Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 26 - Evidence
OTTAWA, Wednesday, October 1, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4 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, I would like to welcome our first witnesses of the day. Mr. Mel Zwaig, Mr. Bruce Leonard and Mr. David Ward from Equifax Canada are appearing.
Please proceed, gentlemen.
Mr. Bruce Leonard, Casssels Brock and Blackwell, Equifax Canada: Mr. Chairman, thank you for having me back again. I was here in June wearing another hat on the international side of things. I am pleased to be back concentrating on domestic insolvency issues.
Today, our presentation will be split into three opening presentations. I will go through a couple of issues. Mr. Zwaig will deal with some of the more controversial issues that fall within our mandate. Mr. David Ward will conclude with some comments on the transparency of the bankruptcy and insolvency process, which, in our view, can be improved.
I should like to start with some background about the Equifax Canada national insolvency group. Equifax Canada has about 6,000 members. Its focus on bankruptcy and insolvency matters has been structured through the Equifax National Insolvency Group, a core group of members that has been meeting for about five years now on a regular basis to deal with issues of concern, primarily to the supplier community, the unsecured creditor community. We appreciate the invitation to be here today. From our analysis of the presentations made so far, it struck us there was not a lot of participation by the trade creditor community in this process. We welcome the opportunity to do that today.
Earlier, I had occasion to have a brief conversation with Mr. Yoine Goldstein. As a result of that conversation, I undertook a bill of research on the topic of income trusts, which I will speak to separately. It will not be part of the Equifax Canada presentation.
I prepared an update on the international provisions to follow on the International Insolvency Institute presentation in June. At that point there were questions from some of the senators that I undertook to answer. I have some updates on where we are internationally. I can speak to that later, if there is time.
First, I will address briefly the unpaid suppliers' rights that were incorporated into the Bankruptcy and Insolvency Act in 1992. I will also spend a few minutes on creditors' committees in Canadian insolvency proceedings generally.
Mr. Zwaig will address issues relating to the independence and accountability of insolvency office-holders. We on our delegation think there is considerable room for improvement in terms of the integrity of the insolvency process. Most of that improvement will have to be focused on the office-holders who are appointed in insolvency cases.
Mr. Ward will conclude with comments on the transparency of the bankruptcy process or, more correctly, the lack of transparency in the Canadian bankruptcy process. Hopefully, we can be sufficiently brief that we can have comments and questions to which we can respond.
Let me speak to the issue of unpaid suppliers' rights and 30—day goods. The Bankruptcy and Insolvency Act, BIA, was amended in 1992 to deal with the perceived abuse of debtors ordering goods and services immediately prior to going bankrupt and then leaving the suppliers unpaid for their goods and services.
At that point — and Mr. Goldstein will have more authoritative views on this than I have — there was a Quebec system that allowed reconciliation and ``revendication'' that then permitted unpaid suppliers to recover their goods.
In 1992, the amendments to the BIA were intended to basically replicate that in the Commonwealth provinces. The question is: Did it work? The answer from almost everyone is that it does not work and has not worked. In fact, at the time, it was not expected to work, thus, we are not surprised it does not work.
The question then is: Can it be improved? It certainly can be improved.
The abuse was intended to eliminate or ameliorate potential cases of fraud — someone ordering something, getting it in, going bankrupt and not paying for it. Goodness knows where the value of the goods supplied would go. What has happened is that nobody in 1992 thought about the Companies' Creditors Arrangement Act, CCAA. Thirty-day goods provisions were not put into the CCAA in 1992. We are not clear even now on why there was a distinction between putting them into the BIA and not the CCAA, but they do not exist in the CCAA.
Consequently, in CCAAs, which are the biggest insolvency cases in the country, there was no ability for an unpaid supplier to exercise any of the rights that Parliament gave to unpaid suppliers in the 1992 amendments to the BIA. There is really no conceptual reason for that.
The other abuse that has surfaced, either overtly or inadvertently in the CCAA, is that a CCAA always begins with a stay of proceedings against creditors exercising remedies. Once the CCAA stay of proceedings comes into effect, what normally happens in an operating business is that the goods that were supplied during the 30 days prior to the filing are consumed — they are gone. As a result of the stay of proceedings, the goods are consumed and the poor unpaid suppliers at the end of the day have nothing to show for the goods they shipped. There is also a timing problem. With regard to 30-day goods, the period does not run back from the date of the filing. It runs from the date of a demand that is made. In our material we set out an example that shows that 30-day goods are not 30-day goods. If a debtor goes insolvent 26 days after the supplier has supplied his goods, you have four days to make your demand. Nobody thought about that at the time. Clearly, it is an example of inarticulate drafting, I suppose, when this was put into the BIA. It can, and should, be improved.
The other area of abuse about which I will comment in terms of unpaid suppliers happens after filings, which is incredible to me. A reorganizing business can seek protection in two ways, under the BIA or under the CCAA. In each case it is considered to be acting or operating under the protection of the court.
Most suppliers think that if they supply to a business that is operating under the protection of the court, that they would be paid for the goods or services they provide to the reorganizing business. Unfortunately, that is not the case. There have been a couple of cases in Ontario where a reorganization has failed and the suppliers say, ``Wait a minute, I supplied goods or services during your reorganization to make it possible for you to succeed. How about paying me for the things I supplied to you while you are were under the protection of the court?'' The Ontario cases that have considered this have said, ``Sorry, there is nothing in the statute. We cannot help you.''
These services that have been supplied during a reorganization go unpaid.
It is a completely unfair example. In the United States, under the Chapter 11 system, you would have what is called an administrative claim priority. You would be paid for the stuff you supplied during the reorganization. It does not happen here. In our view, it should be amended to ensure it does work.
I wish to turn briefly now to creditors' committees. On a number of occasions, the Equifax National Insolvency Group has expressed its concern that there is no ability for unsecured creditors to participate meaningfully in complex reorganizations.
Let me draw the parallel. Normally, in a BIA liquidation, inspectors are appointed to represent creditors. They are entitled to advise the trustee and give directions to the trustee on what the trustee should do in the administration.
In the CCAA there is no provision for creditors' committees to be formed or even to exist. There have been a number of instances in which applications have been brought to the court — at least in Ontario, which is the jurisdiction I am most familiar with — for the appointment of a creditors' committee comprised of the largest representatives of creditors involved in the case, to give the input that the reorganizing company needs from the creditor group. Those applications have almost always been refused or denied on the basis that there is nothing in the statute that contemplates the appointment of a creditors' committee to represent creditors in a CCAA case.
The ostensible reason often given is that if you have a creditors' committee it will increase the cost of the administration of the estate, and that is a cost that, in the interests of the reorganizing debtor, the assets under administration should not bear. I believe the fallaciousness in that is that everyone else who is involved in the case is paid out of the assets of the reorganizing debtor. The debtor always pays the senior lenders. The debtor always pays the trustee and the monitor. Their professional support staff and their professional costs are paid by the debtor out of the reorganization. The only group that really does not have independent representation in a major case are the unsecured creditors, and those are the people we are here for.
I am suggesting that the BIA and the CCAA be amended to allow creditors to organize themselves to represent the interests of the unsecured creditors in major reorganizations, and that the costs of doing so be treated on the same basis as all of the other professional costs that are incurred in major reorganizations. It would add transparency to the process. It would give creditors who now do not have a voice in the process some ability to participate in it, and in my view it would increase the integrity of the process generally.
I think with those, the segue into Mr. Zwaig's presentation is this: In a CCAA case, the act requires the appointment of a monitor. In theory, and going back to 1992 when the monitor provision first came in, the monitor was supposed to represent the creditors generally. That has turned out not to be the case, so the reason we need a creditors' committee function in both the BIA and the CCAA is that the monitor and office-holders in major cases are generally afflicted with conflicts of interest. That means they cannot serve the people they are ostensibly appointed to serve.
With that I will turn the comments over to Mr. Zwaig.
Mr. Mel Zwaig, Equifax Canada: What Mr. Leonard is saying is absolutely right. I will give you something that happened within the last year. I had an article published in Lawyers Weekly on this issue. Auditor gets appointed as monitor on a CCAA filing. The CCAA filing fails, and as a result there is a bankruptcy proceeding. Monitor, for a short period of time, then becomes appointed trustee in bankruptcy of the file.
After that short period of time, the file is transferred to another trustee in bankruptcy. Guess what happens? The first trustee in bankruptcy seconds staff to the second trustee in bankruptcy in order to administer the file.
What, in fact, happens is that under the CCAA you have the concept of the monitor, who is supposed to be looking after the interests of all creditors. Unfortunately, when the filing takes place, that first day order, it is for the most part the secured creditors who are invited to the proceedings in court. The unsecured creditors are not invited. By the time they find out about it, it is too late.
To deal with the issue in the conflict-of-interest sections, we are proposing that the auditor cannot be the monitor on a file. It goes even further than that where you have the secured creditor, a monitor being appointed and then continuing to act on behalf of a secured creditor. Again, it fails from the perspective that the unsecured creditors are not truly represented.
We have to go back to the concept of the auditor in the first place. The auditor is appointed by the shareholders. His interest is to make sure that the company gets restructured in some form or other, but by not thinking in terms of, or representing, the unsecured creditors, the shareholders' value could be enhanced at the expense of the trade suppliers.
I point out, if I may, a document tabled and prepared by the Senate in June 2003, entitled ``Navigating Through the Perfect Storm: Safeguards to Restore Investor Confidence,'' which is a document that has been tabled. If you refer to that document, page 23, you are dealing with a conflict of interest in financial analysts. I think, and suggest strongly, that we can substitute financial analysts for accountants or auditors not being monitors.
The other area we would like to talk about is the whole area of full disclosure. Yes, when appointments are being made the courts are, in fact, making them. Unfortunately, at the time the appointments are made, it is on ex parte applications and the court obviously works with the information that it has before it at that particular time. Again, if the information is not fully disclosed to the court, we then find ourselves in the situation where the appointed individual or appointed firm, in fact, may be representing more than one side, again, at the expense of trade creditors.
