Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 24 - Evidence, September 17, 2003
OTTAWA, Wednesday, September 17, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:08 p.m. to examine the administration and operation of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.
Senator Richard H. Kroft (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we have a number of witnesses today, both individually and in panel, beginning with Ms. Doreen Johnston, Chairman of Securities Regulation for the Registered Educational Savings Plan Dealers of Canada.
Please proceed.
Ms. Doreen G. Johnston, Chairman, Securities Regulations, RESP Dealers of Canada: Honourable senators, I am here on behalf of the RESP Dealers Association of Canada. This association includes four of the organizations whose primary business is the administration of registered education savings plans. Thank you for this opportunity to appear before the Banking Committee today.
Our organizations represent approximately one half of the $7.1 billion of assets currently held in RESPs. RESPs have become a popular and cost-effective means for individuals, primarily parents, to save money to fund the future post-secondary education of children. Unfortunately, the withdrawal of contributions from an RESP for anything except for post-secondary education expenses causes the collapse of the RESP; more important, however, it causes the Canada Education Savings Grant to be returned to the federal government. When the contributor, usually the parent, declares bankruptcy, the assets in the RESP are seized, causing its collapse. Without this financial assistance available through the long-term savings in a RESP, many Canadian families would be unable to provide their children with the financial support during their higher education. Sadly, the main reason children or students do not pursue post- secondary education is lack of funding.
The maximum that may be saved in an RESP is $4,000 per year per child, or a lifetime maximum of $42,000. However, our experience indicates that the majority of subscribers or parents are middle to low-income individuals saving in the neighbourhood of $1,000 for each child each year. It is our view that a child should not be penalized during the bankruptcy process, as is currently the case under currency, bankruptcy and insolvency legislation. In May 2002, our association submitted a proposal recommending that all or part of the funds held in an RESP be shielded or protected from seizure. That is our submission in a nutshell. I welcome any questions you may have.
The Chairman: Thank you. That is clear and to the point.
Senator Angus: Welcome, Ms. Johnston. You have just established a new record for brevity, clarity and other positive things.
Ms. Johnston: I like to be succinct.
Senator Angus: I assume you have been following the progress of our review of the insolvency statutes.
Ms. Johnston: Yes.
Senator Angus: Could you elaborate a little more? You say that your particular organization, which is the RESP Dealers Association of Canada, accounts for half of the $7.1 billion that is invested in these RESPs. Could you tell us about your members, and then talk about the other half?
Ms. Johnston: The RESP Dealers Association, the four companies involved, are Alliance Education Funds, which is a dealer that distributes the Heritage Scholarship Trust Plan, the Canadian Scholarship Trust Plan, the University Scholarships of Canada, and Children's Education Funds Inc. These companies have been around since the early 1960s, which is why we are able to say we can account for half of the $7.1 billion under administration in RESPs.
RESPs became popular in 1998 when the federal government announced the Canada Education Savings Plan, which is where the government will top up or contribute 20 per cent on the first $2,000 that a person puts into an RESP, making the message clear that parents need to start saving for their children's post-secondary education. At that time, many other companies jumped on the RESP bandwagon, including banks, mutual fund companies and a few insurance companies.
Senator Angus: Is it all the usual suspects, as with RRSPs, or is it different institutions?
Ms. Johnston: Similar, yes. Our institutions do not have RRSPs or insurance products. We deal only in RESPs, so the other suspects would have lots of other financial service products.
Senator Angus: Could you provide a practical example of what has been happening that is negative and your suggestion about how to fix it?
Ms. Johnston: Certainly. A couple may each contribute $50 or $60 a month, or maybe even $100, which would account for the $600 to $1,200 a year they may put in. There could be a situation where, in three, four or five years, they get into financial difficulty that ends up causing them to declare bankruptcy.
Senator Angus: Both of them?
Ms. Johnston: No, usually only one of them, but nevertheless, the bankruptcy trustee will approach the RESP company to seize the assets, to take them into account.
Senator Angus: They are not exempt from seizure at the moment?
Ms. Johnston: No.
Senator Angus: At all?
Ms. Johnston: At all. As soon as you collapse the RESP and return the grant to the government, you are not allowed to get grant or participate in an RESP for two and a half years after that. To get back in, it is not that easy once you have declared bankruptcy or collapsed your RESP.
Senator Angus: Do you have any comparable statistics as to what happens in other jurisdictions? Are we unique in Canada? It sounds rather Draconian to me.
Ms. Johnston: RESPs do not exist in other countries.
Senator Angus: They do not?
Ms. Johnston: No, they do not. We are the lucky country that has decided to shelter the income on earnings used for post-secondary education. In the United States, they have something similar but not the same type of product. State by state, you can prepay tuition or have certain types of investments. If they are used for education purposes, then you do not have to pay tax on the income.
Senator Oliver: Are they sheltered from bankruptcy?
Ms. Johnston: No.
Senator Angus: Specifically, then, we are not talking CCAA here; we are talking Bankruptcy and Insolvency Act.
Ms. Johnston: Yes.
Senator Angus: Do you have a specific amendment?
Ms. Johnston: My recommendation would be that we completely shelter all income in an RESP when the contributor is the parent, or grandparent of the child, particularly.
Senator Angus: As opposed to?
Ms. Johnston: As opposed to an aunt or uncle, sister, brother or next-door neighbour. There is no restriction on who can take out an RESP or for whose child. Anyone in Canada can take out an RESP for any child in Canada.
Senator Biron: What about a case where more than one person contributes to the fund, not only the uncle, but the father and grandfather? What if three people contribute?
Ms. Johnston: There can be more than one RESP for the same child, but you would not have one RESP with many people contributing to it. You would have one owner, and that person is named in the contract. Usually, it is the parent. The RESP has to be owned by someone who is of legal age. It would be owned by, say, myself for my young, and I would contribute the money to the plan on behalf of that child. If I should declare bankruptcy, then the assets I have in this plan could be seized.
Senator Biron: But only one person can contribute to the fund?
Ms. Johnston: No. A husband and wife can contribute to the same plan.
The Chairman: To follow up on the last question, on the mechanics of the fund, do the accumulated savings remain the property of the funder until such time as the student becomes eligible for the payment?
Ms. Johnston: Yes.
The Chairman: To clarify, the issue of the beneficiary's bankruptcy does not really come into play here.
Ms. Johnston: No, the beneficiary, being the child, would not be in a position to declare bankruptcy.
The Chairman: The title, then, remains with the donor. Forgetting the bankruptcy, in ordinary circumstance, once a trust or fund is set up, are there any restrictions on ability to undo them or withdraw from them, all or part, in the ordinary course?
Ms. Johnston: It is possible for the owner or the subscriber to collapse the plan and take money out. As I say, though, as soon as they do that the grant has to be returned to the government and they are not able to participate in an RESP.
The Chairman: I have a question that sounds harsh, but it really is one that troubles me. We have heard similar arguments on the treatment of RRSPs, and no doubt we will hear more. With RRSPs, the genesis of the plan was for individuals who are not part of a broad corporate pension plan or government pension plan to be able to develop and administer a provision for their own retirement in a similar sort of way. There is a social objective too, that the government wants people to prepare for their retirement so that they are able to retire in an appropriate fashion and, should I add, not be a burden on the government.
When it comes to the funding of education, the RESP is one way to help out your child or the child of a friend or whatever it is, but it is only one of many ways. You could open a bank account, which may not be attractive today with interest rates, or every year buy a government bond. People have found all sorts of ways of saving to help further the education of young people when the time comes.
I wonder philosophically, what is the case for favouring one type of savings over another type of savings?
Ms. Johnston: The savings in an ordinary bank account generally are not set aside for that one purpose. They are taxable.
The Chairman: No, but they often are. Lots of people have set up a bank account for a child or grandchild, and that is what that money is for.
Ms. Johnston: If they set it up in trust then it is restricted to being used for whatever purposes the trustee sets it up for. The reason that an RESP works so well is because it is earmarked for education purposes only. It gets the tax sheltering, that type of favour, but the Canada Education Savings Grant is what makes RESPs so much more attractive than any other method.
The Chairman: I understand, and your professional role is coming out as to why it is more attractive, but people do have a choice as to which way they want to save, and it could be a bank account or stocks or whatever.
Ms. Johnston: That is true.
The Chairman: I wonder philosophically, in the light of the bankruptcy situation, if one parent has chosen to save by way of putting something away in a designated bank account, this is our kid's education fund, by means of an insurance policy or in any number of ways, why should public policy favour one particular choice over others?
Ms. Johnston: In my view, because the RESP is already a federal government issue, whereas the other means for being able to save are not.
The Chairman: However, the federal government policy has to do with encouraging people to save for education. It is not a federal government issue to protect anything. It is not drawn in the light of bankruptcy.
Ms. Johnston: That is true.
The Chairman: I am having trouble seeing the distinction if people have a free choice to make. It could be a mutual fund. There are many ways of doing this and I am not yet persuaded as to why one particular choice should be favoured under this statute over others. I wonder if you might speak to that.
Ms. Johnston: I am not sure that I am able to do so.
Senator Moore: Ms. Johnston, I realize that this program has only been in place since 1998, but given the concerns that you have expressed here today are there any statistics on how many children have been denied the benefit of education savings because of this clawback and bankruptcy of the donors? Are there many?
Ms. Johnston: Compared to the number of people who have an RESP, the frequency of a plan being collapsed for bankruptcy seizure is very small, perhaps 1 per cent or 2 per cent of the overall RESPs. Nevertheless, it is the children who are involved that we are concerned about.
We know that the number one reason why children do not pursue post-secondary education is because of lack of funding. We also know that student loans are getting much more difficult to get. We also know that with respect to the children enrolled in our RESPs there is a 40 per cent greater chance that they will attend post-secondary education than those who do not have RESPs. We have the statistics that back that up, when we compare it to the nation averages.
Therefore, we want to help more people keep their plans once they have them. The whole purpose was for the child, not for the parent, to benefit from the proceeds in the plan.
Senator Angus: As I understand it, if the parents put in X amount of money and they are at certain levels the government puts in the same amount. In insolvency, does that government portion get clawed back as well?
Ms. Johnston: It goes back to the government.
Senator Massicotte: To make sure I understand it correctly, I gather the essence of your argument is that this funding for future education is so critical that it should not be treated like other assets available to the creditors upon bankruptcy, given, as you say, statistics would show there are no alternate means and it is an important element in contributing to education for our kids.
Ms. Johnston: Yes.
Senator Massicotte: What evidence would you have? For example, I know that one of your suggestions is that there be a maximum of $40,000 over a lifetime, yet I was told yesterday that tuition fees in Ontario are as high as $20,000 but in Quebec they are much lower. Is there a strong correlation between income saved in a registered education savings plan and continuing to higher education? If there is, can you give me some numbers?
