruptcy less attractive for those who are having problems paying off student loan debts.

Since public policy is designed to influence individual behaviour in a "socially desirable" manner, it can be assumed that those who designed this policy have a reasonable understanding of what explains the behaviour they wish to affect. In the case at hand, it can be assumed, for example, that policymakers have concluded that existing legislation makes consumer bankruptcy too attractive and that those choosing bankruptcy need counselling to help them avoid future economic problems.

There was considerable testimony before the Committee challenging these conceptual underpinnings of the bill.

What concerns me is that current reforms and the 1992 act have a tendency to conceptualize the bankrupt as an amoral calculator or as an inadequate person. The latter conceptualization is reflected in the emphasis on counselling. ... While counselling may be a valuable option for those who believe they can benefit, it is not clear why it is appropriate to be compulsory for the many unfortunate bankrupts or for those individuals, for example, whose bankruptcy is associated with a failed business but who go into individual bankruptcy.

Another witness argued:

... Bill C-5 aims to encourage consumer proposals, but many aspects of the bill will result in current barriers to successful proposals being perpetuated. ... one of the greatest barriers to consumer proposals is cost justification. It becomes important that the procedures be as simple and straightforward as possible. The reporting requirements in Bill C-5 can be improved to better meet that test.

Further,

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


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It was also argued that the extra level of mediation proposed in this bill introduces an unnecessary complication into an already complex process, and that the costs involved far outweigh the benefits of the provision. If there is a problem with the courts in some jurisdictions, then witnesses suggested that such problems be dealt with directly.

The proposals with respect to surplus income drew criticism as well. Professor Iain Ramsay argued that these proposals involve two assumptions:

first, that debtors are at present not contributing sufficient income to their estates; and, second that individuals who can pay a substantial proportion of their debts are choosing bankruptcy rather than a proposal to repay their debts.

Again, there is an implicit assumption that individuals are being manipulative, but there is little empirical evidence to substantiate this assumption. One possible effect of this change may be that individuals will be discouraged from using bankruptcy. The consequence of this will be creditors still unpaid, continuing problems of over indebtedness, stress and other social problems.

Professor Jacob Ziegel argued that the consumer bankruptcy provisions of Bill C-5 are based on a lack of understanding of the causes of the escalating number of bankruptcies.

The drafters appear to believe that it is because going bankrupt and obtaining a discharge from one's debts has become too easy and too attractive, particularly in light of the 1992 amendments to the legislation. Therefore, Bill C-5 proposes to put in place a complex bureaucratic and, in our view, coercive set of provisions with a view "encouraging" a much larger set of insolvent consumer debtors to make consumer proposals under Part III, Division 2 of Bill C-5.

Even if enacted, we do not believe that the provisions will have this effect. We believe all the available evidence ... shows that 90 per cent or more of consumer bankrupts are hopelessly insolvent, have negligible assets, live in the shadow of poverty and have no foreseeable prospects of being able to pay off a significant part of their indebtedness in a reasonable time frame. ... Further the studies we cite show that the most commonly assumed causes of consumer bankruptcy are unemployment, the ready availability of consumer credit and inability to budget properly. There is not much Parliament can do about the persistent high levels of unemployment.

The question is whether government should lend its powerful aid to make life even more miserable for consumer bankrupts than it already is. ... This bill makes the government legislation a bill collector for creditors.

Similar questions can be raised with respect to student loans. Bill C-5 would make student loan debts non-dischargeable where a bankruptcy occurred within two years after the debtor ceased being a full- or part-time student. Why should student loans be singled out for special treatment? Is there evidence that students are using the bankruptcy system to avoid their loan obligations?

Creditors make the decision to hand out credit based on the expected profit they can make from granting credit. Among the considerations involved are the price they charge for the credit, the characteristics of the borrower and the legal framework governing debt repayment. If the legal framework is relatively "lender-friendly", then lenders can make access to credit relatively easy; if, on the other hand, the legislation is relatively "debtor-friendly", then lenders will make access to credit more difficult. The public policy question that must be addressed is: what balance should be struck between the responsibilities imposed on grantors of credit, on consumers of credit and on government in the credit-granting process (where bankruptcy is clearly a component of the credit markets)?


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In subsequent correspondence, Professor Ziegel argued that

... these amendments were designed in the offices of Industry Canada by individuals who do not have the same practical experience [as witnesses who deal with consumer bankrupts on a daily basis], and whose views proceed from the entirely mistaken premise that the large number of consumer bankruptcies are due to consumers seeking an easy way out of their indebtedness when they could be making a proposal. ... While the current system may not be perfect, it is certainly greatly superior to the complex bureaucratic structure envisaged in Bill C-5.