With that, I will turn it over to Mr. Ward.
Mr. David Ward, Cassels Brock and Blackwell Equifax Canada: I have some remarks on the section of our written submission, beginning at page 16. It is the section we have entitled, ``Information Availability for Creditors in Insolvency Cases.'' The theme here is that that is something that should be increased. Access to information should be improved. We have five specific proposals about how this can be done.
In our respectful submission, they are great reforms because they are all fairly easy to make in the sense they are largely technical. There is very little incremental cost to the system with these types of reforms because we are talking about information already generated in the course of a restructuring. We are saying there should be improved access to this type of information. The public policy considerations behind these reforms are that we say it will improve the transparency of the system.
There is not enough transparency and these reforms will assist. By doing so, they may increase the accountability of the debtor company and insolvency representatives and support the debtor. In doing those two things and in facilitating those objectives, they will also increase opportunities for participation in the process by creditors at large and, particularly, unsecured creditors.
There are five submissions that we have summarized on pages 16 to 18. Briefly, the first is that the BIA should be clarified so that a proposal trustee in a BIA restructuring is required to provide the insolvent debtor's complete initial filing, in addition to what is referred to in the act as the notice of intention.
As honourable senators know, the notice of intention has very little information in it other than identifying the debtor and the trustee and a few of the largest creditors. However, there is information prepared at the same time, cash flow and financial information, which could just as easily be provided by the creditor body at large. It is there and available and it should be provided.
In the same spirit, a second reform would require the trustee in a proposal to make adverse change reports available to all creditors. Right now, the trustee is mandated to provide adverse change reports to the official receiver. Some time after that they may be filed in court, but there is no requirement to provide the reports to people who are affected by the adverse change that the report comments on. In our respectful submission, that is something that should be provided as a matter of course as well.
In the same vein, a debtor in a CCAA protection scenario should be required to disclose its largest creditors. This information should be publicly available. This would create consistency with what the BIA requires. We would be following the example of Chapter 11 in the United States where this information is typically disclosed. A situation is created where the largest unsecured creditors can quickly organize and participate in the process. They can combine their resources and contribute constructively to reorganization. The danger of not making this information available is what we see happening from time to time today. For one reason or another, usually strategic reasons, the debtor simply will not disclose that. You can make requests of the monitor and the monitor will not feel obliged to disclose that basic information either. This is an important amendment we are recommending.
I will cover two more items briefly, and again they are dealt with in the paper. Regular monthly financial reporting should be made available to the creditor body at large. This is something that everyone knows is generated much more frequently than monthly. In the course of a restructuring, it could be prepared weekly or biweekly. However, as an absolute minimum, this should be available to creditors who are interested in it on a monthly basis. Again, there have been instances that we can recite where it has been difficult to obtain. Creditors need to have this information so that they can make a decision as to the extent that they want to participate and make representations in court during the course of a restructuring.
Finally, this is a practical access to information submission; you see that happening occasionally now. We would submit that important court filings, notices and financial information should be required to be placed on a publicly accessible Web site. This is a credibly cost-efficient way to disseminate this information and would make it available to anyone. You see that occasionally in court orders in CCAA proceedings today but, again, it is something that should be done across the board.
Subject to any questions, those are our submissions.
Mr. Leonard: To sum up, Mr. Chairman, on behalf of the Equifax National Insolvency Group, we would commend this committee for its work in this area. No one has done work in this area for a number of years. On behalf of the credit professionals who are involved in this area, we are grateful for the time, attention and hard work that this committee has put into the subject. You are fulfilling a valuable function that nobody else is fulfilling and has not fulfilled for a number of years.
Mr. Ward, Mr. Zwaig and I agree that Canada can have one of best insolvency and reorganizational systems in the world, but we are not there yet. Honourable senators have heard the difficulties that we have with transparency, predictability, and conflict of interest — Enron kind of issues — that suffuse our system. We can do better than that. The question is how best to get there from here. We hope that the committee will take on board some of the recommendations that we have made in our written submissions. We think they show improvements that can be made without doing any violence to the expectations that creditors have with debtors in doing their normal transactions in the ordinary course of business.
Thank you for having us. We will certainly take questions.
Senator Massicotte: On a 30-day goods provision, I understand the concept of your request today, but just to allow me to understand the act, to the extent that the creditors get any protection for goods delivered, there is a lien right, and effectively a priority against other creditors? The issue of fairness is important to the act. You are talking about suppliers delivering hard goods, but there are many people including employees who offer services, wages or capital. Should they also get priority for goods delivered in the last 30 days?
Mr. Leonard: That is an excellent question. I believe they should. Our written submission suggests that if the intention of Parliament in 1992 was to protect a particular class of people who extended credit immediately prior to a filing, it does not make much sense to us that some people should be protected and other people should not.
Our recommendation would be that anyone should have their positions recognized and protected, subject to some sort of review process, probably with the courts, to ensure that no spurious claims are admitted. This includes people who supply credit, goods, services, labour, within — pick a time frame — 30 days, 15 days, two weeks, whatever, prior to a filing. I totally agree with that suggestion.
Mr. Zwaig: In addition to the 30-day goods prior to the filing, you have the situation where you have goods and services that were provided after the filing. Those should be protected as well. We have discussed this amongst the three of us, along with members of the Equifax committees. It is goods and services we are talking about.
Senator Massicotte: I am trying to understand the issue. I can appreciate the need to cost committees and be well- informed. Whether the act permits it, what stops creditors from causing committee — they talk to each other, there are telephones. I gather in the Eaton's case, there was a concern. Is the issue only who pays for the cost of it?
Mr. Leonard: The issue is largely who pays for the cost of it. Let me illustrate the problem. The large creditors all have professional advice that is paid for from the estate. The difficulty with the smaller creditors, the creditors in our constituency, is that if you have a small claim you cannot afford to spend 50 per cent of your claim on professional costs to get effective representation. You cannot go out and hire a lawyer to go to court on your claim.
What should be done is that the creditors in that situation should be recognized and they should be able to organize themselves into a committee. If funding is a problem, perhaps leave that to the court to decide on any particular case. However, judges have refused the constitution of creditors' committees on the basis that there is nothing in the act that allows them to do that.
That is something of a judicial cop-out, because there are many things that judges do in the CCAA that are not in the act. Here, they have said that there is nothing in the act that allows us to appoint a creditors' committee so we cannot do that. I think there should be the ability to appoint a creditors' committee.
Senator Massicotte: I suspect you will not be able to assist my next area of concern. We have some people who make proposals or presentations to us dealing with Equifax and the other major credit organizations relative to how you rate individuals who suffered bankruptcy and who suffered, more importantly, a consumer proposal. In other words, there are presentations to us on how an individual doing a proposal is rated — getting out, whereby apparently their rating stays negative for a long period of time.
I know you represent Equifax Canada. Why would you maintain such a negative rating for someone who took the responsibility to repay creditors over a period of time?
Mr. Zwaig: This is something that we have been talking about within Equifax on an ongoing basis. Over a period of time, that will change. I agree with what you are saying. From time to time, I have handled consumer proposals. In some instances — and it varies — I have seen where a consumer proposal has been filed and has been honoured and the credit rating came out clean. In others, for whatever reason, it continued to be negative.
Senator Massicotte: What do you recommend we do? Some say we should legislate. I presume open discussions would be more useful.
Mr. Zwaig: I think that open discussions are more useful.
I would like to return to your previous question in which you mentioned Eaton's. Mr. Leonard, your adviser Mr. Goldstein, and myself were acting for the unsecured creditors of Eaton's. The difficulty we had was getting all the creditors together and having them get organized. What we are proposing is that on a filing there be an automatic committee that is appointed. Those would be the seven largest creditors. They would be an integral part of the reorganization process.
Yes, the professional fees would be a charge against the estate. However, if you follow the concept of Chapter 11 in the United States you find that the trade creditor's committee becomes very involved in the total restructuring process. As a result, you will find that the trade creditors in the United States get a bigger return on their bad debt than we do in Canada.
Senator Angus: Mr. Chairman, we are privileged to have such eminent persons as yourselves appear before this committee. On behalf of my colleagues, certainly, I reciprocate your kind words. We have been wrestling with many of these issues for some months now and reading reams of documentation. We are, I think, coming to a conclusion. Having you here at this stage is tremendously helpful. Your reputations precede you.
First, having been late, I must ask you a question on Equifax. If I understand it right, you all have day jobs that are not to do with Equifax.
Mr. Zwaig: Yes.
Senator Angus: Mr. Zwaig, I remember meeting you in the days back in Montreal where in almost every bankruptcy you were the trustee. Yoine Goldstein was on one side and a little lawyer like me would come along representing some creditor. You folks are where it is at in the business. Hopefully, you can shed some light on the issues that are before us.
In the days when I would represent creditors, there was usually a Dunn and Bradstreet report. I had never heard of Equifax. Is it the main organization now in terms of monitoring credit ratings?
Mr. Zwaig: It is one of the main organizations in this country, as well as in the United States.
The background to us getting involved with the Equifax organization is that after the last amendments were enacted they were concerned that there was nothing in the amendments that really impacted or were for the benefit of the unsecured trade creditor. The president of Equifax approached me and asked what could be done. They organized what they call their insolvency group. They asked us to help them through the process. Mr. Leonard, Mr. Ward and I have been working with them for the past five years to understand the issues of the unsecured trade creditors. For the most part, we represent unsecured trade creditors. It became a natural thing for us to be working with them.
Senator Angus: The first time I heard of Equifax — and you will laugh at this — was a few years ago. There was a labourer in Quebec, which is my region, who, like many other unfortunate people, had run up a lot of debts. One of his employers at that time had helped him restructure his debts, if I may use the word ``restructuring'' in the real common man's domain. He no longer owed any money to Household Finance, the Bank of Nova Scotia consumer loan department and so forth. In fact, it was not anywhere where Equifax would know that he had any debts. He said, ``I still cannot get credit anywhere because I am on Equifax and they will not take my name off. I am shown as owing $13,412.92. It is like a millstone around my neck. I cannot buy a new car, or even a second-hand car.''