For instance, in Quebec, where tuition fees are higher, is the percentage of high school graduates going to university a lot higher? Is it? Some studies have said it is more a sociological context than income that determines whether people go on to higher education.
Ms. Johnston: The income level of parents only gets involved in their ability to contribute to an RESP. The people who take out RESPs have a concern and understand that post-secondary education is required for their child or the child they are concerned about to make it in the workplace these days, and particularly 20 years from now, when that particular child will be attending.
It is true that the tuition fees across Canada differ, and Quebec is probably one of the lowest. The East Coast has some of the highest. We also know that tuition fees in the last 10 years have increased 130 per cent. What will happen in the next 20 years remains to be seen.
Senator Massicotte: Does the information show a strong correlation between registered education savings plan and a higher education?
Ms. Johnston: I know that 40 per cent more children complete post-secondary education than those who do not have an RESP.
Senator Massicotte: Do you think it has to do with income saved and not the family content or the environment?
Ms. Johnston: It is because of having the income available. The number one reason for children not pursuing post- secondary education is lack of funding, which is more than all other reasons combined.
Senator Moore: You mentioned as a solution that the RESP, I believe you said, shelters the earnings from bankruptcy. Could you just talk about that a bit more? We have the government portion, which would have to go back to the government upon bankruptcy, and then you would have some earnings within the plan.
Ms. Johnston: That is true, there could be earnings in the plan. The way an RESP is structured is that the earnings can only be withdrawn from an RESP for post-secondary purposes only. That is the only way. If you have a self- directed program, those earnings would be donated to post-secondary institutions. If you have a pooled or a group RESP, they remain in the pool to be used by other students who do continue post-secondary education. The earnings on the Canada Education Savings Grant are treated the same way.
Senator Moore: The earnings on the grant go back to the government in the event of bankruptcy?
Ms. Johnston: They are treated the same as the earnings on the RESP. They would be donated to a post-secondary institution or remain in a pool to be divided amongst other children in a group or pool plan. There are two styles of RESPs.
The Chairman: What if a plan is wound up voluntarily for some reason? The child may say to his or her parents, ``I am going to play the banjo; I am not going to go to university,'' so the parent winds up the plan. What then happens to the three levels? You have the original capital contribution. Can the donor, or the settler or whatever you call it, retrieve the original capital that was tax-sheltered going in?
Ms. Johnston: Retrieving the capital back is never a problem at any time. However, certain conditions need to be met in order for the donor to be able to get the income. If those conditions are not met, then the interest income goes to the post-secondary institution or remains in the pool. The requirements, according to RESP legislation, are that the RESP must have existed for 10 years, the student must have reached age 21 and not be attending post-secondary education, and the student must be a resident of Canada. At that point, the donor can receive the income, less a 20 per cent penalty, plus income tax.
Senator Moore: You mentioned a pool. Where is that pool? Who is looking after that? Who decides to which post- secondary institutions the proceeds of that pool are distributed and in what proportions?
Ms. Johnston: In the self-directed programs, where the interest is donated to a post-secondary institution, it is named at the time of enrolment, or the company holding the funds tells the client where the proceeds will go should they opt out early.
The other style of an RESP is called a pooled or a group program, where the income on the investment is pooled together with that of other people. Those pools are handled by each of the scholarship plan dealers or RESP companies that have a pooled program. A pool is set up for each university year. The students who would go to university or college in that year would get a share of that pool.
Senator Moore: The plan manager manages the pool.
Ms. Johnston: Yes.
The Chairman: You are going for the whole hog here. It is not like in other cases with RESPs where the suggestion may be that contributions in the prior two years to the bankruptcy might be treated differently? You are not trying to make distinctions like that. Your objective and your position here is to preserve the entire fund, from the first payment right up to the last payment.
Ms. Johnston: That would be our preference, Mr. Chairman, primarily because the amount of money that can be contributed to an RESP is small in the general scheme of things, particularly compared to an RRSP where $13,000 can be put in. Our plan has a maximum of $4,000. Rarely do people hit that kind of maximum. Also, the RESP is for the child's use, not for the use of the contributor.
Senator Massicotte: On page 3 of your presentation, it says that, to avoid abuse, any payment made within the last year should be excluded from the bankruptcy file and therefore not accorded the protection. Is that correct?
Ms. Johnston: There are a variety of ways that would be acceptable and that would cause things to work well. The preference would be to shelter the whole thing. We do not want to have abuses as well.
Senator Massicotte: You say that the last year should be excluded. In subsequent paragraphs, you provide a maximum of $40,000 over the lifespan. Is that your recommendation?
Ms. Johnston: Yes.
The Chairman: Any other questions?
Thank you for attending here, Ms. Johnston.
Ms. Johnston: Thank you.
The Chairman: Our next witnesses are from Credit Counselling of Canada.
Please proceed.
Mr. Pran Bahl, President, Credit Counselling of Canada: Honourable senators, we are honoured to have received an invitation to make representations on two very important issues, that is, student loans and the credit counselling role in bankruptcy proceedings.
I will give a brief overview of Credit Counselling of Canada to highlight our credentials to make this submission. Credit Counselling of Canada, or CCC, is a national association representing 33 not-for-profit credit counselling agencies. Our members offer a number of services, ranging from preventive education programs to debt-repayment programs. Our credit counsellors deal with tens of thousands of individuals every year, many of whom have their lives impacted by the policies surrounding the issues addressed in this brief.
As you will be aware, CCC is committed to providing credit-counselling services for all Canadians experiencing money problems. Just to give you an idea, last year we serviced about 100,000 clients from coast to coast.
Each agency is a not-for-profit charitable organization governed by a volunteer board of directors and managed by professional staff. The sole exception is the Provincial Mediation Board of Saskatchewan because that is a government agency.
The objective of all our agencies is to help clients find appropriate solutions to their financial difficulties through counselling, support and referrals. This includes providing assistance with budgeting, money management, education on the wise use of consumer credit, setting up of debt-repayment programs for clients based on their ability to pay, and acting as a vehicle for distribution of payment to clients' creditors.
All our agencies promote informed consumer behaviour on an individual and community basis through counselling and public education programs. The objective of this brief is to provide a CCC perspective with respect to the issues surrounding student loans and the impact of counselling in bankruptcy proceedings.
I shall now turn over the presentation to Mr. Ouellette, who will elaborate on these issues. Following his presentation, we will be pleased to answer questions.
Mr. Pierre Ouellette, Executive Director, Credit Counselling of Canada: Mr. Chairman, honourable senators, we are pleased to be here to make a presentation with respect to the issues of student loans and bankruptcy proceedings, as well as counselling in bankruptcy proceedings. I hope to set another record for the committee.
On the issue of student loans, as the committee is aware, there is currently a 10-year moratorium before an individual is able to obtain discharge on student debt. We believe that that period is way too long. There are too many cases of undue hardship as a result of that moratorium. We strongly recommend that a new date be recommended. We are in favour of the recommendation of the personal insolvency task force, in terms of the five-year limit. We would strongly suggest that that not be used as the lower end in negotiations upwards to the 10-year period. We suspect that HRDC will likely insist on its current position, but that that be seen as just new compromise in the circumstances that these people face.
I can note that over 20 per cent of our cases have individuals who have student loans. I can suggest that that number would be higher if we had the tools to actually deal with those problems for those individuals. Often, we cannot do anything because of the way the collection process works, but also because of the moratorium where we can say there is no solution for you in the near future.
We think that the second recommendation from the task force with respect to the possibility of having the process tied into a court-administered hardship hearing would add flexibility in this context. We feel that there would be need for a greater awareness of that population and certainly that the process be in some way seen as being more summary in nature so that people will think it is a true option and they would not have to seek professional advice to go there.
On the second issue of counselling, we feel that counselling is an important and useful component to the bankruptcy proceedings. Our organizations have been offering family service counselling in terms of Ontario for well over 30 years, and in some occasions since the Depression, in the 1930s, so we are talking about a very long time.
We have seen the positive results of counselling in those kind of settings, including financial settings, where we assisted people restructure their lives — face their creditors, pay off their debts, and move on with their existence.
We help rebuild people's self-esteem and people successfully completing our programs have returned as useful participating consumers. We are of the view that counselling assists in that goal.
We would suggest that there is a need to refine the process of counselling in bankruptcy hearings. There should be a firmer understanding of what should go into each session, probably some firmer standards with respect to the counsellor experience beyond the BIA course and the 100 hours of counselling experience. That kind of experience is already in the communities, in that credit-counselling services across the country are available to provide that kind of assistance to the trustee community and to the bankrupts in our country, and are doing so at a greater and greater level.
We believe there is a need for ongoing training with counselling and that these individuals must be more experienced to provide true advice and direction so these people can regain their lives.
Those are my comments, Mr. Chairman. I am open to questions.
Senator Angus: Are you both involved with the same organization, Credit Counselling of Canada?
Mr. Ouellette: Yes, we are. I am the executive director.
Senator Angus: I am having a problem understanding how it works. How is it funded?
Mr. Ouellette: We are the association for a number of independent agencies. These agencies are community based. The agencies are funded in a number of ways. In Ontario, for example, and in many other provinces, they would be funded by way of client contributions, United Way funding. We also have an arrangement with some creditors for individuals involved in a debt-repayment program that a certain percentage of the money returned to the creditor be paid by way of a contribution to the organization.
Senator Angus: Is it a federal government agency?
Mr. Ouellette: No, it is an independent agency.
Senator Angus: The CCC is the mother organization; the locals subscribe to it and so forth. This counselling, I can understand after the fact when people have gotten into trouble and you in turn help restructure their lives on an individual basis. It sounds like a worthy pursuit. How about before the fact? Are there initiatives that you take?
Mr. Ouellette: We are involved with a large amount of educational programs. We provide materials for schools. We provide presentations at schools. We provide individual counselling.
Nearly 50 per cent of the people who visit our agencies go away with simply counselling. The counselling may take a period of weeks or months, but they are not involved in a debt-repayment program of any kind. They take our advice, tighten their belts and go on in a direction to deal with those issues.
Mr. Bahl: To add to that, we offer telephone counselling also. For example, last year we received 72,000 telephone calls for counselling. Most of those people did not actually end up with any program; they were looking for simple answers and our counsellors were able to provide them with direction. We have preventive programs in terms of education and our education people go to organizations. For example, we were invited by General Motors to speak to their employees at one time. There are preventive programs.
Senator Angus: Are the people in the local organizations, by and large, volunteers? Is this a community service?
Mr. Ouellette: Our boards are made up of volunteers, representatives from all branches of the community. Our staffs are professionals. We have trained counsellors who have many years of experience, executive directors and support staff.
Senator Angus: I understand that one of the more insidious forms of financial trouble that people can get into is as a result of gambling and the growth of casinos. This type of behaviour has led to the ruin of many a family. Are you active in that area?