Government witnesses agreed that there is very limited data that would contribute to an understanding of consumer bankruptcy. Industry Canada is currently financing a study that will profile debtors who have gone through the process of insolvency. This study will provide some very preliminary information about consumer bankruptcy. It will not, however, provide the in-depth information needed for a comprehensive understanding of the causes and process of consumer insolvency. The Committee expects the Department to use the results of its "pilot" study to undertake the much-needed extensive study. Such a comprehensive study, together with public debate, will be needed to permit a sound evaluation of public policy toward consumer bankruptcy. The same will be required for student bankruptcies.

The Committee was not satisfied with the discussion of the consumer aspects of the bill. There were those who argued that it would be better to strip the bill of all the changes affecting the consumer and to maintain the provisions of existing legislation until an adequate database could be assembled to upon which to make public policy. The Committee rejected this argument.

Indeed, the Committee agrees with the witness who said:

The bill definitely incrementally improves the system. Does it solve the underlying flaws that Professors Ziegel and Ramsay have pointed out? Probably not. Are those important flaws? Probably. But [the scope of practitioners in the Canadian Bar Association] is much more restricted and we are dealing perhaps in the edges of the problem to try to cooper them up and solve them in a practical way rather than create a better structure which, perhaps, they are focusing on.

The Committee has already expressed its dissatisfaction with the process that culminated in Bill C-5. It is equally dissatisfied with the general treatment of consumer bankruptcy. It looks forward to a much more open consultation process in general for future amendments to the bankruptcy legislation and to a sound conceptual basis for the treatment of consumer bankruptcy, in particular. The Committee will work with Industry Canada officials to design the comprehensive study of consumer bankruptcy.

 

2. Spousal and Child Support Claims

Under the BIA, spouses are not considered creditors for the purposes of proving claims for spousal and child support in bankruptcy proceedings. Bill C-5 would amend the Act by providing that claims for alimony payments or for spousal or child support required under a court order or an agreement made prior to bankruptcy and when the spouse or child was living apart from the bankrupt would be claims provable in bankruptcy proceedings (clause 87). In addition, claims for alimony. spousal and child support payments that accrued during the year before a bankruptcy as well as any lump sum payable would rank as preferred claims
for the purposes of payment under the Act (clause 90).

The Canadian Bar Association (CBA) voiced its support for an amendment to the BIA to provide that pre-bankruptcy lump sum support plus unpaid arrears accrued in the year preceding a bankruptcy be a provable claim. However, it considered an amendment which would grant preferred creditor status to support claims problematic and called for measures to safeguard against collusion and abuse.


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Mr. Robert Klotz, argued that the amendments to the support provisions of Bill C-5 exacerbated rather than alleviated the CBA's concerns about collusion. According to Mr. Klotz, problems arise because in many cases financial failure and marital dissolution go hand in hand, and support between spouses is often negotiated when creditors are on the horizon.

Mr Klotz gave the following example to illustrate the problem:

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

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

Mr. Klotz went on to suggest that, absent anti-collusion measures, these provisions would have an anti-family impact. As drafted in Bill C-5, they would encourage families to break up rather than stay together in times of financial difficulty. Since a family could save assets through a support agreement, the family would be under pressure to split up to take advantage of the bankruptcy provisions.

Mr. Max Mendelsohn, legal advisor to Industry Canada, pointed out that there is always an opportunity for abuse when a preference is given to a particular party. He felt that the anti-abuse provisions presently found in the Bankruptcy and Insolvency Act would apply to agreements between spouses, and contended that

if an abusive settlement were entered into with, for example, a bizarre lump sum payment that was thought to be treated as a preferred creditor, then the judicial mechanisms already exist in the BIA to attack such a thing as well as under provincial statutes.

The Committee fully supports the provisions of Bill C-5 that would make spousal and child support claims provable claims in a bankruptcy. The Committee also favours the ranking such claims as preferred claims. There is absolutely no question, in the Committee's mind, that the Bankruptcy and Insolvency Act is outdated in its treatment of support and is in urgent need of reform.

The Committee, however, is concerned that the bill does not adequately deal with the potential for collusive activities between spouses that would serve to defeat other creditors. The example provided to the Committee by Mr. Klotz illustrates how a relatively simple agreement between spouses could leave other legitimate creditors of a bankrupt spouse with nothing.

The Committee favours measures that would control collusion and improper behaviour in conjunction with the granting of provability and a limited priority for support claims. There are conflicting views, however, as to whether the present provisions of the BIA are adequate to guard against collusion. The Committee believes that it is important to assess the operation of the provability and priority provisions in light of the general anti-abuse measures of the BIA before specific new provisions are added to deal with the support provisions. The Committee, however, urges the Office of the Superintendent of Bankruptcy to closely monitor the operation of these provisions and to introduce specific anti-collusion measures on a timely basis, if necessary.


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3. Eligibility Threshold for the Companies' Creditors Arrangement Act (CCAA)

The present test for determining whether a company can reorganize under the CCAA requires that the company have issued bonds under a trust deed and that the company's reorganization proposal provides for compromising the claims of bond holders. Clause 121 of Bill C-5 would replace this test with a new threshold test based on the amount of a company's outstanding debt. In order for a company to reorganize under the CCAA, the amount of claims against the company would have to exceed $10 million.