This is a pretty mundane question. However, I understand from subsequent research that it is quite a big problem for the little debtor. Is there some recommendation or an answer to that?
Mr. Zwaig: There is a part answer. Because two honourable senators have mentioned this, I will bring it to Equifax's attention.
The experience I have had is that clients have actually gone down to Equifax. They have gone line by line through their credit report. As long as you can show Equifax some of the background to support what you are saying, it will include that information in their report. As I understand it, that has helped some people get credit.
Senator Angus: You may laugh when I ask about these poor folks because I am notorious for not representing these kinds of people. I got in touch with Equifax and they said, ``No, there must be a clean record now.'' I think they said after six months. However, it was a substantial period. These people were trying to buy a home and get credit for a mortgage. They were completely ruled out because of this.
I gather the furthest Equifax would go is to put a note on your record. They will not expunge your name from their books.
Mr. Zwaig: I will check into that and get back to you. I will send you a note. I will check out their policy and what happens to it.
Senator Angus: On another level, there was mention of the judge in these creditor committees. I believe I am right in saying that in the U.S. they have a specific bankruptcy court.
When I first met you in the old days, Mr. Zwaig, there was a bankruptcy division of the Superior Court of Quebec. I am not sure whether that still exists. However, I do know that in Ontario, and in Quebec to a lesser degree, and I do not think in other parts of Canada, certain judges, not of a specific bankruptcy court, have developed the cachet of being known as the CCAA person.
That strikes me as a flaw in our system. Because I inquired into that as well, I understand that this has led to forum shopping, to filings in jurisdictions that are not necessarily the forum conveniens in the circumstances. I have learned of rivalries between the bench of one province and another because of this situation.
First, is there a problem? If so, would you have any recommendations? If we are to have the best set of insolvency statutes in the Western World, which I hope we will have, is the court system an integral part of getting to that goal?
That is a broad question and it is delicate, but the matter needs to be addressed.
Mr. Leonard: That is a good question. One of the observations made in the International Insolvency Institute's presentation was the need for a specialized judiciary. The American system works well because they have judges who deal with only bankruptcy all the time.
These days, with the incredible complexity in these kinds of arrangements, you should not leave this kind of arrangement to someone who does not have good commercial experience in doing these kinds of things. There is a strong argument to be made. Our group would strongly support a recommendation that there should be more specialization in the judiciary in bankruptcy and insolvency matters. That is an excellent suggestion and I highly endorse it.
Senator Angus: Do you feel there is a problem today? Every case ends up going to Ontario Superior Court Justice James Farley, say, or someone like that. It seems that especially given that one of the good things about our CCAA vis- à-vis Chapter 11 is that there is some flexibility for judge-made law that, in a way, is good because no two circumstances are the same. We get away from the rigidity of a strict jurist interpretation. It is a Catch-22 in a way.
I am very interested in where we will come down on CCAA. The first recommendation is that we probably should have the two separate statutes. That is a good idea, but a different ballgame. The little person from Equifax is good for the BIA, but for Air Canada restructuring or a big company like that, one would look to the CCAA, but with the proper set of rules.
Mr. Zwaig: Perhaps I can help the process and address the subject as non-lawyer and as someone who is in the trenches on a day-to-day basis.
It is very important to us, as practitioners, to have someone on the bench who is not only familiar with commercial law, but also who knows the intricacies of domestic and international insolvency law. That is important.
The other side is that you are looking from time to time for the creativity to make things happen. Whether it is a judge in Montreal, Toronto or Calgary, it does not matter as much, as long as that particular individual in the bankruptcy court — and this should be a bankruptcy court — has knowledge of what he or she is doing.
I am working in a foreign jurisdiction on a file at present where there is no division between criminal and commercial court, let alone commercial and bankruptcy. We are having a difficult time dealing with the judiciary on commercial matters.
Interestingly enough, Mr. Leonard and myself have had a judge from their law reform commission up here. They are inviting Canadian judges down to help them through the process.
That is the other extreme. The quick answer here is that it is important to have a bankruptcy court and it is important to have judges who are familiar with commercial and bankruptcy laws, both domestically and internationally, in today's business environment.
Senator Angus: When you have things like DIP financing and these huge billion-dollar cases, such as Algoma Steel, to have some judge who sits in matrimonial court dealing with these matters is crazy.
Mr. Zwaig: Exactly. That is the best argument for an exclusive bankruptcy court. Wherever you go, regardless of the jurisdiction, where there is a bankruptcy court, I do not think you will be able to avoid forum shopping as you call it.
Senator Chaput: I have two short questions. First, in regard to the protection of the creditors, or the suppliers as we call them — and especially the smaller supplier, because we have many small and medium-sized suppliers in Canada — is the impact on smaller suppliers worse than it is on larger suppliers? If so, do you have figures or statistics that show that the companies declared bankruptcy because of that? Do you have any statistics?
Mr. Leonard: No, and I am not aware of anyone who does have statistics on that subject. It would be worthwhile for someone to collect that empirical information, but I am not aware of anyone who has it.
There is always a ripple effect if a big company goes bankrupt and a bunch of small suppliers have large accounts. Sometimes they do not survive, either. There is a ripple effect. The big company can take a small company down with them. That does happen.
Senator Chaput: You spoke about funds being created to help the suppliers who have lost monies. Are there any other protections needed beside some kind of a fund to help those creditors who have not been paid?
Mr. Leonard: To clarify what I was saying earlier, I would probably call it a lien rather than a fund. If someone supplies something within two weeks of bankruptcy and they are not paid, they would have a lien on the property of the company so that they would be paid.
Senator Chaput: It is not a fund with money in it?
Mr. Leonard: No, there would be a lien and when the assets are sold, the lien would be paid off, which I believe works.
[Translation]
Senator Plamondon: I have two questions concerning consumers. The first one relates to the 30 days. You stated that in Quebec, for a creditor to be able to recover his or her goods, it must be an installment sale. Are you suggesting that a creditor be entitled to repossess merchandise delivered 30 days before the bankruptcy? Would that apply to goods delivered and sold but without there being an installment sale? In Quebec, a creditor can reclaim the goods if it is an installment sale.
Do you want to have a Web site to know in advance those who are in difficulty? Would you like the same Web site to give the list of all merchants in difficulty? That could harm the consumer without him or her even being aware of it. Let me explain. I saw a merchant add three years' guarantee to a piece of merchandise to attract the consumer to then go bankrupt shortly thereafter. Since the guarantee is granted by the retailer, it is automatically cancelled and the consumer is not protected.
[English]
Mr. Leonard: That is not an easy question to answer. For unpaid suppliers, we have always focused on suppliers who have sold items — who have actually extended credit by supplying goods to a debtor who goes into bankruptcy. Our submissions are directed at protecting those people as opposed to any other kind of transaction. We are looking at credit transactions and sales that are not paid for that we think should be protected.
On the question of publicity or a Web site for people in financial difficulty, thank you for asking. That is what Equifax does. Any member of the public can get a report from Equifax on the financial condition of a particular company. It would be a little dangerous, however, for Equifax to put this material on the Web site for the world to see because in the rare instance maybe they might make a mistake.
Senator Plamondon: I do not think my question has been answered. I will go back to the first question.
Mr. Leonard: I am sorry.
Senator Plamondon: In Quebec, you have to have a lien to get your goods back. If I just buy a refrigerator and I give $400 and I do not sign a contract, then you do not have the right to come back and get the refrigerator because there is no lien on that. Is your suggestion to make it a lien automatically on anything that is owned by the retailer?
Mr. Leonard: That is a slightly different question. That is part-paid goods. You put a deposit on something.
Senator Plamondon: Yes.
Mr. Leonard: We do not have anything in our legislation that deals with that. In the United States — and I hate to come back to the United States so often but they do serious analysis of bankruptcy issues — there is a preference given in the United States for deposits that are placed on orders like that. In a bankruptcy, the customer who has put a deposit on something that they have not been given has a priority for the amount of that deposit. We would almost need something like that in our act to address that problem, and I agree that it is a serious problem. Does that help?
Senator Plamondon: Yes, but I do not think it would mingle with the Quebec act very well.
The Chairman: We have had questions raised in the past couple of weeks as our work has progressed in terms of income trusts, which have become such a phenomenon, and whether or not, in the context of this study, there is anything that we should be particularly aware of, or any particular concerns. Mr. Leonard has agreed to briefly address that question for us.
Mr. Leonard: After Mr. Goldstein and I spoke earlier this week about the problem, I did a bit of research, not to confirm what Mr. Goldstein had told me but just for my own benefit. It is absolutely correct that somewhere between 75 per cent and 80 per cent of the new listings on the Toronto Stock Exchange in the last year have been income trusts. That was, to me, an astounding number. I had no idea it had become that popular.
In The Globe and Mail today, it said that the estimated market capitalization for income trust in this country is of the order of $55 billion to $60 billion. It is enormous. When we were revising the act in 1992, and again in 1997, I am not even sure if anyone paid any attention to income trusts because they were not a significant part of the Canadian economic screen. They certainly are now.
The problem with income trusts from a bankruptcy or reorganizational point of view is that their structure is such that it is not clear that they are covered or dealt with under either of the BIA or the CCAA. If one of these things gets into — and Lord knows we hope not — financial difficulty and has to do something, it has no ability to seek out the reorganizational provisions of the BIA or the CCAA. I do not know what it does but there is no ability to reorganize.
My suggestion to the committee would be to have both the BIA and the CCAA amended so that these vehicles, which are becoming so important commercially in Canada, should they fall into financial difficulty would be able to reorganize in the same fashion as ordinary corporations. There is a definitional problem there because it is hard to define a trust. You do not want to amend the act to include all trusts because then you get at family trusts, charitable trusts, and things like that, that really do not need to be covered in the BIA or the CCAA.