Mr. Ouellette: We are very active in that area. Our numbers are not indicating that it is an explosive problem, but we are aware that it is a problem and we are working closely in every province with the equivalent of the problem gambling treatment centres. In fact, Credit Counselling of Canada and the treatment centres are initiating a series of regional training sessions so that counsellors from treatment centres and counsellors from credit counselling centres work together to identify the problem earlier. A series of questions will be prepared so that we can identify problem gambling earlier in the process and recommend some help.
Mr. Bahl: It is not a big problem, but it is an emerging problem.
Senator Angus: This is what we have heard here.
You advocate a substantial shortening of the term for discharge of the student loans from 10 years. Do you have a particular term in mind?
Mr. Ouellette: We are willing to accept five years as a margin. If possible, we would be looking at an earlier period, simply because we want to see these people come back to being productive citizens as fast as possible. If you look at a situation where a person has a 10-year moratorium before they can have those debts discharged, their lives are in stall mode. They are in a form of economic limbo. If you add to that the period after bankruptcy, in which it is difficult to establish credit — another six years — some individuals are facing a period of time of 16 years or more before they can start being normal, active economic citizens. We think that is much too long.
Senator Angus: As you said in your opening remarks, we are aware of the problem because there have been people before us, including students and former students. It is clearly an issue, although I guess from the lender's perspective, it has to be balanced, does it not?
Mr. Ouellette: We agree. We understand that this is not an ordinary commercial loan. In fact, it is a valuable tool for accessibility to university and, as such, it should be treated differently. We think the right balance is in that five-year period.
[Translation]
Senator Hervieux-Payette: I want to come back to the issue of prevention. Credit card companies frequently issue cards to students without doing credit checks beforehand. The cards are offered free-of-charge and even a little carelessly. In your view, is the problem of young people going bankrupt not linked to this practice of issuing credit cards to people with very few resources? These people are at their credit limit, and as they cannot meet their debts they have to declare bankruptcy. Doesn't the current system tend to lead on a path towards bankruptcy?Error! Bookmark not defined.
Would it not be advisable to question how justifiable it is to issue hundreds of thousands of credit cards to people who cannot afford them?
Mr. Ouellette: The Minister of Human Resources Canada set up a number of programs to address this problem, particularly with respect to student loans. In fact, there is another problem. Many credit cards are easily available to people in school. As a result, at the time they finish their studies they have to consolidate not only their student loans but also their credit card debts.
In our area the major problem is credit card debt, not only as regards students but in general.
Senator Hervieux-Payette: As regards other consumers?
Mr. Ouellette: That's right.
Senator Hervieux-Payette: So access to credit cards without a credit check or reserve is quite simply an incentive to assume debts beyond one's ability to pay?
Mr. Ouellette: Exactly. That is why we are trying to set up education programs on this problem. We are in fact asking credit card companies to finance these programs.
For example, last week Mastercard contributed $50,000 to Western University to support the work of a specialist researching the use of credit cards by students. It is not an enormous amount but it is a step in the right direction.
Senator Hervieux-Payette: You have answered my question. I think the problem must be dealt with at the root and not when it is too late.
[English]
Senator Moore: Mr. Bahl, you mentioned in your opening remarks that Credit Counselling of Canada serviced 100,000 Canadians last year. You also mentioned that 72,000 phone calls were handled. Does the 100,000 serviced Canadians include the 72,000 phone calls, or is that in addition to?
Mr. Bahl: That is in addition to the 100,000.
Senator Moore: So you saw 100,000 people in an office.
Mr. Bahl: Yes.
Senator Moore: Mr. Ouellette, you mentioned your school education programs or preventive programs. Do you and your volunteers do that on your own initiative, or do you work with school boards or provincial departments of education to encourage credit education in how to handle that facility?
Mr. Ouellette: There has been an encouraging trend towards providing that in the curriculum over the last five years across the country. For example, in British Columbia, as early as the early primary grades, there are programs that deal with consumer advocacy and consumer understanding of credit and the like. It sounds preposterous, but there are programs in kindergarten, which we obviously encourage.
More often than not, we bring forward our materials to the institutions and the school boards, and we try to advocate plugging these materials in with the provincial curriculum to make it easy for teachers to pick up our materials and use them in a school setting. For example, we are producing a video at this moment for high school students and junior high students. It is basically a scenario where people talk about credit, including easy accessibility to credit cards, and how to deal with that. We have worked with groups like the Ontario Association of Modern Language Teachers to ensure that it is in two languages and that the material fits into particular cubby holes of curriculum, and we communicate that fact to the teachers. We work hard in that area. We are volunteer groups and have limited resources in that context.
The Chairman: Coming back to the student loans, it is easy to look at the 10 years and listen to the evidence and say that that is very harsh and extreme, and maybe it should be five years or whatever. However, we have to be conscious of what gave rise to this situation in the first place. We have been advised of a reprehensible situation, where these loans lost meaning — and this was an American experience as well as a Canadian experience, and maybe even more so. These loans just fell into disrepute in the sense that students, upon graduation or shortly thereafter, went into a process of bankruptcy as a way of getting rid of them. They negated the effectiveness and the meaning of the program altogether.
Has human nature changed? I notice you have gone to five years, not to two years or to doing away with this. Does that suggest that, through your counselling and your insights into human nature, you feel there is a risk toward falling back to that type of practice if we removed any special rules on student loans?
Mr. Ouellette: I am not aware of how broad that practice was, but I will take it as a given that it existed because my friends at HRDC suggested that that was the case. We see people who are in crisis, and when they come to our office they are at the point where they need some help. Often, we do not have the tools to help them. Recommending the five- year point recognizes that, had that possibility existed, people may have abused the process early on or too quickly, and that if they are five years into their careers, they might not, especially given the types of individuals that were supposedly doing this. I think that the five-year period is closely tied in to a judicial remedy in cases of extreme hardship. If we have the two working together, we will be able to deal with all those circumstances in a positive and fruitful way.
The Chairman: Our curiosity has been satisfied. Thank you very much. We appreciate your attending here.
[Translation]
Mr. Ouellette: I would particularly like to thank Mr. Robert for his help with our presentation.
[English]
The Chairman: Are there any further questions?
Thank you very much.
The committee continued in camera.
The committee continued in public.
The Chairman: We now welcome Mr. Mel Fruitman to the committee.
Please proceed.
Mr. Mel Fruitman, President and CEO, Consumers Association of Canada: Honourable senators, thank you for inviting us to appear during your examination on the administration and operation of the Bankruptcy and Insolvency Act and the CCAA.
The Consumers Association of Canada is a 56-year-old, independent, non-profit organization dedicated to acting on behalf of and representing the interests of Canadian consumers to governments and all sectors of society. We are a volunteer-driven association operating at the moment with only nominal part-time staff, and I am the volunteer president.
The acts that you are currently reviewing are extremely complex and you have already heard from a number of organizations commenting in detail about many of their elements. Many issues related to consumers have been dealt with by others. My remarks today will be relatively brief and will concentrate on one area in which the consumer is placed at a great disadvantage, indeed at risk, by the current legislation.
This is the area referred to in other venues as consumer liens. Specifically, it refers to situations in which consumers have dealt with vendors of goods or services, made deposits on purchases for future pick-up or use, or even given in items for repair, but find themselves incurring financial loss as a result of failure of the vendor.
In commercial transactions, business to business, the assumption is usually made that the parties to a transaction, whether it be a loan or extending credit for the purchase of goods and/or services, are in a position to assess the risk or to seek appropriate assistance and make an informed addition.
In a consumer-to-business transaction, it is widely recognized that the positions of the participant are not equivalent. Even when following the basic principle of caveat emptor, or ``buyer beware,'' and avoiding situations that appear to be risky, the consumer is basically at the mercy of the vendor. This understanding is at the heart of much of existing consumer protection legislation. However, when it comes to protecting the consumers who inadvertently gets tangled up in a business failure, there is a huge gap.
When, for example, a consumer purchases tickets for a play that is to be staged in a month's time, there is an expectation that, having paid for their tickets, they will get to see that play. There is no reason for them to believe otherwise. The ticket-seller, promoter, agent — whichever — has taken the money and the consumer has received his or her ticket. They are not expected as consumers to run a credit check on the vendors.
However, as revealed in the Livent situation several years ago, consumers were operating under a false assumption. A large number of consumers had innocently purchased advance tickets either directly from Livent or through its agent, TicketMaster, for scheduled public performances.
Shortly after filing for CCAA protection in 1998, Livent announced the cancellation of all future performances at the Ford Centre in North York, including a series of performances throughout the balance of 1998 and 1999 for which prepaid advance tickets had been issued. They also advised that, despite the cancellations, there would be no refunds of prepayments made on account of advance tickets issued to what were now cancelled future performances. Prepayments it had received directly and indirectly had not been retained in trust but instead were treated as being available upon receipt for use in Livent's general operations across North America. This, by the way, is the procedure under which most airlines operate these days.
It was believed by most consumers that they were entitled to a refund. However, in what I, as a consumer advocate who is not a lawyer, can only describe as an extremely bizarre ruling, the court ruled that an advance ticket to a future entertainment event is primarily a seat licence, not evidence of a contract for the future performance of services. It is simply a licence to attend the venue or theatre where the ticketed performance is to be presented and to occupy a seat to view the performance of the event to which the ticket relates. In other words, the ticket allows you to occupy a seat but does not ensure that anything will happen or even that the lights will be on in the theatre.
I recognize that we are now running into an overlap of jurisdiction with both provincial consumer protection legislation and federal legislation coming into play; however, if federal legislation made provision to protect those assets that are, in our opinion, still the property of the consumer, then this situation would not likely have come to pass.
A similar situation occurred more recently with the bankruptcy of Canada 3000. Once again, we had consumers who acted in good faith and purchased tickets in advance. Actually, there was not really any option other than to buy them in advance, and many were left holding worthless pieces of paper. Some consumers who had paid for their tickets via credit cards were reimbursed by their credit card company, which had no legal obligation to do so. Those who had purchased through a travel agent were covered by the industry's compensation fund. Unfortunately, those who had dealt directly with the airline, something that we as consumers are increasingly being encouraged to do, were left with nothing.
These are but two examples of situations in which consumers had little option but to pay in advance and subsequently lost their funds through no fault of their own but because of deficiencies in providing appropriate consumer protection in legislation. Similar circumstances can arise when a consumer makes a down payment on merchandise that is not available at the time but is to be delivered at a future date or on merchandise that is held by the merchant on layaway or in any other circumstance in which the vendor has received part or all of the customer's payment but the goods or services have not been delivered or utilized.
One other situation less frequent but nonetheless real is where a consumer has left goods for repair and the organization declares bankruptcy. I can speak to this one from personal experience. Several years ago, my wife took a ring in to a jeweller to be repaired. Before the repair was completed, the jeweller went bankrupt; it looked as though she might not get her ring back and would have no recourse. Fortunately, because of her persistence, and armed with the insurance evaluation forms, descriptions and pictures, she was able to convince the receiver to locate and return the ring.