The $10 million threshold is designed to ensure that smaller companies will reorganize under the BIA rather than the CCAA. However, the Committee was told that the proposed threshold might preclude companies in certain parts of Canada, particularly in the Atlantic and prairie regions, from reorganizing under the CCAA.

The Canadian Bar Association stated:

... a threshold of $10 million indebtedness for CCAA eligibility effectively precludes access to that Act in areas of the country where debt levels, even for large corporations with complex affairs, rarely reach that level. Practitioners in certain regions are concerned that this will prevent some debtors from successfully reorganizing where the BIA rules prove insufficiently flexible.

The CBA recommended that the threshold indebtedness for CCAA eligibility be lowered to make the Act accessible in all areas of the country, or alternatively, that judicial discretion be introduced to lower the threshold where a judge was satisfied that the circumstances warranted the application of the CCAA.

The Insolvency Institute of Canada supported the introduction of the $10 million eligibility requirement but felt that its application to a group of companies making a single application under the CCAA should be clarified. The Institute suggested that it would be "fair and equitable to provide that where the group of affiliated companies has total liabilities in excess of ten million dollars, a CCAA filing could be made for the whole group."

The Committee supports the creation of a monetary threshold to determine eligibility for relief under the CCAA. However, the Committee shares the concern of the CBA that the threshold proposed in Bill C-5 may be preclude companies operating in certain regions of the country from reorganizing under the CCAA. The Committee believes that a $5 million threshold along with provision for a single filing by a group of affiliated companies would accommodate businesses based in all regions of Canada without compromising the integrity of the BIA as a reorganization vehicle for small and medium-sized companies.

The Committee recommends that Bill C-5 be amended to provide a five million dollar threshold for eligibility for relief under the Companies' Creditors Arrangement Act and to include provision for filing by a group of affiliated companies.

 

4. Debtor's Auditor as Monitor under the CCAA

Bill C-5 (proposed section 11.7 of the CCAA) envisages the appointment of a monitor in CCAA reorganization proceedings that would perform duties similar to those of a trustee under a BIA proposal, as well as any other duties specified by the court as set out in the plan of arrangement.

Proposed subsection 11.7(2) of the CCAA provides that the company's auditor can be appointed as a monitor, unless otherwise directed by the court. Under the BIA, the equivalent is not allowed; a company's auditor cannot be a trustee unless the court permits the appointment.


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The rationale for the CCAA provision was described in this way:

The CCAA never had any requirement for anyone to supervise or report. Over the years, the practice developed of having a monitor appointed. This was purely a creature of lawyers' imagination and the courts' support who would, in order to instil some confidence in the creditors, report to them on what was going on. The practice developed, if there were no objections to using the debtor's auditor. The reason was that, in most cases of very large debtor corporations, the auditors had the familiarity; they were up to speed; they prepared all the information; none of the major lenders questioned their integrity. They were there to see the plan through.

In the current crop of amendments, we institutionalised this particular approach. It provides that where creditors do not object, the auditor may be the monitor. However, there is an obligation to appoint a monitor. In not every case before us is the auditor acting as monitor because the debtor is often sensitive to the fact that the creditors may not accept their auditor. This purely allows for flexibility.... It is not a licence. It is something allowable if creditors do not object. It is within the discretion of the court.

The proposed CCAA provision does not mirror the BIA prohibition on auditors becoming trustees because the CCAA provision carries forward current practice.

The Bankruptcy and Insolvency Act does not have the same measure of flexibility that the courts can exercise. Therefore there is a cost saving. In complex situations, it takes a long time for an outsider to get up to speed, particularly with a real estate company with several hundred properties.

The matter of monitors becoming trustees or receivers was also considered by the Committee. The Committee was told that when companies have financial problems, financial institutions will often appoint a monitor to examine the business and watch cash flows. These individuals assess the viability of the business but do not manage it. If the financial institution determines that it is necessary to appoint a receiver, the monitor is often asked to take on that role.

Concerns have been expressed about whether a monitor should become the receiver of an insolvent business. These concerns tend to arise where the receiver has been appointed under a private agreement rather than pursuant to a court order.

While the Royal Bank of Canada has a policy guideline of utilizing a different firm for monitor's work than it does as a trustee, it would not want such a guideline legislated. The Committee was told that situations may arise where it may be appropriate for the same firm to take on both the monitor and the subsequent trustee roles. This will most often occur when there is sufficient information to determine that a bankruptcy, receivership or liquidation is likely. In other situations, it may be too costly to separate the functions. In addition, consolidations among major accounting firms, which have reduced the number of firms capable of dealing with large businesses, have made it more difficult to separate the monitoring and trustee or receivership roles.