We get a little bit of help in this analysis from the Income Tax Act, which has a complicated juxtaposition of the definition of ``personal trust'' and ``non-personal trust'' basically, and income trusts are one item. There are also oil and gas trusts, real estate investment trusts, REITs, and a bunch of other trusts. In the next five or 10 years clever lawyers and financial advisors will invent more vehicles that we cannot think of at the moment.
My recommendation for a change to the act would be to focus on entities resembling trusts in which an investor acquires an interest for consideration. It is not a charitable trust; it is a commercial trust. I would almost use the definition of ``commercial trust'' meaning a trust in which interests are acquired for consideration so that it is clear that it is a commercial transaction, not a family or a charitable transaction. A definition of that kind, put in the act in connection with debtors, which are defined both in the BIA and the CCAA, would let these things have recourse to reorganizational legislation in the event that it becomes necessary. It is too big an area to ignore that, and that is one suggestion I would hope the committee could take on board and give some consideration.
Senator Kolber: Are leases not income trusts?
Mr. Leonard: They probably are.
Senator Kolber: That would include the energy ones. They are all income trusts, including the yellow pages.
Mr. Leonard: That is fine. I stand corrected. I am not an authority on that.
Senator Kolber: It is not a question of that.
The Chairman: We have what we hear from the point of view of the insolvency side of practice, namely, there is something that should be paid attention to on an early basis.
Mr. Leonard: Yes, it should be done.
Senator Angus: I then wish to pursue on CCAA. One of the issues we heard about last week came from the intellectual property people. They had done a major study and they came to us with the issue — I forget the technical wording — basically it was the right to disallow contracts or licensing agreements. They were very detailed, on the face of it at least, and all these recommendations made a lot of sense. I asked them if everyone in the profession, in the insolvency bar, and so forth were on side and they said yes. I am assuming that you folks would also be on side with their recommendations.
However, it lead me to start thinking more about other kinds of agreements and not intellectual property, not patents, trademarks and the like, but rather this whole issue, with labour contracts being the best example to my mind. In the U.S., in these big Chapter 11 situations, the courts seem to have the right to open up contracts and to re-jig them, if you will, with a view to accomplishing a successful restructuring. Here, there seems to be considerable doubt. Do we need clarity? Is the U.S. better?
I asked this of witnesses when we started these hearings and I personally went away with a mixed message. I intend to have some discussions here in committee, when we are doing our report. With the expertise you folks bring, I would like to ask you what you think about that level of CCAA proceedings.
Mr. Leonard: My own view is to be sympathetic to that line of thought. The U.S. used to have a provision that would let a court abrogate a labour agreement. There was a hue and cry some 15 or 20 years ago that this was unfair meddling into labour relations. Therefore, it was modified back. In the U.S. a reorganizing debtor can amend labour relations contracts, but it is a hearing kind of thing. The company gives notice, the union responds and the judge will ultimately decide what to do with the labour contract.
Senator Angus: There is no agreement required, then. Does the judge have the power, in effect, to legislate changes to the contract?
Mr. Leonard: That is right.
The Air Canada situation is the best example of which I can think which illustrates the need for that kind of legislation in Canada. Justice Farley convened an 8 a.m. Sunday hearing at one point to say, ``The unions are not agreeing with what everyone else is agreeing with. Let's get together at 8 on Sunday morning and I will decide whether this thing goes forward or dies.'' No judge should be put in that position. It would have been much better for him to have the authority to say that there is merit on both sides, but on balance the unions, if they cannot agree with the company, should compromise some of their interests in order to let this whole situation go forward. There should not be one holdout group able to veto a restructuring. I think that is a sound principle of insolvency law. Although it is not directly in the Equifax mandate, our delegation would support an amendment to that effect.
Senator Angus: Along the same lines, and this is really the main point I am trying to get at, it seems that today there are different phrases used, such as globalization, open borders and free trade. It is important to have an element of uniformity in our laws. I have noticed in recent major CCAA restructurings in Canada that there has been a simultaneous filing under Chapter 11 because these big companies, like Algoma, Canada 3000, Air Canada — all of the big ones in Canada — have had an international aspect to them where they have had to file in Canada at the same time as they have had to file in the U.S. You then get a situation of conflict of laws and different rules applying.
As a lawyer practising in maritime law, which is a totally different area, there is a constant focus, if you will, on trying to have uniformity amongst all the trading nations insofar as shipping laws are concerned. If there were not, it would be unworkable and there would be real forum shopping.
Would you recommend that we say something in our report about how important it is that our laws be at least worded in the same way as the U.S. ones are worded?
Mr. Leonard: I am very grateful for that question. Let me segue into something I had spoken about in my June appearance.
You are absolutely right, senator. Stakeholder value has to be preserved in these multinational cases. You can only preserve stakeholder value if the cases are coordinated so that one country does not seize its assets and sell them and another country does the same thing. You have to keep these things as a whole.
That is where the Model Law on Cross-Border Insolvency that I reported on earlier comes in. The function of the model law on cross—border insolvency is really to say that, ``Listen, there is a primary country here.'' The primary country is where the centre of main interest, the head office, the principal business operations are. That should be the controlling jurisdiction. Other countries that sign the model law would accept that that is the controlling jurisdiction and they would act in aid of what the controlling jurisdiction is doing. That is what the model law would bring us in Canada.
I think that is the way of the future.
There was earlier testimony about the model law being prejudicial to Canadian creditors. It really is not. I will be delivering a supplementary report to the committee, if I may, saying that under the model law, local proceedings control. We are not having reorganization sucked out of the country under the model law. Canadian creditors will be protected.
The list of countries that have now adopted the model law has expanded by two. We have Mexico, Japan and South Africa. The U.K. is recommending it. The U.S. has passed, although not enacted it. Australia and New Zealand have studied and recommended it. There should be no controversy about adopting the model law. It is in Canada's best interests and Canada's fine tradition of leadership in this area.
Senator Angus: I think that needed to be said.
The Chairman: Thank you very much for being with us and giving so generously of your time.
We have with us now from Calgary, via videoconference, Professor Keith Yamauchi.
Welcome, professor. Please proceed.
Mr. Keith Yamauchi, Professor, Faculty of Law, University of Calgary, as an individual: Mr. Chairman, honourable senators, let me start by thanking Mr. Robert, the clerk of the committee, for organizing this and allowing me to stay in Calgary to present my statement to you.
I am here today to respond in the main to the issues addressed in the two papers you have received from the Office of the Superintendent of Bankruptcy. I will also address a collateral issue.
The original idea was that I would address the issues outlined in those papers to assist the Office of the Superintendent of Bankruptcy in its testimony that it presented to you on May 7, 2003. My review of the transcript of those hearings indicated that these issues were not addressed, which is why I appear before you today.
As such, I prepared those papers for a different purpose. They are, indeed, much longer than the 10 pages outlined in the guide for witnesses. For that, honourable senators, I apologize.
I am a full-time faculty member in the Faculty of Law at the University of Calgary. However, before I joined the faculty, I practised law for 18 years in the areas of bankruptcy and restructuring. Most of my practice involved acting for bankruptcy trustees, although I represented court appointed receivers, privately appointed receivers, secured and unsecured creditors and debtors. The majority of my practice was in the area of commercial bankruptcy and restructuring. However, I have also acted for consumer debtors, as well as trustees in dealing with their consumer debtors.
I prepared my papers, therefore, in a way that would address not only the theoretical underpinnings of the arguments but also the issues from the perspective of a practising member of the bar. Accordingly, you might find the papers to be slightly different from the usual scholarly works that you review.
The issue with which I deal in the first paper is the discretion the courts exercise under their inherent jurisdiction when dealing with a problem under the Companies' Creditors Arrangement Act. Many of the witnesses who have appeared before you addressed these issues. You have likely gained in expertise, or at least now have a thorough knowledge of that area, so I will not focus on it in this opening statement.
The second paper is a comparative work in which I deal with the reorganization regimes used in the United States, the U.K., New Zealand, Australia and Hong Kong. One of the objectives of that paper was to see how those jurisdictions view the Canadian reorganization regimes, and how we see them.
Many of the witnesses who have appeared before you have made a passing reference to the American model, which is logical since obviously the United States is our major trading partner.
My collateral issue is to talk briefly about the United Nations Commission on International Trade Law and the Model Law on Cross-Border Insolvency. I will refer to the commission as UNCITRAL and the Model Law on Cross- Border Insolvency as the model law.
Obviously, Canada trades primarily with the United States. However, it also trades abroad with major trading partners, such as the United Kingdom, Japan and others. You have others who have sung the praises of the UNCITRAL model law. You have also heard one witness severely criticize the model law. I tend to be on the side of criticism, but not severely so, and for different reasons.
As you have heard, the model law was created and developed through various United Nations colloquia in which various stakeholders, including creditors, lawyers, accountants, academics and judges from all over the world contributed to the creation of the model law.
But is it the best law? Probably not, as, in my view, it was primarily created through the work of certain proponents who represented relatively affluent countries. The fact that Eritrea has adopted it, and certain relatively affluent countries have not, raises the concern as to whether this one-size-fits-all model will work in a major industrialized nation such as Canada.
The other concern I have with the model law is the terminology it uses. In passing, one of the witnesses refers to the concept of ``adequate protection.'' I am in the process of completing a paper that deals specifically with that term and the fact that in the United States that term has been developed over the past 60 years and is a term of art with very subtle and not so subtle nuances.
Should other nations rely on the U.S. jurisprudential development or take their own 60 years to develop it? My argument is that when adopted by a state the model law should create its own definition of it. But that goes against the recommendation contained in the model law itself, where it exhorts countries to adopt the model law with as few changes as possible. If Canada adopts the model law, but significantly changes it, one then has to wonder whether reciprocity will become an issue in a cross-border insolvency. The issue of reciprocity was addressed by a former witness.