Unfortunately, our association does not have the resources to conduct research into the number of bankruptcies or CCAA filings involving consumers as creditors, nor to their financial impact. However, the failure of Canada 3000 and the current circumstances of Air Canada suggest that the consequences can be dramatic. Consumers' exposure is likely to increase as Internet usage increases for placing and paying for goods and services well in advance of delivery.
While it may be possible for provinces to adapt their consumer protection legislation, documents filed during the Livent case raised serious questions about whether that would be effective given the jurisdictional overlaps.
In summary, consumers should not suffer a loss of assets because of the bankruptcy or CCAA filing of an organization with which they had been doing business. Any consumer funds that had been advanced to the organization or any goods belonging to the consumer but in the hands of the organization should be returned since, in effect, they are being held in trust. This suggests that these assets should be treated completely separately and should not become part of the assets of the organization. This approach would be preferable to other possible solutions of giving consumers super-creditor status.
I would be pleased to try to answer any questions.
Senator Oliver: I am wondering if you think that there should be a difference between ordinary small businesses, a mom-and-pop operation, and consumers, or even corporations. Corporations, if you look at their statements, always have a section saying ``prepaid expenses.'' A corporation may have to pay its insurance right up front, to last it for the year. If something happens, it may lose that. There are many other circumstances where small business has to make payments for certain goods, chattels and other things up front. Why should we even be contemplating making something special for consumers? What is so unique?
Mr. Fruitman: The difference is that this is not a business-to-business transaction. Transactions between businesses, whether they are large or small, are entered into, presumably, with full knowledge of the risks inherent in those transactions, and organizations have the capability to take the appropriate steps to try to cover themselves.
Senator Oliver: But you know that when you buy a ticket to a hockey game, a movie or anything there could be a contingency or force majeur so that it could not take place. What is your insurance?
Mr. Fruitman: That is back to the other side of it. That is the consumer side of it. Force majeur may take place. Unless it is a failure of some sort of the organization, those tickets will usually be honoured or refunded. I do not see that there is any difference whether the consumer is dealing with a large or a small organization. A consumer, who are not entering into a commercial transaction in the same way that a business-to-business transaction exists, has no way of protecting himself, other than if one knew that a corporation were in dire straits, in which event the consumer would probably be wise not to give the corporation funds anything he was not going to receive immediately. Other than that, a consumer does not know. If I were to purchase an appliance from Home and Rural, I would have no reason to suspect as a consumer that if I give them a $500 deposit against a $2,000 refrigerator, to be delivered in six weeks, the company may go bankrupt and I will lose my $500 deposit.
Senator Oliver: The normal way our society deals with unforeseen risks is through insurance policies. Why should this not simply be an issue for bankruptcy legislation but for insurance? Your issue is consumer liens. Why not arrange for an insurance scheme to cover this contingency?
Mr. Fruitman: For the individual consumer to take out?
Senator Oliver: Yes.
Mr. Fruitman: Again, how would you possibly insure against all of the transactions that you make as a consumer? This is virtually impossible. Of course, it transfers that assessment of risk or the risk element to the consumer rather than to the business. I do not see that consumers should have to buy insurance to protect themselves in the event that a transaction into which they are entering into in good faith goes bad.
Senator Prud'homme: Hear, hear!
Senator Angus: You have outlined a lot of situations, for example, your wife's ring situation. I have some friends in Toronto who sold their house, and because their new house would not be ready until a certain day, they put all of their furniture and belongings in storage. When the time came to get their belongings, they discovered that the storage company had gone belly up and that they could not get their goods. It is a nightmare. It is a similar situation to the one you are talking about. What are you recommending to protect them?
Mr. Fruitman: There are a number of ways to deal with that. Changing the Bankruptcy Act and the CCAA would be the simplest way of dealing with it. Actually, there is no reason for the goods a company is holding to be considered an asset belonging to the organization. The belongings do not belong to the company; they belong to the consumer.
Senator Angus: Like the ring, though.
Mr. Fruitman: It is the same situation. I do not think there should be any question but that those goods should be returned to the proper owner.
Senator Angus: Is there any question?
Mr. Fruitman: There appears to be.
Senator Angus: I do not know; I cannot remember the bankruptcy courses I took with Mr. Goldstein here years ago, but it seems to me that there is a provision in the Bankruptcy Act. I agree you have to incur legal expense probably to repossess.
Mr. Fruitman: Again, why should a consumer have to do anything more complex than produce a receipt, or whatever, to get back his or her goods?
Senator Angus: I totally sympathize with you, but the reality of modern society, and I am talking about going back, say, 50 years, our legislators have dealt with these situations. Usually, when a company or depository goes bankrupt, chaos prevails. Everyone is milling around and the doors are shut and the power is off. Imagine going into a warehouse and saying, ``That is my desk and my sofa is over there,'' at a time when many other customers are also milling around. There are already provisions in the law, as far as I know. Over and above what is already there, what do you want us to do? That is the issue.
Mr. Fruitman: There are different situations. To the extent that that is covered off in law, make it as simple as possible for the consumer to retrieve his or her goods. The other part of it, of course, is this whole prepayment element, in which I make a deposit against merchandise that I will pick up at a later date, the refrigerator that I described, tickets for a sporting event, airline tickets — a very big issue at the moment because of Air Canada and Canada 3000. One solution that had been suggested in the past, which I recognize is very complicated, would be for those funds to actually set aside in trust. Segregating funds in that manner can be difficult.
One solution, as this gentlemen has suggested, might be an insurance policy, but then I would suggest that it is the corporation, the organization, that should take out that insurance policy, not the individual consumer, or indeed not necessarily segregating funds.
There needs to be a system of bookkeeping where X amount of dollars are held in trust. There needs to be a mechanism ensuring that these funds do not belong to the corporation, that they are not there as a first call for the secured creditors. Those funds should go back to those people who have no other recourse.
Senator Angus: I do not think you will find anyone who is not sympathetic with the points you are making. I think I am hearing you say that there has to be less red tape or whatever. I will certainly buy into that. I, for one, will be asking your consultant how to give redress to the points you are making. My own personal sense at the moment is that there is stuff in the law that is fairly workable. It would be interesting to see what he says.
Mr. Fruitman: As I mentioned, I am not a lawyer and we have little resources to delve into this. However, with regard to the Livent case, to which I referred, my understanding is that, as with Canada 3000, those who were not covered in some other manner, such as the credit card company indemnifying them, basically lost their money.
Senator Angus: Right. The word on the street is ``tough bananas,'' unfortunately. It is caveat emptor, and usually there are some forewarnings for the prudent consumer. I would be interested in knowing more about the jeweller your wife took her ring to. Was this a little jeweller, a fly by night type, or was it Birks?
Mr. Fruitman: No, it was actually someone she had dealt with for a number of years. To your other point, I suppose it depends which side of the street you are walking on. I do not accept the ``tough bananas'' response.
Senator Angus: No matter how sophisticated one is, society cannot provide a big dole for everyone who makes a bad investment.
Mr. Fruitman: Again, a distinction has to be made. When an individual makes an investment, presumably he or she gives considered thought to what it is they are making the investment in. There is an unexpected return on that investment, which in turn carries an associated risk. When an individual makes a down payment at a store on a particular good, he or she is presumably not in a risk position.
Senator Oliver: Is there a risk when one buys a theatre ticket?
Mr. Fruitman: Even for a theatre ticket — well, very nominally. I would not think that when you go out to buy a theatre ticket you are putting your money at risk. There may be technically, in law, but from a consumer perspective, an individual who buys a ticket to a performance to take place at the National Arts Centre next month does not believe he or she is taking a risk.
Senator Angus: The individual would not be taking a risk, because it is government backed. However, if the consumer purchases a ticket to a play at a theatre that is operating on a shoestring, that may happen. It would then become a charitable donation.
Senator Tkachuk: I also have a lot of sympathy for a consumer who would lose money on this. However, this is about consumer choices and who should be responsible for their choices. Someone who wants to attend a Maple Leafs hockey game, for example, has to purchase his or her ticket ahead of time, generally, because they are hard to come by, as opposed to a ticket to attend a Nashville Predators game, where one may be able to purchase a game-night ticket. Essentially, the consumer is taking a risk and knows he is taking a risk, because he cannot be certain that that particular event will go ahead — say, if the team goes bankrupt.
The same is true where airline tickets are concerned. At one time, Air Canada, and Canadian, would let you cancel a ticket up to the last minute, so you never were at risk. Then, cheaper airlines came about and the idea was that if the consumer paid ahead of time and guaranteed the ticket the airline would offer a good price on the, say, Saskatoon to Regina or Winnipeg flight. Consumers chose that option rather than the more expensive option, where they could cancel until the last minute. That option is still available, where you do not have to buy a ticket ahead of time, you actually wait until the last minute.
Consumers put their money at risk when they pay ahead of time. When they buy on the Internet because it is cheaper, and then something has to be shipped to them, rather than going down to the Bay and actually putting it in their truck the same day, they run the risk of giving someone money on the hope that that actual product will be there. Surely, we cannot in law prevent all of those risks. We cannot eliminate all of those risks, can we?
Mr. Fruitman: I would disagree with you, sir. It is not on the hope that that product will be delivered; it is on the expectation that that product will be delivered. That is a major difference. Again, there is no valid reason for suspecting that it will not be.
If you buy a ticket to a Maple Leaf's game, there is no history that would suggest that you might be at risk that you will not be able to attend. When you are buying airline tickets, it becomes much more complex because you have few choices in which you can actually just buy the ticket and walk onto the plane. You are more or less obliged to buy and pay for that ticket in advance in most situations.
When you say ``consumer choice,'' there may be an option in which you buy a first-class ticket that would cost you $2,000 to get from Toronto to Ottawa, as opposed to buying a $300 or $400 advanced purchase ticket. However, the airlines in particular are known to be using these funds as their operating funds. They are working on a cash flow basis, so they are the ones who are putting these funds at risk.
Senator Massicotte: Basically, I am trying to separate the two. I think the ring and the inventory is a separate matter because it does not belong to the debtor, it belongs to the consumer. You are talking about deposits.
The premise of your argument is that there is not a fair relationship. You are saying that even if it is not a business relationship you think the consumer should receive greater protection because caveat emptor cannot apply because he is not as well informed. I would not mind if you had numbers or polls showing that. When my wife puts a deposit, say, on the price of a dress, we always wonder whether or not she will get the dress. In other words, she does realize there is a risk. However, maybe you have studies that indicate otherwise.
Using that argument, I suspect that, under your proposal, any consumer dealing with a business, be it theatre tickets or whatever, would be protected. Not only theatre tickets and deposits, but any relationship between an individual and a business, using your argument, should be protected. Is that accurate?