The Committee has some concerns with the practice of having a company's auditor taking on the role of monitor. At this time, the Committee is not prepared to recommend amendments that would mirror the BIA provisions with respect to the appointment of auditors as trustees. The Committee, however, urges Industry Canada to review the operation of proposed subsection 11.7(2).

The fact that monitors can act as trustees or receivers of financially troubled companies is of even greater concern to the Committee. The potential for conflict of interest exists particularly where such appointments are made under private agreement.However, the Committee recognizes that in some cases it may not be appropriate to separate the functions. The Committee therefore urges the lending community to separate the positions of monitor and trustee or receiver except in defined circumstances and to develop policy guidelines in that regard. Recognizing that flexibility is required, the Committee does not recommend that the separation of these positions be embodied in statute.


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5. Burden of Proof on an Application for an Extension of an Initial Stay Order under the CCAA

During consideration by the House of Commons Standing Committee on Industry, clause 124 of Bill C-5 was amended by deleting proposed subsection 11(6) of the CCAA and replacing it with a new subsection which provides as follows:

(6) The court shall not make an order under subsection (3) or (4) unless

(a) the applicant satisfies the court that circumstances exist that make such an order appropriate; and

(b) in the case of an order under subsection (4), the applicant also satisfies the court that

(i) the applicant has acted, and is acting, in good faith and with due diligence,

(ii) a viable compromise or arrangement could likely be made in respect of the company if the order being applied for were made, and

(iii) no creditor would be materially prejudiced if the order beingapplied for were made.

The amendment requires a debtor applying for an extension of an initial 30-day stay order under the CCAA to, among other things, "prove that no creditor would be materially prejudiced if the order being applied for were made."

The Committee received many submissions on this amendment. The need to prove that no creditor would be materially prejudiced before an extension could be obtained was a major problem for many witnesses.

The Insolvency Institute of Canada was of the view that the amendment would force companies to file a plan of arrangement within 30 days after an initial order under the CCAA. The Institute felt that this would be "very impractical and almost impossible" in large, complex reorganizations. and would "seriously impact the ability of an insolvent company to make a viable restructuring plan under the CCAA."

The Institute pointed out that this amendment was never considered by the Bankruptcy and Insolvency Advisory Committee during its deliberations.

As for the argument that these requirements are acceptable under the CCAA because the BIA imposes the same requirements on an insolvent debtor seeking an extension of time for filing a proposal under that Act, the Institute observed that these criteria would be "contrary to the express policy of the government to encourage insolvent businesses to restructure their financial affairs and emerge as viable operating companies."

The Institute believes that this provision would be used by certain creditors to thwart reorganization proceedings:

This section will be used by secured creditors holding specific assets as their security who are clearly not going to benefit from a significant restructuring because they are well-secured and will be paid in full in any event. They would use this language in order to impede a restructuring that would be for the benefit of everyone: the ordinary creditors, the employees and the enterprise in general. In most cases the opposition to a restructuring is by a well-secured creditor and this section, we believe, would give that well-secured creditor ammunition for opposing a stay of proceedings.

The court still has the power to grant leave to a creditor to continue to bring proceedings to enforce its security, to bring what we have called colloquially a carve-out motion. If a secured creditor can convince the court that it is entitled to have the stay of proceedings lifted as against it, then the court can grant such an order. We believe that courts should retain this power to deal on an individual basis with various creditors, but the court should not have its hands tied on the grounds that it could not make a blanket stay order if any creditor would be materially prejudiced.


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The submission of Barry I. Goldberg, an experienced insolvency counsel, summed up the concerns with the provision in the following manner:

It is difficult to see what subparagraphs (a) and (b)(i) and (b)(ii) add to the process. All court orders should be based on assessments of appropriateness having regard to the circumstances of each case. Moreover, the consideration of the enumerated criteria in subparagraph (6)(b) is subsumed in the historical judicial consideration of whether an extension is appropriate. At best those provisions are superfluous.

Subparagraph (6)(b)(iii) is particularly problematic. It provides that an extension cannot be ordered if the applicant cannot satisfy the court that no creditor will be materially prejudiced. That test emasculates the CCAA. Invariably, an extension will cause prejudice. Whether the prejudice is material or not will be the subject of costly and protracted debate which cannot in terms of time or cost be afforded by most applicants or their creditors (often including employees).

And, what is the test of materiality? Is it purely a financial test or are other factors to be considered? Is materiality to be assessed relative to the consequences of liquidation or a potential restructuring? And, while materiality is being debated (and appealed) what is the status of the applicant? Will the stay remain in effect?

A number of insolvency experts were of the opinion that the proposed amendment would make it virtually impossible to obtain extensions of the initial 30-day stay under the CCAA and force companies to file plans of arrangement within 30 days after the making of the initial stay order.

Others suggested that some CCAA reorganizations would have turned out differently if the amendment had been in place.