As you know, the 1997 amendments to the Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act resulted in, among other things, provisions dealing with cross-border matters under the heading, ``International Considerations.'' These new provisions, which were put in place in 1997, have been not used much despite the fact that we have seen some cross-border insolvencies in Canada. Rather, the stakeholders tend to resort to what academics and others have referred to as the ``ad hoc approach,'' which recognizes the time-honoured mechanism of negotiation to arrive at a protocol that deals with not only procedural but also substantive matters.
Is that so bad? Probably it is not, as it takes the proceeding away from the courts and puts it into the hands of the persons who will have to live with the consequences, the stakeholders. The ultimate threat, of course, is the stakeholders could say that the negotiation is not accomplishing the objectives they seek, so they will let their own courts decide the issues. This could result in international chaos.
Having said all this, the model law does have a bailout provision. If use of the model law does not protect domestic stakeholders, the courts have the ability to opt out of the model law. This could make the model law a hollow piece of legislation.
In a perfect world, of course, all countries would adopt the model law with no opt-out clause. This means the main proceeding would govern all matters dealing with the bankruptcy or the reorganization but does this raise the concern that domestic public policy need not be recognized by the court carrying on the main proceeding? Likely yes, which may dissuade countries from adopting it.
South Africa, Mexico and Eritrea have adopted the model law. New Zealand has taken a wait-and-see approach to determine whether its major trading partner, Australia, will adopt it. Australia is looking closely at the legislation. Japan has adopted a revised version to address its civil law issues. In the United States, Congress seems to want to adopt it, but bankruptcy reform seems to be placed on the back burner when it gets stalled by unrelated issues.
You have heard from the joint committee composed of the Insolvency Institute of Canada and the Canadian Association of Insolvency and Restructuring Professionals. I will refer to that committee in this testimony as the ``joint committee.''
That committee asked you to consider whether Canada should adopt the model law ``on the grounds of harmonization''; and, if so, whether the model law should be modified to address the Canadian reorganization culture and its economic circumstances.
Taken alone, harmonization should not be the driving force behind the adoption. Because of the way in which the model law is structured in the interests of harmonization, Canadian courts may lose some autonomy, or the use of the model law in Canada could be marginalized. Does this accomplish its purpose? Likely not. Making changes to the model law to address Canadian culture and economics goes against the urgings of UNCITRAL. With the greatest of respect to those who feel otherwise, I feel Canada must conduct a thorough review of the model law from a Canadian perspective to see if it adds anything to the Canadian business culture.
Why did I do the comparative work? It seems that globally, at least among the countries that I studied, governments prefer to see businesses reorganized and liquidated. Of course, if the business is worth saving, the public policy objectives of maintaining jobs and assisting the economy are beneficial. I call this economic Darwinism.
With advanced telecommunications and the Internet, trade and commerce are becoming seamless. Although international trade and commerce have been with us for centuries, its ease is becoming more apparent. Whether we are dealing with a merchant in Pretoria, a financial institution in Kyoto or a multinational manufacturer in Bombay, the ease of trade and comment is evident. I wanted to see how other nations are dealing with business failure and whether they see the Canadian model as not fulfilling its parent role.
As a general comment, it seems that Canadians are more critical of their reorganization systems than the rest of the world. I have reworked these papers that are in front of you to refer to the fact that Canada has a bifurcated reorganization system rather than one that is two-tiered. Tiers connote different levels, which is not entirely accurate. Each of our regimes is intended to address different entities, so it is more bifurcated than two-tiered.
Other countries see the Canadian system as sophisticated, balanced and effective. Canada is composed primarily of small to medium-sized business. The flexible, court-driven nature of a proceeding under the Companies' Creditors Arrangement Act lends itself to large multinational entities. The bifurcated system in Canada works well from a practitioner's perspective.
The single thread that seems to tie the various reorganization regimes together is the inherent jurisdiction of the courts so they may exercise their discretion when dealing with the diverse issues they face. I will not discuss those issues in these opening comments, but I now invite your questions, honourable senators.
The Chairman: If I can sum up where you are, professor, in terms of the international model, you are suggesting that there is no rush; that there is a great deal that we should look at; that we should not underrate what we have as we have it; and that we are not terribly out of step with our significant trading partners, or otherwise, if we do not rush to the international model. Is that an oversimplification?
Mr. Yamauchi: That is my position. We need to do a little bit more work with the model law and really analyze it. As I said, I have started this paper on adequate protection, and I expressed some concerns to some of the other members of countries that attended the colloquia. Although my position in the first instance was that it was a made-in-America term, they seem to suggest that it was a more general term that we could look at strictly on a semantic basis and determine whether something is adequately protected.
However, the concern I have with respect to that terminology, sir, is that the Americans may take a particular view of that term ``adequate protection'' when dealing with someone from, for example, Eritrea, who has no idea what that term means other than in a literal sense.
I think we need to spend more time with the model law and examine it. Our system works well as it is today with the ad hoc protocol approach, and I am not sure that practitioners would be inclined to use the model law even if it were in force.
The Chairman: You do talk about inherent jurisdiction and judicial discretion. Following up on a line of questioning earlier from Senator Angus, we rely a great deal on the creativity of individual judges, and most prominently in limited jurisdictions now, largely because of the concentration of economic activity in Quebec and Ontario. However, as federal legislators, we need to be satisfied that there is capacity for the federal law to be delivered evenly and fairly across the country and through the system. I suppose one could say that the worst system in the world can work if it has good enough people, and the best one can be spoiled if the people are weak enough.
Given that you are looking at it now as an academic rather than as a practitioner in a particular court, would you have a comment on the effectiveness with which the principles of inherent jurisdiction and the application of those are allowing fair application of the laws on a national basis as opposed to the one or two jurisdictions that we are most familiar with?
Mr. Yamauchi: Yes. Thank you for asking that question. I believe in one of my papers, you perhaps noted a quote where former Chief Justice Cardoza was referring to the fact that judges do not roam around like knights errant, or they are not fumbling around in the dark. The beauty of the Companies' Creditors Arrangement Act, as we are sitting here today, is that we have had almost two decades of decisions. Those decisions are from Ontario and Quebec primarily, but we also have very strong decisions from British Columbia and Alberta in particular. The provincial judicial bodies, as far as I am aware, sir, are, for lack of a better term, starting to create specialist judges to deal with reorganizations. Included in those, of course, are Ontario and Quebec. In Alberta, we have people like Justice LoVecchio, and in British Columbia we have Justice Tysoe. Saskatchewan is also doing the same. They are creating a body of specialist judges to deal with these types of matters.
In terms of getting uniformity across the country, it seems to me from my review of several cases that most judges refer to cases from other jurisdictions and do their balancing to come out with a fair and reasonable approach for all of the stakeholders. There is that balancing. There is that uniformity across the country when one reviews all of the cases of the Companies' Creditors Arrangement Act.
I do not see inherent jurisdiction as necessarily a bad thing. My view is that we should do some tinkering with the Companies' Creditors Arrangement Act to add some of the 86 recommendations that the joint committee proposed, but leave flexibility in the hands of the courts so that they can deal with issues that we have not seen and that we did not see when the Companies' Creditors Arrangement Act was first enacted in 1933. They need to have some flexibility to account for societal changes and changes in business values and economic values. I see uniformity in the CCAA.
Senator Chaput: Since Canada has many small and medium-sized enterprises, do you feel that what we have at the present time is sufficient in regards to answering the needs of those small and medium-sized enterprises as far as creditors and things not being paid?
Mr. Yamauchi: Yes, absolutely. The rigid provisions of the Bankruptcy and Insolvency Act fit quite nicely with the reorganization of small to medium-sized business.
In doing my work around the world and in looking at some of the law commission reports from other countries, Canada is seen as a model. I was lucky enough to be in New Zealand two years ago and to meet with people from their Ministry of Economic Development. They specifically asked that I send them a copy of the most recent version of our Bankruptcy and Insolvency Act. They wanted to examine our model because it seems to work.
The bigger criticism is with respect to the Companies' Creditors Arrangement Act and the flexibility that it provides.
The Chairman: There being no further questions, I thank you for your submissions.
Perhaps we can have a little flexibility here since we like it when we see it in the courts. Our next witness is not here so we will ask the previous panel to return to the table. We have some questions left in our reservoir.
Senator Massicotte: I have a question for Mr. Leonard. It was further to a question by Senator Angus and I want to make sure I understood. Senator Angus was comparing the American example of terminating or amending executory contracts and you referred specifically to labour contracts.
You seem to be in favour of giving the courts the right to terminate or amend executory contracts?
Mr. Leonard: In my answer to Senator Angus, I was focusing specifically on labour contracts because that is where the real controversy is. Labour contracts in this country are normally considered inviolate; you cannot touch them. We do not know what Justice Farley would have done in the Air Canada situation at all.
The topic of executory contracts is a lot more complex because such a variety of contracts exists. The Americans have bogged down and become overly fascinated or overly concerned with executory contracts, but they come at it from a different system.
If I can just digress, in the American system, when you file a Chapter 11, a line is drawn. At least theoretically and certainly in the statute, the company that emerges on the other side of the line is a new company. It is the ``debtor in possession'' but the ``debtor in possession'' is given the responsibilities of a trustee under the legislation. As a new company, it must go back to the court for two things — to get authority to assume old contracts that belonged to the old company, and to get authority to reject contracts that continue.
We would be biting off a lot to generalize and say that the court should be able to authorize the debtor to reject contracts unless we had some sort of framework for doing that.
Senator Massicotte: You are referring to the right to terminate employment contracts?
Mr. Leonard: Yes, I was talking about employment contracts.
Senator Massicotte: You are saying that you would favour the right to terminate those contracts?
Mr. Leonard: I would, based on the Air Canada example. As a matter of insolvency law, I do not think it is appropriate or proper for one stakeholder group to be able to render a reorganization meaningless or futile.
Senator Massicotte: Let me clarify. I would see labour contracts, leases, offers of services, all major contracts and intellectual property, as about the same. It is important to determine if you have a right to terminate or a right to amend. It is tough to force people to provide services in the future out of consideration if they do not agree. I can see terminating but I have difficulty with amending. What would you recommend there?