Mr. Fruitman: I am sure we could find some exceptions that would belie the rule but, basically, yes. It is seen by consumers as not entering into a risk. There is no assessment there. It is just a different type of transaction.
If your wife, for example, puts a deposit on a dress, one would normally expect that that dress is set aside waiting for her to come in and pick it up. There should not be any risk involved in that.
Senator Massicotte: As you said, you ``normally expect'' that, but just the fact that those two words are used suggests that there is a risk that the transaction may not occur.
Mr. Fruitman: I am not suggesting that consumers receive special protection. I am suggesting that these are funds that are advanced in a different type of transaction, in a different way than commercially advanced funds. Therefore, they really should not be considered to be an asset or part of the corporation. The money still belongs to the consumer. It is a different type of relationship.
Senator Massicotte: Do you realize how broad that is? It covers any relationship with a consumer, individual or corporate. Your premise is that there is an unfair relationship. There is not the same knowledge, not the same appreciation of risk, therefore protection is needed for those deposits or any form of receivable. That is very broad.
Mr. Fruitman: Yes, but the flip side of that argument could lead to a situation such as that raised during the Livent case. If such an event occurs frequently, consumers who may now in their naiveté freely make such purchases will soon become convinced that those purchases are risky. That could change the way we purchase tickets and make retail purchases. Will we demand something else? It turns the whole commercial world upside down if you take the flip side of that argument.
Senator Massicotte: What happens in condo development? Condo developers pre-sell 60 per cent or 70 per cent of their units; they take deposits on those units. What would happen if, for some reason, the developer could not complete the building? Are those deposits protected?
Mr. Fruitman: I believe they are protected under provincial legislation. There was a case recently in Ontario involving a purchase agreement that contained a clause that stated that if the developer did not complete the project within a specified period the monies would be refunded. In this case, the developer deliberately delayed completion of the development because prices were rising.
Senator Massicotte: Those monies are deemed to be trust funds. Am I correct?
Mr. Fruitman: The case got very complicated.
Senator Massicotte: You are suggesting that the same thing should exist for all other consumer relationships, that basically these are trust funds; correct? It is not the company's money, in other words?
Mr. Fruitman: I am saying that is so in effect. I am not necessarily saying that that is the operating mechanism. That would obviously depend on what makes sense for the organization. I am not trying to put a heavy burden on those commercial organizations that are dealing with consumers.
Senator Prud'homme: Briefly, I am very impressed with the work done by the Consumers Association of Canada. I am a strong supporter. Ring aside or dress aside, I am impressed with the general tone that you are putting forward through the reflection of very astute members. I am a new member of this committee. This is not an area of great expertise for me, other than to say that if I had to take sides I would take the side of consumer protection, because I know how the other side works. I was elected for 30 years, and in my district the Consumers Association of Canada never lacked for money because I knew of the immense work that they could do with so little money to protect consumers. The others are so filthy rich sometimes that they can have all the lawyers and so on. I do not want to talk against my own profession, but I think there must be a balance somewhere.
Today, we are encouraged to buy ahead of time at a reduced price, to the point where people are expecting so much from little dollars. I know for some people here it may be peanuts, but not for me. Senators Angus, Oliver and Kroft are experts; I am sure they will get the message. It may not be totally what you are expecting from this study. You have raised in my mind enough doubt to further delve into this subject, which is new to me. The protection of consumers is primary. The others can pay to defend themselves, but consumers should come first. I want to thank you, Mr. Fruitman.
Mr. Fruitman: If I may pick up on a couple of themes in what you said. You indicated that you are relatively new to the committee, that you are perhaps not steeped in the issues as much as the others. I would suggest that that is a familiar perspective that may colour one's attitude as a consumer. Sometimes, we do not realize what we do or do not know. Everyone in this room is well informed, has at least a modicum of knowledge about how this legislation works. We are not in that context by any means with the typical consumer who does not know what is likely to happen to them when they enter into a transaction.
The other point is this: If you could find some way to get us more funds, we would be pleased to do more research.
Senator Prud'homme: I express a suggestion; I do not ``recommend'' or ``advise.'' I think those words can be arrogant sometimes. May I suggest kindly that, as of yesterday, we have a new champion of consumer associations — Senator Plamondon from Quebec was appointed as an independent senator.
Mr. Fruitman: Yes, I heard.
Senator Prud'homme: My colleagues have not seen her in action yet. Perhaps she will replace me here some day as ``the'' independent, because there cannot be two independents on a committee according to certain rules. I suggest that you get in touch with her with your views. She is listening already. She may come to this committee because every senator is can sit here; however, a senator is not allowed to vote unless he or she is a member of a committee. Senator Plamondon will listen if you make your case to her.
Mr. Fruitman: That should be interesting. I do know Senator Plamondon, and she is a tiger on behalf of consumers.
The Chairman: Let me make an observation, to complicate things further. It seems to me that you equate the words ``individual'' and ``consumer'' as the person dealing with a company. However, many of the problems and the challenges exist in a business-to-business relationship. There are thousands of small or medium-sized businesses incorporated, unincorporated, that deal, by choice or necessity, with larger businesses as suppliers or as customers somewhere in their relationships. I urge you not to assume that, just because they have the appearance of a business, they somehow have all sorts of knowledge about the other business entity with which they are dealing. They may have many of the same problems.
I know that in your world, in your work, you tend to think of the consumer as an individual or a family, but the issues go much broader than that, through a much more complex set of relationships.
Mr. Fruitman: Yes, I do, as a former small businessman myself, recognize the imbalances that occur in those commercial transactions. Again, I make that distinction, even though it may be small versus large, an independent, unincorporated business versus one of the huge corporations, it is nonetheless a business-to-business transaction. I continue to make that distinction. While a small-business person may be unsophisticated, he or she should at least know that they are in a business transaction. If there is any doubt at all, there are advisors available to them. That is part of the cost of doing business, unfortunately. I do make that distinction between those people who are acting simply as consumers as distinct from small people in a business-to-business transaction. I recognize that the problem exists there as well.
The Chairman: On the flip side, consumers may have choices in whether to buy an item, but small businesses may not have many choices in buying their raw materials. There are problems in both areas. I understand you have defined your constituency of concern for your purposes.
Thank you. We appreciate your attending here.
Our next panel is from the Canadian Labour Congress, the United Steelworkers of America and the Canadian Auto Workers.
Please proceed.
Mr. Bob Baldwin, Director, Social and Economic Policy, Canadian Labour Congress: Honourable senators, thank you for meeting with us. The Canadian Labour Congress is a federation of 65 unions and about 2.5 million members from all sectors of the economy and all parts of Canada. We have provided to your committee a written submission. We hope you have had a chance to review it. In that submission, we made a number of recommendations. If acted on, those recommendations would substantially strengthen the position of employees in collective agreements in bankruptcy situations. Underlying the recommendations is the view that employees of bankrupt firms are particularly vulnerable in bankruptcies. Both unpaid wages and pensions are at risk.
I will hand over to Mr. Yussuff.
Mr. Hassan Yussuff, Secretary-Treasurer, Canadian Labour Congress: Honourable senators, thank you for this opportunity. We hope that our submissions will stimulate discussion about the necessity to change the Bankruptcy Act.
We have provided to the committee a number of recommendations. There are strong reasons to enhance the relative claims of employees in bankruptcy situations. Workers currently go into bankruptcy situations in substantially weaker positions relative to other creditors and often relative to senior executives of the employer. Unlike other creditors, workers are not in a position to negotiate the terms on which they may become creditors of the employer. Unlike creditors, they are not in a position to assess the risks that they are required to bear. Unlike other creditors, they are not able to guarantee their employer's obligation by way of secured charge. Unlike senior executives, they are not in a position to have their termination entitlement, including golden parachutes, set aside in trust accounts and thereby protected in bankruptcy proceedings.
In our submission, we have made a number of recommendations of a procedural nature. They include providing trade unions and employees with advance notice of initial application under the CCA and the BIA, codifying the recognition of trade unions and employees as interested parties under the CCA and BIA proceedings and providing unions and employees with broad disclosure rights and require companies to pay legal costs incurred by trade unions or by organized employees.
To advance these claims in the insolvency proceeding, our submission includes a number of recommendations to protect wages that might otherwise be lost in bankruptcy. These recommendations include expanding the definition of wage to include termination and severance pay, evaluating the status of wage priority above the claims of secured creditors, increasing the amount of wage priority at least to $20,000, requiring that concessions given by unions be valued and the value be given an unsecured creditor status, and creating a federally regulated wage protection plan to pay the difference between the total value of wages owed and the amount that can be paid from the company's assets.
Regarding the last of these proposals, it is worth noting that a consultation document issued by Industry Canada at the outset of the review process includes a brief history of an attempt to put a wage-earner fund in place. It is disappointing that the establishment of a fund has not been achieved, but the near misses are indicative of the understanding that the wage earners are in a vulnerable position in bankruptcy.
Because some portion of the defined benefit pension promised may be at risk in a bankruptcy proceeding, we have included the recommendations to evaluate the status of claims for pensions, contribution arrears for the full amount of any pensions deficiencies above secured creditors, and to create federal pension insurance arrangement to fully protect workers' pension entitlement. Regard the latter proposal as part of a package of changes that could enhance the protection of pension rights.
Finally, we have recommended that BIA and the CCA be amended to make it clear that the proceedings under these acts do not create exemptions from either labour or other regulatory acts.
Again, I wish to thank the committee for affording us the opportunity to make our presentation.
Mr. Lawrence McBrearty, National Director, United Steelworkers of America: Unfortunately, our union has had too much experience with Canada's legislation governing business in economic distress, both in the CCAA and the BIA. For the most part, our experience has been unfortunate. For example, in the last few years, we have gone through quite a bit of CCAA — two with Algoma Steel, Consumer Glass, Ontario Fixtures. Currently, now we are in two, one for Slater, in which the Canadian Auto Workers are also involved, and one just as early as yesterday, Ivaco, both operations in Quebec and Ontario, and part of their operations in the United States. For those who read the newspaper, and I am sure they do because of the stock market, I suppose Stelco is only a question mark.
Unfortunately, our experience has not been that great for some of the same issues that my brother just mentioned. I wish to elaborate separately with the CCAA and the BIA, and I believe that these issues raised in these pieces of legislation are connected tightly with whatever happens to the consequences of working people, their community and their families.
With respect to the CCAA, let me say that we fully support the public objective underlining the legislation, and we share the goal of the framers of the legislation. Also, in any situation of corporate distress, it goes without saying that the workers, whose livelihood depends on the continuity and the existence of the employer, have a vested interest in the maintenance of their employer on an ongoing concern. It follows directly that changes to the CCAA and the BIA that strengthen the economic position of workers and their unions that represent them in the process will inevitably advance the overall public policy purpose of CCAA.