We believe there have been a number of examples that would have turned out differently had the 30-day rule been in place where, if any one creditor was prejudiced, the courts could have put an end to it. The Dylex restructuring ... is a situation that comes to mind where one creditor argued before the courts that their position had the potential of being prejudiced. I think in the O&Y case, Justice Blair of the Ontario court summed it up best. He said that under the CCAA, it is a case of balancing all of the prejudices.

Of the submissions received about proposed subsection 11(6), all but one condemned the provision. The Canadian Life and Health Insurance Association (CLHIA), which supports the amendment, pointed out that there is no requirement that a plan be presented at the end of the initial 30-day stay period. The only requirement is that the debtor and the creditors come back to court and that the three-pronged test contained in clause 124 be met if the stay order is to continue.

The CLHIA argued that the amendment to the bill would be a significant improvement to the CCAA for four reasons:

(a) it would give direction to the courts as to the tests that must be met before the extension order was granted;

(b) it would more closely align the CCAA with the BIA;

(C) the tests are well-established under the BIA and have received extensive scrutiny and study; and

(c) the tests would direct the courts to consider how the stay would affect creditors.

The Committee shares the concerns expressed about the potential impact of proposed subsection 11(6) of the CCAA, particularly the concern that the CCAA may no longer be a sufficiently flexible vehicle for large, complex corporate reorganizations.


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While the Committee fully supports initiatives to align the provisions of the CCAA more closely with those of the BIA, these initiatives must be the subject of thorough discussion and analysis before make their way into legislation. Unfortunately, such discussion did not take place prior the introduction of proposed subsection 11(6).

The Committee recommends that proposed paragraphs 11(6) b) (ii) and 11(6) b) (iii) of the Companies' Creditors Arrangement Act (CCAA) be deleted from Bill C-5 and the matter of criteria applicable to an extension of an initial order under the CCAA be thoroughly examined during the next review of the CCAA.

6. Liability of Directors and Stays of Action against Directors during Reorganizations

Corporate directors may be liable for certain debts of a corporation, such as wages, vacation pay, source deductions from employees' salaries and GST remittances. When a corporation seeks to reorganize under the BIA to stave off bankruptcy, the directors continue to be liable unless they can negotiate releases with the relevant creditors. There has been concern that directors' inability to settle such claims in the course of a reorganization may dampen their commitment to rebuilding the insolvent company.

Bill C-5 attempts to address this concern by proposing that a reorganization proposal be allowed to include provisions for compromising claims against directors that arose before the commencement of proceedings under the BIA and that are related to liabilities for corporate obligations that are imposed on directors by statute. Claims against directors that are related to contractual rights of creditors or that are based on allegations of misrepresentations made by directors to creditors or on wrongful or oppressive conduct by directors would not be included in a proposal. Creditors whose claims against directors would be compromised would have the right to vote on the proposal (clause 30, proposed subsections 50(13)-(17)). In addition, where a notice of intention or proposal had been filed by a corporation, the bill would stay all proceedings against directors in relation to their statutory obligations (clause 65).

The Insolvency Institute of Canada proposed a number of amendments to the director's liability provisions of the bill. One amendment proposed that compromising claims against corporate officers also be allowed; another proposed that where a compromise was voted on, directors and officers would be relieved from liability, whether or not the debtor corporation carried out its obligations under the proposal.

The Institute also stated that it would like to see a due diligence defence for every type of liability.

In its August 1996 report, Corporate Governance,
the Committee examined the issue of directors' liability and, among other things, recommended that the Canada Business Corporations Act and all other statutes that impose liabilities on directors be amended to provide directors with a due diligence defence. The Committee felt that a due diligence defence would "encourage corporations to put the appropriate due diligence systems in place, provide directors who fulfill the due diligence requirements with a measure of comfort as to their personal liabilities, and contribute to better corporate governance in Canada."

The Committee recognizes that directors are subject to a myriad of liabilities under federal, provincial and territorial statutes. Both the types of liabilities and the amounts for which directors can be held liable are significant. Many of these liabilities arise in situations where a corporation cannot meet its financial obligations; in other words when the corporation is insolvent.

The Committee supports the provisions of Bill C-5 that would allow a reorganization proposal to include provisions for compromising claims against directors relating to liabilities for corporate obligations that are imposed on directors by statute. This provision should go some way toward improving the situation of directors of insolvent companies.

The Committee is of the view that a due diligence defence to statutory liabilities should be made available under the Bankruptcy and Insolvency Act and the CCAA. There was, however, disagreement among members of the Committee about the appropriate time for introducing such a change. Some wished to proceed immediately; others, to seek further consultation. The Committee as a whole, while disappointed that such an amendment would not be introduced at the present time, adopted the following recommendations as the best alternative.


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The Committee recommends that the federal government undertake consultations with the provincial and territorial governments with respect to adopting a due diligence defence to directors' statutory liabilities within the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.