Mr. Leonard: In labour contracts primarily, legislatively Canada must proceed carefully. Labour contracts have never been touched in insolvency issues before. I would favour the ability of a court, in the absence of an agreement between the unions and the company, to impose terms that vary from the terms of the original contract.
It would be too draconian to say that the contract is at an end. The business will not be at an end; the business will continue and will need employees. It is a question of the basis on which the employment relationship should continue. The employment relationship, as in any reorganization, requires some compromise by all stakeholder groups. The employment relationship, as far as I am concerned, should continue but in a modified basis approved by the court in a fashion that is consistent with the overall reorganization.
The Chairman: May I interrupt? Regarding the American experience, did I understand you to say on this exact point that, under Chapter 11 or otherwise, they had gone to the point of terminating and then moved back off that to a position of renegotiation?
Mr. Leonard: That is essentially it. When Chapter 11 was amended in 1978 in a serious way, labour contracts were not singled out. They were dealt with under the general power to reject contracts. After one of the airline cases — it may have been Eastern Airlines — there was a great kerfuffle about the courts not being able to interfere with labour contracts. The code was amended in 1984, I think, to allow termination of labour contracts but only after certain steps and mandatory negotiations in good faith. Those steps and the absence of an agreement are now required before a court can amend or vary the labour contract.
That is a model from which we could start if we were considering that. It is a useful example to have.
Senator Angus: My point was on uniformity and the desirability or non-desirability of having two different sets of rules right across the border. We are so interlocked with their economy, that it does not make sense. I think the witnesses agreed with me earlier. It is not a case of whether termination is allowed. Whatever the systems are, I think they should be the same. That is really my point.
Senator Massicotte: Let us take the argument further because I am trying to understand the concept. The Americans have four tests that must be satisfied but, at the end of the day, if there is no agreement given the threat, the court has a right to impose terms.
Given that the labour contract, socially and politically, is the most difficult issue, would you not go further? If the courts have the right, after a reasonableness test and after proving that a contract is not profitable, would the courts also have the right, using your argument, to terminate intellectual contracts? Or perhaps they should have the right to reduce the rent on a long—term lease to ensure the company can operate? How far do you go with that argument?
Mr. Leonard: That is a logical question to ask.
The Chairman: Can you give us a logical answer?
Mr. Leonard: I hope so. How far do you go? It is a conceptual issue. There are some social reasons behind it. A contract of employment is more than just a contract. Employees are people to whom our legislative system gives special care and concern. They cannot take their jobs and walk out and go and get another job the next day. It is a serious upheaval in their lives to lose their jobs. We give employment contracts special attention, hence the union contracts.
I think intellectual property is different. Intellectual property licences are not really contracts. I think they are really interests in property. If I own something and I license it to someone else, that is an interest in property that the other person has. If I go bankrupt, I should not be able to deprive the other person of the property interest in that licence that I have given him. It is a slightly different issue.
Equally controversial was a huge hue and cry in the United States based on the Lubrizol case, which Mr. Goldstein will know fully about. We have not got there.
In cross-border transactions, American companies and creditors are appalled that we live in a pre-Lubrizol world because they think of that as being primitive and exciting in a way, but not comforting to them. I think IP contracts are a little different.
On leases, you have me. That is a good example: if you can terminate, why can you not amend? That would be a plausible way of doing it. We have not thought about doing it that way. In a sense, the power to terminate something must include the power to amend it. If you can destroy it, you should be able to tinker with it. I would go that far, although the drafting might be quite tricky. Maybe what you do is say, ``Okay, the debtor in possession or the insolvent company can terminate or modify it, but it must say on what terms it is prepared to continue the contract.'' Then the other party can agree to accept or not accept that reduced level of performance.
Senator Angus: I have my mind back on track regarding this issue.
You were in the room when Mr. Yamauchi from Calgary was providing his thoughts to us. He also provided us with a number of interesting papers. The bottom line of what he was saying, at least as I grasped it, was, first, we should be very careful that our two-tiered system works before we make any changes. In these hearings and on the task force, we have at the present a unique opportunity to improve our insolvency statutes. It will not happen again for another 10 years or so. We need to bite the bullet and to make Canada's laws, as you said earlier, state of the art.
I hope you will not consider it to be unfair, but could I ask you whether you agree with the proposition of the professor?
Mr. Leonard: As it relates to the model law?
Senator Angus: Yes.
Mr. Leonard: No, I do not accept his positions on model law. I was involved in the model law from the outset. Thank you for the question. It gives me an opportunity to say a couple of other things.
Senator Angus: You would think we have been out rehearsing together, but we have not.
Mr. Leonard: That is right. The model law, not to make light of it, was developed by UNCITRAL. It is a United Nations organization, but it is a framework organization. Its membership is 60 countries from around the world. The model law project took between three and four years. The Government of Canada was there. We were prominent in the piece. The chair of the working group on insolvency law that produced the model law was a lawyer from the Department of Justice in Ottawa. The Canadians were very prominent in the whole thing.
The UNCITRAL process is also driven by consensus. Every step of the way, at every meeting, every clause was looked at, and there was a consensus on every clause, or it did not go forward. We had to go back, think about it again and come back. Every country agreed to every clause. This thing has been studied viciously for a long period of time. It is a little late in the day to say, ``Let us go back and think about this again.'' People have thought about this for four years.
He mentioned Eritrea, which is unfortunate. As far as I know, Eritrea did adopt the model law, but I do not hold that out as the gold standard. The gold standard is the United States, which will adopt it. The United Kingdom will adopt it. Mr. Zwaig and I were in Vienna for the last meeting of the UNCITRAL working group in September, last month. The United Kingdom is firmly on side with that. New Zealand and Australia will come along. Australia has recommended it. My supplementary report will show that Poland, Romania and Japan are on board. There are eight countries and 700 million people who have now adopted the model law.
The question I would have asked the professor, had it been my position to do so, is this: What particularly Canadian insight does he have to indicate that this thing is dangerous and needs to be controlled? I cannot see it. I do not think there is a problem with the model law, especially — you will get it in my supplementary report — if the structure of the model law is a domestic proceedings control. If there is a foreign proceeding, the foreign proceeding must recognize the domestic proceedings. There will not be any Canadian creditors prejudiced as a result, or, if there will be Canadian creditors prejudiced under the model law system, creditors in the United States, the United Kingdom, Poland, Romania, South Africa and Japan will all be prejudiced, too. How can everyone be prejudiced at the same time? It is not there.
Because of the Canadian involvement in the development of the thing, the Canadian government's participation and acceptance of the principles of the model law, it would be very difficult for Canada, as a nation to go back and say, ``Wait a minute. We think this thing is not worth considering.'' I do not know how we could say that.
Mr. Zwaig: I have been attending these United Nations hearings for the last two and a half years. I support everything that Mr. Leonard has said. Everything is by consensus. It is almost like studying it on a paragraph-by- paragraph basis, or, even more refined than that, on a line-by-line basis.
With the Canadian involvement to date, I would say that it would be very difficult to backtrack.
Senator Angus: It is like international treaty law.
Mr. Zwaig: That is right.
Senator Angus: All of these international conventions are arrived at through delegations from government organizations shored up by the private sector expertise. To me, it is the only way to go.
Perhaps I could ask another question, in the interests of time, because I have so much respect for these particular witnesses, as we all do.
Is there anything that you would like to add that we should specifically consider in our report?
The Chairman: You do not get this chance very often!
Mr. Leonard: I have to tell you about what the United Kingdom has been doing lately. As of September 15, the United Kingdom has enacted a sea change in its insolvency legislation. It is incredible to me how far they have gone.
Senator Angus: That was just last week, effectively.
Mr. Leonard: Yes, it is amazing. The first of the three major changes is that private receiverships as a means of enforcing security have been abolished in the United Kingdom. Of course, the United Kingdom is the country that invented the receiver. This is like the Pope becoming Anglican or something like that. It is unusual.
The second change is something we should consider, if we had the opportunity. The United Kingdom has abolished — dare I say this — Crown priority in claims. Can anyone believe that? The country that invented Crown priority has now abolished it. The claims to the Crown are now ordinary, unsecured creditors.
Senator Angus: We have had some evidence in support of that position.
Mr. Leonard: The International Insolvency Institute is undertaking a study, and we have six or seven countries so far, but four or five of them — Australia, Germany and some others — have abolished state priority claims as well. A trend may be developing here. That is something we should probably look at.
The third thing the United Kingdom has done is basically to guarantee unsecured creditors a piece of the pie in insolvency.
The Chairman: That is a bit of an oxymoron.
Senator Angus: Or at least a paradox.
Mr. Leonard: There is in place now in the United Kingdom a provision under which, up to a certain limit, unsecured creditors get approximately 20 per cent of the realization that comes from floating charge security. If a lender has floating charge security on all of a company's assets and the company goes into liquidation and there is a distribution, 20 per cent of the funds that result from the sale of assets that are subject to the floating charge form a fund for unsecured creditors.
The Chairman: Does that include wages?
Mr. Leonard: Wages maintain their current priority. They probably do not participate in that. That is a technical question I should look at.
Senator Angus: It is a Labour government, after all.
Mr. Leonard: That is right. There are some things they will not do.
Mr. Zwaig: I will leave you a copy of this document. Fifty per cent of the first £10,000 is allocated to the unsecured creditors and 20 per cent of the remainder, up to a maximum of £3 million. A fund, therefore, is created automatically. Perhaps this committee should give some consideration to something like this if we are not going to have another series of amendments for 10 years. This could be something of interest.
Mr. Leonard: To my understanding, it was sort of a trade-off. The government gave up its priority claims, but in giving up its priority claims, if it did not do anything else, the priority claims would flow down to the secured creditors, and the government wanted to ensure that the benefit went to the unsecured creditors. The carve-out was intended to flow the abolition proceeds down into the unsecured creditor group.