With respect to the CCAA, our principal concerns have to do with information about the access to the process and with the obligations of the employers who are operating under CCAA. Employees, and the unions that represent them, are directly affected by both the ongoing CCAA process itself and by its outcome. Accordingly, corporations making applications to the courts for CCAA protection should be required to provide notice to employee representatives, the union, when the initial application is filed with the court.
As an example, I had to go to court Tuesday morning at ten o'clock for Ivaco. I was informed at 9:15 the night before that the company would be in court the next morning under the protection of CCAA. I had to find myself an expert lawyer and had to prepare the arguments. We received the company documents at about eleven o'clock Monday evening, and we had to be in court the next morning. All other shareholders knew a couple of days ahead of time.
A union's right to participate in the process is only meaningful if the union can be represented throughout that process by expert advisers. The price of such advice is often too costly for many unions and many workers. Our union is often the only party to the CCAA process whose expert advisers and legal counsel are not funded from the estate of the corporation operating under court protection. This is unfair. In cases where there is a certified bargaining agent, arrangements with respect to payment of advisers and counsel should be identical to those provided for any other party in the process.
In our view, the court should not be entitled under the guise of a CCAA proceeding to interfere with the operations of freely negotiated collective agreements that affect the rights of many workers. As this committee know, unions have demonstrated in times of legitimate economic crisis that they are capable of acting responsibly and in the best interests of their membership to agree to amendments of a collective agreement that may be necessary to enable the employer to survive. This corporate approach is to be preferred to an approach that would eliminate workers' rights with the stroke of a pen and subvert the primacy of a collective agreement.
In addition, it is essential that the employers' obligations related to pension be clarified. At present, there is no consistent rule for the treatment of pension obligations. While it is clear from pension legislation that benefits continue to accrue while a company is operating under CCAA protection, the courts have not been consistent in requiring that the companies operating under CCAA protection continue to contribute to the pension funds of their employees. CCAA orders require that employees continue to be paid, and there is no reason why the CCAA should not protect the pension funds, which are, after all, deferred wages.
As we note below, we believe that the BIA should be changed to give super-priority immediately following federal and provincial taxes for underfunded pension liabilities. This would lower the stakes with respect to pension plan contributions during restructuring and facilitate the process.
With respect to the BIA, we believe that a number of changes must be made. At present, only unpaid wages are recognized as priority obligations. In addition, in most jurisdictions in Canada, the cessation of operations in bankruptcy give rise to a claim for unpaid vacation pay which can be recovered from the directors of the corporation. We believe that the scope and the nature of the protection offered to workers in bankruptcy is totally inadequate.
Generally speaking, two types of solutions have been advanced to address the issue of unpaid workers' claims in bankruptcy. One is super-priority, and the other is a wage earner protection fund. We believe that Canadian bankruptcy law should include both of these types of provisions, especially legislation that would give priority to claims for wages, vacation pay, severance and termination pay and any wind-up deficiency in pension funding. At the same time, the legislation should also establish a wage-earner protection fund that would guarantee the prompt payment of wages, vacation pay, severance and termination pay pending the final resolution of these issues in bankruptcy and insolvencies.
In our view, the establishment of priorities as described and the adoption of a wage protection fund would achieve four important objectives: First, it would eliminate the extraordinary delays in settlement that characterize a bankruptcy process. Workers are not like other creditors. For most creditors, time is simply money. For the workers, time is the difference between being able to bridge the gap between unemployment and re-employment and sliding into welfare.
Second, as it relates especially to severance and termination pay, it would eliminate a bias built into many current arrangements. We often find in bankruptcy and CCAA proceedings that the severance arrangements for senior executives have been protected by the courts through the establishments of trust funds or prioritized changes while ordinary workers are left with nothing. Giving priority to severance pay would be a move towards balance.
Third, it would protect the public purse. The sponsor guarantor of the protection fund would gain subrogated rights to recover in the bankruptcy process some or all of the payments it made towards the affected workers' severance, termination, vacation pay and wages.
Fourth, it might encourage the expansion of the idea of a pension benefit guaranteed fund in all jurisdictions outside of Ontario. A bankruptcy provision giving super-priority to unfunded liabilities on pension plans wind-up would enable pension guarantors to recover all or part of their obligations through subrogation or plant members rights in the bankruptcy process.
We do not accept that super-priority and wage earner protection should be seen as a substitute for each other. In fact, we would submit that the appropriate results for workers, taxpayers and the general public interest can only be achieved if both are applied.
Overall, these suggestions of strengthening the position of workers in bankruptcy and insolvency accomplish two important objectives. In the event of full bankruptcy, they provide a measure of justice for workers consistent with their rights and the personal financial consequences they face. By strengthening workers' rights in the BIA, these changes would increase the leverage available to workers in the CCAA process, making more likely successful restructuring or reorganizations of companies in financial distress into viable, going-concern enterprises.
In our open and competitive economy, corporate financial distress is becoming more a fact of life. These results that flow from distress are always painful for every interested party. Legislative change cannot change that. However, legislative change can do two things. It can alter the balance of power and influence in corporate restructuring and give added weight to those interests that coincide with the public interest in having business emerge as a viable, going concern. It can redistribute the pain among interested parties so that those less able to bear are protected in the greatest degree possible.
I want to add as an example that we see pension funds that employers did not fund through the years with liabilities of $6 million, $7 million and $100 million, and then these companies fold up and past retirees, people retired for years, see their pension benefit going from 100 per cent to 80 per cent to 60 per cent to 50 per cent and some to 40 per cent income. It is a disgrace, and I hope we have an open discussion on this.
Mr. Lewis Gottheil, Counsel, CAW-Canada: Thank you for the opportunity to address the committee. As you may be aware, the Canadian Auto Workers Union is Canada's largest private-sector union, with membership in excess of 255,000 persons working and living in every province and every territory in Canada. Regrettably, our union as well has been engaged in numerous proceedings over the years under the umbrella of either the CCAA or the Bankruptcy and Insolvency Act. For example, about 18 months ago, we witnessed the operation of the CCAA pertaining to the insolvency of an Ontario auto parts supplier by the name of A.G. Simpson Company. As mentioned a moment ago, we are currently engaged in CCAA proceedings with respect to a steelmaker in Welland, Ontario, called Slater Steel. As the committee is undoubtedly aware, our union, as well as a number of others, has been engaged in proceedings under that same statute, the CCAA, with respect to Air Canada.
These proceedings, particularly the proceedings at Air Canada, in our view and in our respectful submission, have highlighted several deficiencies in the CCAA, and I should like to take the minute I have here before you to address those deficiencies.
In essence, I wish to make three key submissions. The first submission deals with notice. It was mentioned earlier, and I should like to underline the importance of notice to bargaining agents, to unions and to workers when CCAA court proceedings are contemplated and initiated. Our experience, unfortunately, has demonstrated that, in the past, our union has learned of CCAA proceedings in an article in a local newspaper, via the radio or, on occasion, via a courtesy phone call from the employer, frequently after the fact. This is an experience that we say has to be brought to an end.
It is critical that a CCAA order or a bankruptcy order should propose that the workers' exclusive and certified bargaining agent and workers generally are given reasonable notice of the application and all the documentation that supports the application. Today, there is no legal duty in the CCAA placed upon an applicant employer to provide such notice. It makes sense to do so. Notwithstanding the fact that it accords with our sense of fairness and principles of natural justice, it makes sense to give the bargaining agent and workers notice. They represent an important constituency and an important part of the process. A judge hearing a CCAA application or bankruptcy application can only benefit from being assured of the insight of an important constituency in that process. I dare say it would facilitate the job that a judge has in making an order, and it would allow the judge to make an order that best reflects the circumstances at play in the given workplace. For that reason alone, notwithstanding the fact that it accords with our ideas of fairness and transparency, it makes the job of the court hearing the matter that much easier and results in a better disposition of the situation.
Next, I should like to talk about what should not be included in a court order once a judge has taken jurisdiction over the application. In this sense, I am speaking about something that should be clarified in any revised CCAA statute or amendments. When such an order is granted, it should not include a stay or suspension or curtailment of administrative tribunal proceedings that deal with employment rights, such as human rights, employment standards, grievance arbitration proceedings, and health and safety proceedings.
Our view of the statute today, properly read, is that section 11(3)(b) of the CCAA does not permit or contemplate a stay of non-judicial proceedings. We have explained the reasons for our position in our brief. However, some courts have taken the view and some commentators have taken the view that, under that section, a stay of all proceedings, including administrative proceedings involving employment rights, may be granted.
We disagree. In our view, that section of the act is not intended to achieve that objective because the act is not designed to strip employees of the right to remedy, in a timely way, ongoing violations of their employment rights, certainly, as long as the company is continuing to operate.
It is important to return to first principles, I suggest, and understand the purpose of the CCAA. It is to preserve the status quo, primarily amongst creditors and between creditors in the company, by preventing any movement between creditors or jockeying for position so that one particularly aggressive creditor is able to take unfair advantage to the prejudice of other creditors. It is a statute designed to preserve a status quo and allow for a time and space for matters to be organized.
The CCAA, in our view, is not designed to put the insolvent corporation in a better position than it was before the statute was triggered by essentially immunizing it from effective prosecution of violation of employment rights. It is particularly so when the disposition in the prosecution of employment rights does not fundamentally undermine the financial position of the corporation.
Our recommendation is that, should there be any doubt on the issue, a revised CCAA make clear under section 11 that there be no stay of employment rights proceedings before administrative tribunals and that the stay applies to judicial proceedings. This, in a sense, connects to the next and last submission coming from our brief. In a sense, this section of my remarks could be entitled, ``Hands off the Collective Agreement.''
We submit that any revised CCAA statute should clearly not include any provision that permits a court or the insolvent corporation to amend a collective agreement or bridge it in any way unless the trade union, which is a party to the collective agreement, consents to such a change. We start from the fundamental proposition that the Canada Labour Code federally and similar provincial statutes across the country regulate collective bargaining rights and they regulate how and when these bargaining rights are acquired, how they are exercised and how and when they may be terminated.
Superior courts have been found to have no jurisdiction in this area. Labour relations boards have jurisdictions in this area; superior courts do not. Parliament has traditionally recognized that superior courts, with all due deference to them, do not have the expertise or the background to take upon themselves decision-making processes regarding collective bargaining rights.
If the preservation of the status quo of an insolvent corporation is a key objective of the CCAA, then the terms and conditions of employment at the time of the CCAA order should stay. They should be maintained. They represent the status quo under which workers, prior to the order being granted, have worked. If workers are to continue to provide services to the corporation while it is under an order, during the restructuring period, for example, then these services should be delivered on the same terms and conditions that applied prior to the order, just as, for example, electricity, gas or communication utility services would be delivered in the same terms as of the status quo of the day the order was granted.
This means, of course, as well, that all forms of compensation, including pension service contributions, should be rendered to the employees or to the benefit of the employees according to the terms defined in their collective agreement and the applicable law.