The Committee further recommends that these statutes be amended to incorporate a due diligence defence to directors' statutory liabilities in conjunction with the forthcoming amendments to the Canada Business Corporations Act .

7. Liability for Environmental Clean-up Costs

Clause 15 of Bill C-5 contains an important provision with respect to claims for costs incurred in remedying environmental damage; claims for clean-up costs by the federal or provincial Crown would be secured by a charge on the affected, as well as contiguous, real property that is related to the activity that caused the environmental damage. This charge would rank above all other claims against the property and would be enforceable in accordance with the law of the jurisdiction in which the real property was located in the same manner as a mortgage or other security on real property (proposed subsection 14.06(7)).

The Canadian Life and Health Insurance Association (CLHIA) argued that:

by restricting the "super priority" lien to real estate, Bill C-5 discriminates (i) between lenders on real estate and lenders on chattels and equipment and (ii) because of the nature of their lending, between life and health insurance companies and other lenders.

The CLHIA noted that, among all financial institutions operating in Canada, life and health insurance companies are the largest source of financing in commercial mortgages.
Extending the super priority to real property only would not, in the view of the CLHIA, create a level playing field between lenders on real estate and lenders on other types of assets.

The CLHIA recommended that the super priority for environmental clean-up costs should apply to both real and other business assets of the debtor.

Other witnesses argued that the super priority should attach to real property only.

To talk about having charges against moveable property on the premises would be a difficult administrative task to sort out.... I think it would be extremely difficult and impractical to run a system where assets frequently being moved from different premises should be available, subject to the environmental clean-up costs. A most pragmatic and effective method is that proposed in the bill, which makes the real property subject to the environmental clean-up costs.

Mr. Gordon Marantz, legal advisor to Industry Canada, noted that the super priority for environmental clean-up costs takes nothing away from anyone. He put it his way:

What happens if the property costs more to clean up than it is worth? The lender abandons the property. What will happen? The province will go in. If there is leaching into the ground water, it will take steps to contain the leaching. The province has now put money into the property. The owner has abandoned it. The mortgage lender has abandoned it. That is where the super priority comes in.

The Committee has considered the arguments for extending the first charge for environmental clean-up costs to personal property. The Committee believes that the provision of Bill C-5 which would make the charge for clean-up costs applicable to real property is appropriate and fair and would not recommend that the priority be extended to personal property.


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8. Workers' Compensation Board Claims

Bill C-5 would amend the BIA by providing that Workers' Compensation Board (WCB) claims would rank as ordinary claims, but could obtain a secured position by registering a security interest (clauses 73 and 74). The security created by registration would rank according to the date of registration and in respect of the amounts owing at that date.

The 1992 amendments to the Bankruptcy Act purported to alter the provisions governing the priorities of WCB claims in two respects: a) paragraph 136(1)(h) of the Act which conferred preferred creditor status on WCB claims was repealed; and b) sections 86 and 87 were added to the Act to recognize Crown statutory securities, if they were registered.

Prior to 1992 amendments (Bill C-22), WCB claims ranked as preferred claims under the Bankruptcy Act. At the same time, provincial workers' compensation legislation gave WCBs secured creditor status. Until the mid-1980s, WCB claims were treated as secured claims in a bankruptcy. The 1985 Supreme Court of Canada decision in Jac's Jackets, however, held that WCB claims had only preferred creditor status and the statutory securities created by provincial legislation to protect such claims did not operate in a bankruptcy. After this decision, WCB claims could only be considered preferred claims and provincial legislation that granted secured creditor status to these claims was ineffective in a bankruptcy.

The repeal of paragraph 136(1)(h) in 1992 removed the basis on which the Jac's Jackets case was decided. Since 1992, some WCBs have argued before the courts that, because the BIA no longer specifies that WCB claims have preferred creditor status, their claims can be secured under provincial legislation. Case law has confirmed that not all WCBs are agents of the Crown. As such, their securities were deemed not be subject to the registration requirements and the priority limitations established by the 1992 amendments.

The 1992 amendments have resulted in differing treatment for WCB claims depending upon whether a particular WCB is regarded as a Crown agent and the interpretation of the impact of the repeal of paragraph 136(1(h).

The WCBs contend that statutory securities relating to their claims should be recognized in a bankruptcy. They want their claims to be treated in the same way as income tax, Canada Pension Plan and employment insurance withholdings. Mr. David Stuewe, President of the Association of Workers' Compensation Boards of Canada stated:

We believe that workers' compensation is part of the very important economic safety net of this country. If we wish to ensure that we can operate efficiently and deal with the problems we have been receiving, ... we would ask you to make it very clear that we are similar to QPP and CPP.

Alternatively, the WCBs are requesting that the proposed amendments contained in Bill C-5 be deleted from the bill. Removing clauses 73 and 74 would ensure the continuation of the priority granted to WCB claims by recent judicial decisions.