In a sense, you might need both ends of that to make it all work. If we wanted to do it more gently and not so revolutionarily in Canada, we could have a partial reduction of Crown priorities and have the same sort of carve-out down to the unsecured creditors. It is a question of economics. They ran their numbers and figured out that if they were prepared to give up the Crown priority claim, this money should go down to the unsecured creditors.
Senator Angus: Where are our American friends on this line?
Mr. Leonard: They are not there. They have not done that. Effective last year, there were major amendments to article 9. That is where we get our PBSA from. They expanded the coverage of article 9 so that secured creditors could have a better grasp on assets. The suggestion was made, and it was debated at the time, that there should be a carve-out from floating charges for unsecured creditors, but it did not have support in Congress.
Senator Angus: The case for uniformity, which is so evident in cases of restructurings and the like, is not the same for Department of Internal Affairs, DIA, type law?
Mr. Leonard: That is right.
Mr. Zwaig: You keep referring to the American laws. One must recognize that their laws are debtor-friendly. As a result, you can say they are anti-creditor. Our laws are creditor-friendly so we have a better opportunity of following something like what the United Kingdom has enacted.
The Chairman: Another way of casting ``debtor-friendly'' is a greater commitment to seeing that the business as an enterprise continues on. Do we know much about the longer-term survival rate of companies that come out of a Chapter 11?
A previous witness cautioned us not to be too oriented that way because you get the dip where the business comes out and then a year or two years later, they are gone again with all the collateral damage. Do we know anything about the long—term survival or otherwise of companies coming out of these processes?
Mr. Zwaig: I have always referred to the CCAA process in this country as a sophisticated method of liquidations, whereas in the United States, because you have the concept of a debtor in possession and DIP financing, the companies have the opportunity to restructure and go forward.
There is another thing in the United States that is very different from here in Canada. To file for protection under CCAA or the BIA, you have to be insolvent. In the United States that is available to you even when you are solvent.
Good examples would be companies like Dow Chemical that are concerned about product liability claims. Perhaps a better example is the dispute between Texaco and Pennzoil. Texaco filed for protection, and that was part of a process to settle eventually with Pennzoil. Texaco was never insolvent.
In my opinion, because solvent companies can take protection under Chapter 11, you would have a better statistic under those circumstances.
The Chairman: The litigious nature of the American society creates a lot of those conditions. I am thinking of companies that you have named. It seems that, as often as not, rather than protection from bankruptcy it is protection from what may be bankruptcy as a result of litigation. There is a bit of a cultural difference there.
Mr. Leonard: This is an area in which we could really do some work. In the BIA in particular, we have an historical anomaly that punishes people for seeking to compromise their debts. That seems counterintuitive to people, but if you are reorganizing a company under the BIA, you get one chance. If you do not file your cash flow statements in a particular period of time after your filing, or if you cannot get an extension of the time within which to continue negotiations with your creditors, the BIA currently says that you are bankrupt. People, therefore, hang on. They do not seek protection as early as they could, because when they go into protection they are betting the company that they can resolve all their financial difficulties in 30 days, and you cannot do it in 30 days. So the 30—day period does not work and the idea that you get one shot and you are dead discourages people from going into negotiations with their creditors. It is a throwback from the 1960s when proposals were perceived as a means of staving off creditors while you consumed your assets.
Fraud is fraud, and if there are examples of fraud in BIA cases the trustee is supposed to take these to the court and the court is supposed to deal with it, but surely we have passed the point where we need to threaten people with extinction if they do not successfully reorganize within 30 days.
On the U.S. experience, Professor LoPucki, a member of the International Insolvency Institute, has done a considerable amount of empirical research on Chapter 11. He has a Web site and a database. His conclusion is that in the large CCAAs, which in his case is in the order of $150 million to $200 million in assets, the success rate in large Chapter 11 cases is 100 per cent. They all work, which is amazing.
With regard to the success rate in large CCAA cases, I do not know. There is no empirical evidence.
Senator Angus: Is it less than 50?
Mr. Leonard: It is certainly less than 50. I was grasping for 10 or 15. There are very few successful cases. There are a lot of successful sales of assets in CCAA cases, but to my mind that is not a successful reorganization. It is a liquidation, as Mr. Zwaig had said.
Remember that over $200 million, they are all successful. Maybe they know something.
Senator Angus: Is this issue of predictability important? I find that the Canadian system is not predictable. Take Canada 3000 as an example. It is a viable business, perhaps, or perhaps not, but boom, they are in liquidation within 30 days, or soon after the filing, because it is not predictable. I suppose everyone who files under CCAA is taking a risk, whereas if it was Chapter 11, in these big ones, it is a partnership with the system that you will save this business. You can predict that the outcome will be some ongoing enterprise.
Mr. Zwaig: What in fact happens here, and just to follow on that you are risking the business or gambling the business, what brought Eaton's down at the end of the day was a creditor making application for revendication of 30- day goods. Something will tip the scales.
There is obviously information out there, but their longevity was not there. Canada 3000 files for protection, files for a stay and there are jurisdictions that do not recognize that. Those are things that in considering how to go forward with revised or amended legislation should be taken into consideration.
The Chairman: Gentlemen, we will have to bring this to a close. For the record, I would like to ask one question based on the U.K. information you just gave us. This is looking for a speculative response on that 20 per cent reserve or that sort of a concept.
From your knowledge of the lenders in this country, specifically the banks, do you think that kind of a proposal would be viewed as a constructive one, or as a problematic one?
Mr. Leonard: The lenders would say that this will do awful things to the economy and so on and so forth, but they have said that with 30-day goods. Anything that impacts on the way they are doing things normally at the moment, with which they are comfortable, would be negative because it is a disruption in the routine and new policies have to be put in place. I understand all that.
As Mr. Zwaig said earlier, the United States has the most debtor-friendly system in the world, barring none. It has all the bells and whistles. By contrast, the U.S. banking system is the most vibrant in the world. Now, you would think, in a debtor-friendly system you would not be able to get credit and the banks would not lend. But the banks, in my experience, will lend into any kind of situation, as long as they know what the rules are, what the risks are and they can price their loans. Everything has a price.
The banks in the U.K. have complained about the 25 per cent carveout, which is justified. Everyone over there thinks the banks will factor the thing into their pricing and they will go on. It will not be a sea change. The banks are the most resilient and adaptable organizations in the world. They will survive and do well, no matter what. All they would ask is, ``Let us understand what the rules are and we can play in the game.''
The Chairman: That is a wonderful statement. Thank you for this appearance and encore. It has been very much appreciated.
We will now hear from the Canadian Federation of Independent Business, Mr. Garth Whyte, Vice-President, and Mr. André Piché, Director of National Affairs. Before you begin, I want to welcome you here particularly in light of the problems we had last week when the committee was unable to sit after you had taken the trouble to be here. You have come back again, and we appreciate it and look forward to your presentation. Please proceed with your opening statement.
Mr. Garth Whyte, Executive Vice-President, Canadian Federation of Independent Business: Thank you for inviting us back to speak about the Bankruptcy and Insolvency Act. When I think of a Bankruptcy and Insolvency Act review, I think of one of our 105,000 business-owner members across the country. Sharon's company repairs and refurbishes aircraft instruments. A typical job is about $7,000 to $8,000. She has been caught in a number of bankruptcies, the latest involving Air Canada. In her business, you either extend credit unsecured or you do not get the business. Unlike a creditor who can go in and retrieve merchandise after a bankruptcy has been declared, her company cannot because the instruments on which the work is performed are owned by the bankrupt company. Even worse, her company has done a job but not yet shipped it. They still must ship it, knowing they will not get paid. Sharon often loses $7,000 to $8,000, and that is not right, nor is it fair. There are thousands of smaller businesses like the one I just mentioned across the country unfairly hit by business bankruptcies, and I do not think you have heard about that yet. That is what we are here to talk about. We are here to talk about Sharon and the 105,000 business owners we represent.
Our presentation breaks into three parts. In the first part, we want to talk about the changing economy and how things have changed since the last round of review of the Business and Insolvency Act, the BIA. The second part, which will be given by Mr. Piché, will outline our members' priorities and concerns regarding the bankruptcy legislation, and the third part outlines some recommendations.
To deal with the first part, we are not experts on bankruptcy or insolvency legislation. Let us get that on the table right away. However, we have been involved over almost two decades. When I came here from Manitoba, I was involved about 10 years ago when I was at a subcommittee of the Business and Insolvency review committee. I think there were six subcommittees, and I was on one of them. I remember being on a conference call with 24 people across the country. I was the only business representative on the call. The call was full of experts from the banking community and the legal community, and government officials. I suspect, ten years later, you have had presentations primarily from the experts. I remember being on the call. I do not know about you, but often it gets confusing and quite technical. I am sure these same people are coming forward and making the same proposals they made ten years ago. The issues are still the same, but there is one big difference: The economy has changed. That is where we are experts.
We have two things in front of you. One is our presentation, and in the first part I will just refer to some of the graphs. The first figure talks about the makeup of Canada's economy. You may have seen this before, but 97 per cent of all businesses have fewer than 50 employees. What most people do not know is how much the small and medium- sized business sector has grown in the last decade, even since 1997 when the act was changed. They are 50 per cent of the gross domestic product and 60 per cent of the total employment, and they have created virtually all the net new jobs in the last several years.
Even we did not fully comprehend the impact of the small business community until that terrible event on September 11. When September 11 happened and we saw the twin towers fall, everyone said the economy will fall. However, there were businesses all around those twin towers. We do 4,500 small business visits a week. We said, what can we do? We started surveying businesses across the country and visiting with them, asking them about what was happening. If you remember, everyone was watching in the news and watching the stock market go down. Our members said, ``No, we are hanging tough. We will still keep employing.'' About five months later, we presented to the Finance Committee, opposite all the other large business groups, and everyone was talking about how bad the economy would be. We came out and said, and it is on record, that we think that between 200,000 and 300,000 jobs will be filled. I will tell you that we were nervous to say that because we were watching the news and saw Nortel and heard about Enron. Well, we were wrong. It was not 300,000 jobs; it was 540,000 jobs that were created by the small and medium-sized business sector. Thank goodness for them, because since September 11 they have kept the economy going.