The records of the proceedings before this committee have demonstrated that some commentators have taken the view that the court has — it may not be spelled out or is not spelled out in the statute — but the court has some inherent jurisdiction to suspend some or part or even a few words of a collective agreement and under the proposition that this is all for the best. We disagree.
The concept of inherent jurisdiction of our superior courts does not include the idea that they can exercise such a jurisdiction in plain contravention of statutes of Parliament, for example, the Canada Labour Code. That concept of inherent jurisdiction should not be permitted to override express provisions of other statutes passed by Parliament or by a provincial legislature.
While we take the position today that the CCAA does not permit the abridgement or amendment of collective agreements, should there be any doubt, or should we be wrong — and we do not believe we are — then any change contemplated to that statute should include the clarification that a judge has no jurisdiction to amend a collective agreement unilaterally, nor does an insolvent employer.
Those are the three points I wish to highlight.
The Chairman: We have had a lot of thought put before us, honourable senators.
Senator Tkachuk: One of the briefs mentioned that, in the United States, the bankruptcy provisions were different as far as notice was concerned and, I believe, as far as the union contract was concerned. Perhaps someone can comment on that and how they are different, what is good and what is bad about what they do, so that we do not duplicate any of their mistakes.
Mr. McBrearty: There is probably nothing good about bankruptcies.
Senator Tkachuk: I know that.
Mr. McBrearty: In the United States, our union just went through 32 chapter 11 protection bankruptcies, as they call it in the U.S., in the last 27 months. It was all the restructuring of the steel industry and some other related industries.
For example, I went to the court yesterday with our lawyers, and the application of that company that was going under CCAA had the right, under its presentation, to terminate our collective agreements. They were asking for the right to downsize without notices of layoff, no payment of vacation pay, no severance pay, et cetera, and were also requesting that the labour standards act of the province be waived. I am not sure, and I agree with my brother here, but if a judge of the court under CCAA has all that power, everyone will go under CCAA to get rid of the collective agreements and his or her obligations.
Here they want to get rid of our grievance procedures for arbitrations when we go under the protection of CCCA. In the U.S., if you take that away, you have the right to strike. I am sure that if we want to do that here we will end up in other circumstances.
It is not that there is that much difference. In the U.S., I know that our union got notices; other companies just did not notify us. With Slater Steel, in our case — and I am sure in my brother's case too, because both of our unions represent members there — we got a phone call after the company had filed for bankruptcy protection, in both countries for that matter. What do you do? They are already in court; they have done it. We were not there to protect what we should be able to protect. That is very important for us.
Things get done in the U.S. There is a culture in the U.S. in the way they do things, but it is not the culture in the way we do things in Canada. That may be somewhat different. In the U.S., they go under chapter 11 protection, and then not too long after they are in chapter 7, which is liquidation. I do not think there is anything in the legislation in the U.S. that can help what we need here in Canada.
Senator Tkachuk: You said that they had the right to strike.
Mr. McBrearty: They retained the right to strike, I guess.
Senator Tkachuk: If they retained the right to strike, then can they retain the collective bargaining agreement?
Mr. McBrearty: If you take the grievance and the arbitration procedure out of a collective agreement, you might as well say you have no collective agreement, because if the employer violates an article of the agreement you have no process to go through.
Senator Tkachuk: Right.
Mr. McBrearty: It is like a piece of legislation. There is a piece of legislation. You want the piece of legislation to apply, but you have no courts to appear in front of and you have no piece of legislation. Therefore, you cannot defend it. It is the same as a grievance procedure.
Mr. Yussuff: We did include in the CLC brief, on page 8, some specific reference to the U.S. system under the bankruptcy code. I will ask my colleague to respond briefly and maybe we could highlight the points.
The Chairman: Without any personal reference, we only have so much time. I am looking forward to hearing from you, but please keep your responses as tight as possible, to get the most opportunity to speak. Thank you.
Mr. Murray Gold, Partner, Koskie Minsky, Canadian Labour Congress: The U.S. experience has illustrated why giving courts the jurisdiction to overwrite collective agreements is a bad idea. It is a bad idea for at least three important reasons. The first is that courts have no collective bargaining or labour relations expertise. They do not know in general about labour relations, and they certainly do not know about the labour relations at the enterprise. Once they begin meddling in a 50- or 75-article collective agreement that is a delicate balance of labour relations at the workplace, probably you will get a very dysfunctional result.
Second, in these kinds of proceedings, the employer comes and says, ``Unless this is cut, that is slashed and this is undone, we will fail. We will be bankrupt and it will be your fault.'' They will either say that to the union or to the judge. When they say it to the union, the union has to think long and hard, and does. They have a lot at stake. However, they also have an interest in protecting what they have fought for a long time to get. They can make that choice; they can make that decision. A judge, without that history, that is, without knowing what is really at stake and without really understanding the books, the records and the history of the company, is in a poor position to make that judgment.
The third reason it is a bad idea is that judges disagree about when and how they interfere in collective agreements in the United States. They adopt different approaches and different standards and what you get is uncertainty. You get uncertainty that takes time, that gets appealed and that gets redone. It is simply not a good system. The U.S. experience, I think, gives three strong reasons why it is a bad idea for courts and judges to be given the authority to revisit collective agreements.
Senator Tkachuk: When you say ``uncertainty,'' to clarify, could it be interpreted as flexibility?
Mr. Gold: The courts disagree between themselves as to what the standard it is. When you go to court, you do not know what today's judge will do, nor do you know what the appellate court will do because there is a disagreement.
Senator Massicotte: I have a couple of questions to ensure that I understand correctly. The presentations are good. They are detailed and complicated.
In the last presentation, the position is that the contract should never be amended whatsoever — that is, these are status quo, and so on. However, I gather in the Canadian Labour Congress report, you use the American example whereby — and I am using my words here — there is a process where the employer and the union try to negotiate a deal. If they cannot make a deal and it is critical, then you are allowing a judge to impose a solution. I am trying to understand what is recommended. Is the latter recommended? Is it possible?
Mr. Gottheil: I will let the CLC speak to their brief, but it is not our recommendation.
Senator Massicotte: The Canadian Labour Congress is what I see here.
Mr. Gottheil: No, I am speaking on behalf of the CAW.
Amendments to the collective agreement can occur, but they will occur through the process of bargaining and through mutual agreement. Parties will sit down and there will be long nights and days of bargaining in which discussions aimed at coming to a solution will take place.
The Air Canada experience is demonstrative of that. In the Air Canada experience, the parties got together and bargained and changes were made. Collective bargaining works. I adopt the comments made by my friend. They are right on. Collective bargaining can work. We agree that, even when the road gets rocky and difficult, there should be no power for a judge to amend the agreement.
Senator Massicotte: You all agree with that. I just misread the paper, then. The whole process is to avoid bankruptcy. Therefore, the status quo is not acceptable. The status quo is insolvency. Everyone has to give way and everyone has to find a solution for the better good of all stakeholders, including yourselves.
How do you attempt to achieve that? You cannot have everyone negotiate. There must be recourse to a third party if there is a better good for everyone. That is the whole purpose of the CCAA. How do you achieve that?
Mr. McBrearty: We are saying that when we end up in front of the CCAA in courts the bankers are there, the suppliers are there, and so on. We are saying here that we have collective agreements and that the judge, under CCAA, should not have the authority — and we believe he does not have it — to amend in his order.
Senator Massicotte: I appreciate that.
Mr. McBrearty: We walk out of there with our collective agreements. In the one I walked out of yesterday, the judge ordered that in the restructuring everything must be looked at, even the renegotiating of collective agreements. We will do that in the process with the employer through bargaining, but it is not imposed on us so that our collective agreement, upon walking out of the court, is amended and reduced automatically.
Senator Massicotte: Refresh my memory. Why would that stakeholder have a right different than, say, the bank or the landlord? In your brief, you are saying that the bargaining position is not equal and you are not in a position to protect yourself adequately, so you want this favoured position. Is that a good summary of your position?
Mr. Yussuff: It would also be fair to suggest that the union and the workers that they represent are not interested in the company going bankrupt. We have the most at stake. We want to see the viability of the company. It makes no sense for us to go before the court and roll the dice. The point is to say, ``We are in a difficult situation. We are best able to advise, in the circumstance, as to how we would address this moving forward.'' We have no interest in a bankruptcy proceeding that would see our job disappear, our pension become insolvent and see us not know where we would get our next pay cheque. It is critical to weigh the importance of the workers' interest in this process as opposed to the other creditors in the process.
Senator Massicotte: I saw some numbers, and collection by the bank was so much higher than that involved in bankruptcies. It is in everyone's interest to reorganize the company. In your case, they should not touch it at all and not even a third party should impose an agreement as opposed to the other contracts.
Mr. Gold: As you know, the CCAA provides that the court cannot dictate the terms of any contract, no contract. The question here is: Can a court dictate the terms of a collective agreement? Some would say, ``You cannot dictate the terms of a lease. You cannot dictate the terms of the trade creditor supplying the services. You cannot dictate the terms of a real estate premise but, yes, court, you can dictate the terms upon which working Canadians will deliver their services.'' It is completely anomalous in the context of the CCAA to extract one agreement, the collective agreement, and give a judge who knows little about labour relations and the financial ins and out of a company in the business the power to rewrite it. It is completely anomalous. It would put labour in a second-class status vis-à-vis every other participant in the restructuring. Every other participant can say, ``I am prepared to negotiate and provide my service for a lower price because you are in distress.'' Or they can say, ``I am not prepared to renegotiate my price and I am leaving.''
Senator Massicotte: I think I understand the point.
You talk about insurance but you also talk about super-priority of unpaid wages and severances and so on. You mentioned that Ontario and the United States has insurance. Is there any other jurisdiction anywhere that allows super-priority where there is no insurance provision?
Mr. Baldwin: I did a bit of scouting around this afternoon to find examples of countries that provide wage- protection insurance. I know that the source I was looking at contained the answer to your question, but I passed over it because it was not on my mind. I would be happy to provide information on that. I know the ILO has kept track of that as part of a process of monitoring their convention on the payment of wages in insolvency. I would be pleased to provide the information through the clerk of the committee.
Senator Massicotte: Please. Thank you.
The Chairman: If you have it, please provide that together with some costs of the plan.
Mr. Baldwin: If it is available, I would be glad to pass on to the clerk the information I can find from the ILO. I know they have looked into this.
Mr. Gold: The CLC has flagged this issue. Many other jurisdictions take great care in regard to pension funding in the first place so that they do not have deficiencies. For example, in Holland, monthly reports are required. In Canada, actuarial evaluations of pension plans are required every three years. Deficits can really build up. Other countries require reports more frequently so that problems are caught earlier, are smaller, and they are paid off sooner. The members are less of a creditor than they are here where they can be out three years.