Mr. Stuewe told the Committee that clauses 73 and 74 would take about $15 to $20 million out of current assessments which are received and recovered through bankruptcies and could result in an increase in workers' compensation assessments by about one cent. He also suggested that it would not be practical for WCBs to register security.

The amendments found in clauses 73 and 74 of Bill C-5 are intended to fulfil the intention of the 1992 amendments. WCBs would be unsecured, but be able to obtain security by registering a security interest. At the time the 1992 amendments came into effect, it was not foreseen that that courts would revive their secured creditor status and determine that they were not agents of the Crown.

The Committee has considered the arguments put forward by the Association of Workers' Compensation Boards. Although compelling, these arguments appear to disregard the impact of the 1985 Jac's Jacket decision which determined that such claims had only preferred status. A return to the pre-1985 secured position would confer a form of super priority on WCB claims and put them in a position that would exceed the priority they had between 1985 and 1992.

Because clauses 73 and 74 are intended to give WCB claims the ranking that had been intended by the 1992 amendments, the Committee would not support their removal from the bill.


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9. Wage Assignments

Credit Union Central of Ontario appeared before the Committee to discuss the matter of wage assignments. Prior to 1992, bankruptcy law allowed wage assignments to be operate after a bankruptcy, thereby giving Ontario credit unions a priority claim on the wages of a bankrupt individual.

Subsection 68.1(1) of the Bankruptcy and Insolvency Act, enacted in 1992, makes an assignment of existing or future wages given by a debtor before the debtor became bankrupt ineffective in relation to wages receivable after a bankruptcy. By declaring wage assignments invalid, the 1992 amendments removed the priority and relegated credit unions to the position of an unsecured creditor.

Credit Union Central of Ontario noted that credit unions in Ontario regularly use wage assignments (a pledge of up to 20% of a person's future wages) as security for loans. Moreover, Ontario law recognizes such wage assignments as valid security.

According to Credit Union Central of Ontario, the passage of subsection 68.1(1) has encouraged credit union and caisse populaire members to assign themselves into bankruptcy in order to defeat the wage assignment. Also, it has led to a retraction of personal credit through credit unions and caisse populaires.

Although credit unions in Ontario have experienced increased loan write-offs, according to the President and Chief Executive Officer of Credit Union Central of Ontario, they have learned to adjust to and live with the change.

Credit Union Central of Ontario argued that the proposed amendments to section 68 of the BIA, which would give creditors access to income of a bankrupt individual that exceeded what was required to maintain a reasonable standard of living (surplus income) was unfair.

Our proposition is that Bill C-5 gives access to those wages through the amendments to section 68 to trustees and to credit card and other creditors who are unsecured to begin with and charge a high rate of interest. That right was normally ours prior to 1992, and we think that the credit unions are more entitled to that right than trustees or other creditors....

Credit Union Central of Ontario, however, acknowledged that the proposed surplus income provision would not make Ontario credit unions worse off.

The main plea of Credit Union Central of Ontario is that subsection 68.1(1) of the BIA be repealed thereby allowing wage assignments to continue as valid security in a bankruptcy.

The Committee notes that while credit unions in Ontario have been permitted by provincial law to take wage assignments as security for loans to their members, credit unions and caisse populaires in other provinces have not. The position of Ontario credit unions is unique and it would appear that credit unions in other provinces have not suffered from their inability to take enforceable wage assignments as security. Moreover, Ontario credit unions told that Committee that they have adjusted to the 1992 amendments.

Subsection 68.1(1) serves to protect a bankrupt's estate and creditors generally from actions taken prior to a bankruptcy. It also ensures that creditors will have equal access to a debtor's wages during a bankruptcy. The Committee is of the view that subsection 68.1(1) of the BIA should be retained.

 

10. Treatment of Retirement Savings Plans in a Bankruptcy

Under paragraph 67(1)(b) of the Bankruptcy and Insolvency Act (BIA), property of a debtor which is exempt from seizure under the laws of the province in which the property is situated and within which the bankrupt resides does not form part of the estate of the bankrupt for the purpose of distribution to creditors. Because provincial laws differ, the type of property that is exempt from seizure in a bankruptcy varies from province to province.


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One particularly anomalous situation that was brought to the attention of the Committee was the position of RRSPs in a bankruptcy; RRSPs associated with life insurance policies (insurance product RRSPs) are exempt from seizure in a bankruptcy while other types of RRSPs are not exempt and can be divided among creditors. The exemption for insurance product RRSPs stems from provisions of the insurance acts of each province.

The brief of the Canadian Bar Association points out that some judicial decisions have challenged pre-bankruptcy contributions to insurance product RRSPs. In addition, the case law dealing with the exemption varies from province to province. There is also uncertainty and inconsistency in the case law relating to the applicable test for recouping pre-bankruptcy contributions to exempt RRSPs, and reversing pre-bankruptcy transfers from non-exempt to exempt RRSPs.