Senator Moore: Mr. McBrearty, you said you were in court yesterday. The judge said your collective agreement had to be examined. Is that what I understood you to say? Where were you in court yesterday, in Canada or in the United States?
Mr. McBrearty: I was in court in Toronto for Ivaco. They had an order to go for protection under CCAA.
The documents filed by the company counsel were expressive, saying that the company under the law is obliged — as my brother said here — to pay wages if people were working, but their document was also requesting authority to terminate the collective agreement. Their document included authority to close, sell or downsize. In the case of downsizing the workforce, the company would not be obliged to give notice under the collective agreement, because it would have been terminated, nor to comply with labour standards acts — in this case those of Ontario and Quebec — nor to give payment of severance or vacation pay. Those requests were set out in the document of the company.
Now we come back to notice, requiring that we be informed ahead of time. If I had not been informed late that night, I would not have known that the company was under CCAA the next morning. The company lawyer would not have defended the union. I am sure neither the National Bank nor the Bank of Nova Scotia nor TD nor the creditors would have defended the union either. The company would have walked out of there and we would have ended up by four o'clock in the afternoon with no collective agreement. We would not know where we were. We probably would be on a picket line today because we would have had nothing left.
As my brother is saying, in most circumstances, we find out about the bankruptcy of the companies we represent when we read about it in the newspapers. We are not there to defend ourselves or make representations.
In this case, we were able to make representations. The final document is not written yet. The judge only told us, with regard to the union, it is business as usual, that ``you can grieve but not process to arbitration without coming back to see me, so that I can give you the authority to do it.''
The company told us this morning, ``We are not sure we will pay the severance pay if it comes to that.'' We also have unfunded pensions. It is a mess out there when you get into that.
Senator Moore: How does unfunded pension happen?
Mr. McBrearty: The company just does not fund the pension.
Senator Moore: I hear about big numbers. How is that happening in your case?
Mr. Yussuff: As my colleague just stated, there are legal requirements and a time frame in which employers must meet their obligation under respective legislation, provincially or federally. There is a time lag. There is three years to fully fund the pension and to do an actuarial evaluation. At the end of that time, you may be notified about a deficiency by the Pension Commission and told that you must now start putting resources in there.
There is a space in which these things happen. As we noted, in Holland, companies must notify every month about funding liabilities and they must make the payments as necessary. In our situation, there is a huge gap between the requirements. Of course, when a company is insolvent, it is too late to get the money to fund the pension plan. We are just one in a series of creditors trying to deal with the problem.
Senator Moore: Are you reporting once every three years?
Mr. Baldwin: The direct answer to your question is that they come from three sources. One is the experience that departs from what was assumed by the actuary at the time of the last valuation. As my colleague Mr. Yussuff has suggested, requiring these reports only once every three years can be problematic, as it was in the Air Canada case, especially bearing in mind that the reports usually come into the public domain often a year or more after the valuation date.
There are two other sources of unfunded pensions that are worth noting because one does relate specifically to insolvencies. The second source is that the plan takes on promises that apply to service prior to the creation of a new benefit. That is actually the main source of unfunded liabilities. In other words, an employer says at a particular moment in time, ``We used to promise you $25 a month per year of service; we are now promising you $30 a month per year of service and this new benefit level applies to all service prior to the new benefit.'' Suddenly, you have a lot of obligations for which, understandably, you were not setting aside money in the past.
There is a third source, though, that relates to Mr. Gold's comment. When companies get into difficulty, they start looking for ways of managing their cash. They will stop making contributions to the pension plan maybe well before they are actually faced with bankruptcy because no one is monitoring them as closely as they might.
Senator Moore: Inside of three years, you would know that happened from the last time reporting to you?
Mr. Baldwin: You might pick it up in something known as an annual information return but there is one pension plan member out of a million that knows to look for them.
The Chairman: You commented a lot about inequity and inequality of information. You do not get advance information about filings. Can you tell me who does get that information?
Mr. McBrearty: My brother here is probably more knowledgeable than me on that. To my knowledge, the creditors get it; the banks get it; probably the suppliers get it. They definitely get information before us. At a certain time, the company is obliged to inform the stock market, the day before they go to court.
The Chairman: It is my impression — and you can correct me on these two things. First, not all of those people do get the information. The trade creditor organizations and the income tax department do not get that information.
Mr. McBrearty: I am sure the income tax department does not; they are probably like us.
The Chairman: The bank may have; it has an ongoing relationship.
Mr. McBrearty: In this case, they treat us like government and they do not call us.
The Chairman: Non-unionized employees do not get it. There is a long list of people who do not get that information. I am trying to put some balance into the record because I think, if one had sat here and listened, the impression may have been that organized labour, through the unions, are the only ones who do not get told. That is what I am hearing, and I suspect that you are only one of several that should be told about the affairs of a company at this stage of their financial difficulties. That is a difficult thing.
I should like to know who they do have to tell and who they do tell. My impression is quite different from the one you are leaving.
Mr. Gottheil: The law today under the CCAA does not require that anybody be told. The judge, in that sense, has power to issue an order ex-parte without notice if the judge thinks it is appropriate to do so.
The Chairman: Is that the only time, when it is before the judge?
Mr. Gottheil: That speaks to the initial application, the first appearance before the judge. The law today does not require that anybody get notice, and an order may go if the judge thinks it is appropriate to go without notice.
The Chairman: Is it your experience that the judge would give ex-parte orders that secured creditors should be told, that non-unionized employees should be told but unions should not? Are there judgment selections made down the list?
Mr. Gottheil: My experience is anecdotal, relating that the large secured lenders often know, and I am afraid I do not have a scientific study to offer the conclusion, but, anecdotally, the large secured lenders often know and often have counsel there. However, there is no requirement that a corporation inform even their large secured lenders, or anyone, for that matter, that they are going forward.
The Chairman: You are not alleging that they do with or without the assistance of the court. I am trying to get this balance of fairness issue here. We have had a graphic story about ``I am the last one to know and I go rushing to court and everyone else seems to know.'' I want to get to the root of that.
Mr. McBrearty: In the case of Slater Steel, we were not informed. It was the company that called us after the fact and after they had the order of the courts, and we read it in the papers. I read it in the papers the same morning that the CEO of the company called me, but it was all done the day before. I do not know how many creditors were there. We were not there.
In a couple of other cases, the main creditors, such as the main banks, the ones that are going to finance the company with so many million dollars to operate during the restructuring phase, which sometimes is GE Canada or others, are sometimes there. In the case of yesterday, the two main banks were there, one main supplier was there and a couple of other creditors were there. We were there because we got a phone call the night before. If we had not gotten a phone call, we would not have been there.
There again, in a case like this, we are talking about the livelihood of workers, be they unionized or not. We believe that the legislation should read that, if we are called stakeholders, stakeholders should be informed. There is no way we can defend ourselves or make any representations in front of the courts if we do not know that a hearing is going on.
Mind you, we have brought this to bargaining tables, and I think it will be an issue on bargaining tables. It will become a strike issue in Canada in the labour movement. We cannot let this go.
I will tell you what we are told by the companies at the bargaining tables. They cannot tell us that because they have to have authority from their board of directors, and their boards of directors tell them that they cannot give them that authority because of the stock market rules. If everyone knew that a company were going bankrupt tomorrow morning, it is not hard to imagine what would happen to the stock market. It is bad enough the way it is now. There is something in the legislation that has to give us notice that somebody is in court for us, and we do not know anything about it.
The Chairman: We are just about out of time. I should like to ask one general question. Most of the discussions here represent large unions, and it flows automatically that you deal with large companies and most of your experience would be in the CCAA.
One of the matters that is debated broadly professionally and around this table is drawing distinctions between the U.S. situation and the Canadian situation and our Companies' Creditors Arrangement Act, which is a broad framework with not very many rules and a lot of flexibility given to the judge and the court to make appropriate decisions to a particular case in the hope of creating an arrangement that can keep the entity ongoing. The U.S. has more specific rules, chapter 11 and many more defined situations.
Do you have any general view that the idea of moving towards a piece of legislation with many more things specifically set out would be, in principle, something that you would favour? Is the idea of the flexibility of the CCAA something that you are reacting against, or is it the way in which it has been applied?
Mr. Yussuff: The experience we have had, generally speaking, has not been a good one, and there is enough documentation of experiences to fill this room. Given this committee's responsibility in looking at this act and the datedness of this act, I think it would be appropriate that specific changes be made to the act. The rules as they currently stand do not solve the problems we deal with on a regular basis.
In our situation, we think it is important that the committee reflect on the recommendations we have made. They are specific in nature. I do not think it would make the system more cumbersome but would make it more fair and equitable.
The Chairman: I have no trouble understanding the recommendations. I was trying to draw a broader principle. In chapter 11, where you have a much more detailed approach, one of those details is not something you like in terms of union agreements.
Mr. Yussuff: The one point I would make in regard to the discretion given to judges is it is quite open, and, again, what we have seen from experience does not make us feel comfortable that this process ought to be left alone and not touched. We think it ought to be looked at and changes ought to be made.
Mr. McBrearty: I would like to add that chapter 11 in the United States sometimes is complicated. We have to have a system that is transparent, that the workers understand. Let us not forget that the ones that are caught the most and suffer the most out of CCAA or in bankruptcy are the workers, their families and the communities.
I have nothing against banks or financial institutions, but, in time, they get their money back, one way or the other. However, working people and families and their community do not get anything back. If we look at a way or a process that is more transparent, how can you explain to Canadians, working people, men, women and communities, that you have been dealing with companies for 30, 40 and 50 years and all of a sudden they decide to go under the protection of bankruptcy or go bankrupt, they do not say a word to anybody, and everyone ends up in the white line of the pavement the next morning, and we say, ``What the hell happened?''
In most of the cases of protection of bankruptcies — and I do not think you will find one that does not say what I am going to say — it is due to labour costs.
Everything is not due to labour costs. Unfortunately, when companies come out today and say, ``We negotiated six months ago but we gave something to the union and its members that we cannot pay,'' then why did they give it? That argument does not stand with us or with the public. However, trade issues do. The high Canadian dollar that is affecting the economy does, and there are decisions that our politicians could take that could help us.
Let us not forget one thing: For an employer, when it comes time for the protection of bankruptcy, the bankers and the creditors are not the friend of the employer. The creditors and the banks are there to get their money. If the employer wants to side with the union to negotiate how a restructuring can be done, how efficiency can be done on the shop floor, how ratios of workers versus supervisors can be done, and how much money out of profits can be taken to put into pension funds to assure a good a survival to people that worked 30 or 40 years of their lives, we are the best partner for employers at that point to work with. Mind you, sometimes we can be the worst enemy if they want to be an enemy with us.
The Chairman: That is a powerful note on which to conclude.
Mr. McBrearty: I will not go any further. I should not have gone to court yesterday.
The Chairman: Thank you very much.
The committee adjourned.