The Canadian Insolvency Practitioners Association (CIPA) noted that the differing treatment afforded RRSPs, Deferred Profit Sharing Plans and Registered Pension Plans is inconsistent and unjustified. The CIPA felt that there was no logical basis for affording such plans differing levels of protection in a plan holder's bankruptcy.

Both the CBA and the CIPA recommended change in this area. The CIPA suggested that Bill C-5 be amended to exempt RRSPs and similar retirement plans from seizure in a bankruptcy and to establish equitable rules on property that would be exempt from seizure. It also recommended that in the absence of BIA amendments, Industry Canada initiate negotiations with the provincial and territorial governments to develop a harmonized exemption regime.

The CBA recommended that the government address the artificial inequities between insurance product and other RRSPs and establish a more consistent national treatment for RRSPs and the review of pre-bankruptcy dealings with RRSPs.

The discussion surrounding the status of RRSPs in a bankruptcy raises two important issues for the Committee. The first is the issue of the exempt versus non-exempt status of insurance product RRSPs and non-insurance product RRSPs. The second is the broader issue of the differing treatment of employer pension plans such as Registered Pension Plans and Deferred Profit Sharing Plans and RRSPs generally.

The current rules, which exempt insurance product RRSPs from being divisible among a bankrupt's creditors enable debtors who have chosen that investment vehicle to retain all of their retirement savings after a bankruptcy while debtors who have chosen other types of RRSPs lose those savings. This rule appears to favour sophisticated debtors and those to whom expert advice is available.

The Committee sees no justification in continuing the varying treatment of insurance product RRSPs and other RRSPs in a bankruptcy. Subject to the establishment of appropriate anti-abuse mechanisms, the Committee favours exempting all RRSPs from seizure in a bankruptcy. This would make the exemption rules more equitable and certain and provide consistent protection for RRSPs regardless of type.

The differing treatment of retirement savings plans and RRSPs must also be questioned. Registered Retirement Plans are exempt from seizure in a bankruptcy while RRSPs (other than insurance product RRSPs) are not exempt. This would appear to create a serious inequity and to discriminate against persons who rely on RRSPs to accumulate retirement income.

The Committee favours exempt status for all such pension plans.

The Committee urges the federal government to address the inequities between insurance product RRSPs and RRSPs that are seizable and to establish consistent protection for RRSPs in a bankruptcy. The Committee also urges the government to establish consistent rules exempting all retirement savings vehicles from seizure in a bankruptcy.


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11. Unpaid Suppliers

The BIA gives unpaid suppliers the right to repossess merchandise delivered to a purchaser who becomes bankrupt or goes into receivership. A number of conditions apply to this right:

° the supplier must make a written demand for the goods within 30 days after their delivery;

° when the demand is made the purchaser must be bankrupt or in receivership;

° when the demand is made the goods must be:

(i) in the possession of the purchaser, trustee or receiver;

(ii) identifiable and not fully paid for;

(iii) in the same state as they were on delivery;

(iv) not have been resold at arm's length; and

(v) not subject to any agreement for sale (section 81.1).

The supplier's right to repossession ranks ahead of any other claim in respect of those goods, except a bona fide subsequent purchaser for value without notice of the demand for repossession.

The right of repossession applies only in cases of bankruptcy or receivership. It does not apply when an insolvent business begins reorganization proceedings under the BIA.

The BIA also provides a special right for farmers, fishermen and aquaculturists who deliver their farm and fisheries products to a purchaser who subsequently becomes bankrupt or is placed into receivership. When such products are delivered within 15 days prior to the bankruptcy or receivership and the farmer, fisherman or aquaculturist files a claim for any unpaid amount in respect of those products within 30 days after the bankruptcy or receivership, the claim is secured by a charge on all of the inventory held by the purchaser. This charge takes priority over all other rights or charges against that inventory except a supplier's right of repossession (section 81.2).

Witnesses pointed to a suspicion that some debtors have been using proposals as a means to liquidate their assets, in order to avoid the 30-day repossession provision. The CIPA encouraged Industry Canada to monitor potential abuses of section 81.1.

Professor Jacob Ziegel felt that the fact that debtors can deal with goods during a reorganization and are not accountable to the supplier for the proceeds of sale creates an unfair situation for unpaid suppliers. He called for measures to protect unpaid suppliers when reorganization proceedings were commenced. In particular, Professor Ziegel recommended that:

Section 81.1(4) should be replaced with a provision providing that where reorganization proceedings are commenced under the BIA or any other Act and where, but for such proceedings, the seller would be entitled to demand return of the goods, the seller shall be deemed to have a purchase money security interest for the amount of its unpaid claim ranking ahead of all other security interests.

The Committee is concerned that some debtors may be using the reorganization provisions of the BIA to prevent suppliers from repossessing goods which have been supplied and not paid for. The Committee urges Industry Canada to monitor reorganization proceedings for such abuses and, if abuses are found to have taken place, to develop measures to protect unpaid suppliers.

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