We survey our members on what we call a business barometer. We brought this for you. One of the good things about us not presenting last time is that we could not have given you this because this came out a week later. Some of the graphs inside have changed. We asked our members about their expectations for the economy. It is one thing to ask business owners about their expectations for the economy; it is another thing to ask business owners about their expectation for their own business. They are experts. They know whom they will hire. They know about their own business. That is what we call our barometer. Bloomberg uses it, Governor Dodge uses it, and Finance Minister Manley and several of the budgets have quoted it regularly, because it is a great indicator of the economy.
If you go to graph two, you can see our barometer, the blue line, which is our members' expectations over the year. We layered on top of that the GDP, which is the gold line. They are amazingly the same.
I am referring to page 2 of the brief. The indicator is layered over the gross domestic product. You can see how amazingly predictive the figures are of Canada's economy.
Why are we talking about this? When you consider recommendations on the BIA, remember this line and remember what happened on September 11. The blue line is also used in figure 3. The blue reflects the GDP. The green line is the TSX indicator, the stock market. We think this graph explains why Canada's economy has done well, compared to United States, and why we held our own and why we created jobs. This graph partially explains it. There are two economies now. There is the stock-market economy, which is reflected in the green line. There is the non-stock-market economy made up of small and medium-sized enterprises.
That is an important backdrop to any policy change or discussion. Think about the non-stock market economy. What does the BIA do to help the non-stock market economy? Whatever we do, let us not introduce recommendations that hurt the non-stock market economy. As the Superintendent of Bankruptcy said to you at the beginning of the summer, the key principles in any insolvency system are fairness and transparency. You have to ask, is the current act fair?
I want to leave that message with you. Is it fair? Does it reflect upon and help the small business economy. We have a lot of dividends. I will turn it to Mr. Piché to talk about specific recommendations.
Mr. André Piché, Director, National Affairs, Federation of Independent Business: My comments are organized in three areas. I will talk about the wage-earner protection fund, the protection of RRSPs and unpaid-supplier rights.
If our members have one message in terms of their preoccupation with the act, it is that small to medium enterprise, SME, owners perceive the bankruptcy legislation to be Byzantine and complex, and that the debate about changing the act is dominated by specialists. I think Mr. Whyte made that point. That is what we heard from our membership. The vast majority of creditors involved in proceedings are small-business owners who do not feel adequately protected as unsecured creditors.
On protection of RRSPs, figure 6 on page 5 reflects the 22,200 responses from our members across the country about the retirement savings vehicles that they use. As you can see, RRSPs, at 91 per cent, are very important vehicles for our membership.
CFIB has surveyed its members about whether RRSP holdings should be as protected from forced liquidation by creditors as are registered pensions. The results are shown in figure 7. Two—thirds of respondents answered yes; 26 per cent said no; 8 per cent were undecided or had no interest. Clearly, the vast majority of SME owners are in favour of equal treatment between RRSP holdings and registered pensions.
The wage—earner protection fund has been recommended by numerous committee reports over the years. I believe this committee has discussed such a fund being financed through the Employment Insurance fund. We surveyed our membership in 1986 on whether they were in favour of such a fund. Almost 13,000 business owners responded; 82 per cent were opposed; 11 per cent were in favour; 7 per cent were undecided. That is on figure 8.
Over the years, we have been against the idea of a wage-earner protection fund for the reasons listed below. We feel it would increase the burden of payroll taxes. Our members have told us loud and clear that is a big issue with them, in survey after survey. We also know that payroll taxes hurt economic growth and job creation. The problem is that not only is it a tax but it is a profit-insensitive tax. Those taxes are applied whether you make money or not.
Second, as a basic principle of equity, we feel well run firms should not be penalized or required to subsidize the poor business practices of others. The proposed fund would penalize all firms for the transgressions of a few and encourage irresponsible behaviour on the part of debtors.
Third, the Bankruptcy and Insolvency Act maintains preferred-creditor status for unpaid wage claims for $2,000 of wages earned during the past six months before insolvency. This level of protection is similar to the one found in the U.S.
Finally, should the government judge that existing wage-earner protection is inadequate, we recommend the government consider instead giving wage claims super-priority.
The area of unpaid suppliers' right attracted the most comments from our membership. When asked in 1986 whether members were in favour of giving unpaid suppliers the right to retrieve goods from insolvency customers, 79 per cent of respondents answered yes; 15 per cent answered no; and 6 per cent were undecided. The changes made in 1992 to the legislation in terms of protecting unpaid suppliers' right were a step in the right direction, but the conditions added were very, very strict.
We have listed a number of examples, and Mr. Whyte mentioned one, where there is absolutely no protection for unpaid suppliers.
Some members recommended extending the repossession-right period. Right now it is set at 30 days. Unpaid suppliers have no claim to get the goods returned, regardless of the amount of money owing on the goods after that point. Standard terms for most goods are set at net 30 days. That means the customer has 30 days to pay for the goods. The goods could conceivably be seized on the very day the invoice is due.
We have some cases and Mr. Whyte mentioned the particular example of Sharon who was in that position. They really had no choice in providing credit. The conditions of the business were such that they had to provide credit and, unfortunately, they were caught and had no means of getting the goods back.
Another issue raised was clarification of the repossession rules. Currently, these rules are quite vague and they tend to work against the unsecured creditor. The example given is a box of goods that is open or slightly altered; then the unsecured creditor cannot repossess those goods. We recommend that those rules be clarified and made fairer for the unsecured creditor.
Regarding protection for goods being worked on, Mr. Whyte gave another example of someone who is refurbishing equipment on behalf of a client. If the client goes into bankruptcy, the goods must be returned to the debtor even though the work invoice has not been paid. We feel that is highly unfair. That should be rectified as well.
Regarding ownership of goods purchased on credit, some SME owners have noted that debtors tend to load up on goods on credit before bankruptcy proceedings. That increases their asset base at the expense of the supplier. When the assets are liquidated, the secured lender has first claim against all disbursements. We believe that the ownership of the goods purchased on credit should not pass to the debtor until the goods are paid in full. In our view, that would negate the secured lenders' claim against unpaid assets.
Regarding the representation of unpaid suppliers on the creditors committee, many creditors complain about their inability to have a say and to be heard in bankruptcy proceedings. There is a widespread perception that the bankruptcy trustee acts largely on behalf of the secured lender. Unpaid suppliers should have representation on the creditors' committee that helps to oversee the bankruptcy process.
Regarding keeping debtors at arm's length, this is not an area where SME owners complain about what we call quick flips under which a firm enters receivership, wipes out the obligations to unsecured creditors, and starts up in a matter of days or weeks with a new name but effectively with the same assets and the same management structure.
We have five main recommendations, and they deal with the issues that we talked about before. The first is to provide timely and accessible information to creditors. We believe that the Office of the Superintendent of Bankruptcy could do more to provide information quickly to creditors in general. The use of the Internet should be an area into which they put more resources. That would be to the benefit of creditors, as they would have quicker access to information and easier access to information.
The second point is to make both trustees and debtors more accountable. Many SME owners have expressed that point, namely, that the trustees do not necessarily fulfil their obligations under the act. That is an issue for them because they feel that the law, as it is, and the way that it is applied, is stacked up entirely against them.
With respect to RRSPs, we believe that they are an important element for the small business owners in planning their retirements, and we feel they should be fully protected in bankruptcy proceedings and should be treated in the same way as registered pension plans.
With respect to wage-earner protection funds, for the reasons given earlier, I believe that it should be strongly opposed and that wage claims be given super priority, if the government feels that it needs to give more protection to the employees.
With respect to the unpaid suppliers' rights, I have already mentioned the various points before. The recommendations are fivefold, essentially. The notice period to unpaid suppliers needs to be increased beyond the existing 30 days. As it is now, it does not protect at all the rights of the unpaid suppliers, in many cases.
Possession rules should be clarified and made fairer to secured and unsecured suppliers. That means clarifying what is an altered good and what is not.
Ownership of goods purchased on credit should not pass on to the debtor until the goods are paid in full. It seems like common sense that if goods are in the hands of a debtor and they have not been paid for, somehow, they still belong to the supplier of those goods.
Unpaid suppliers should have representation on a creditors' committee that helps to oversee the bankruptcy process.
Finally, the debtor should be, in all instances, at arm's length regarding the disposal of assets. Rules regarding assets for rollovers should be tightened up, and penalties should be made more severe to prevent abuse.
That is the sum of our recommendations.
The Chairman: Those are extraordinarily clear. The point of view from which you and your membership base speak is also very clear.
Senator Tkachuk: Regarding RRSPs, I think life insurance is protected, but not banks, or is it vice versa?
Mr. Piché: Life insurance is protected.
Senator Tkachuk: That is what I thought. What is the reason for that now in the law?
Mr. Piché: I am not an expert in that area. I believe it goes back a long way. The life insurance treatment is different because it has to do with passing on assets to your children. There is a different set-up for that type of RRSP.
Essentially, if an individual knows the law he can put his RRSPs with a life insurer and get that protection; however, someone who is unaware of the law would essentially have his RRSPs seized.
Senator Tkachuk: I always thought your RRSP was protected in a personal bankruptcy, but maybe that is not so.
Senator Angus: It is not.
Senator Tkachuk: I guess it is not. You want the laws changed to allow that to happen?
Senator Angus: Yes.
Mr. Piché: It is to have fair treatment. At the moment, someone who has a registered pension is protected, and someone who has an RRSP is not. There is an inequity in that sense.
There is also inequity in how the RRSP rules are applied across provinces and also depending on where you go, whether it is a bank or a life insurance company. We feel this should be clarified and made equitable. The only way to do that is to exempt RRSP holdings from bankruptcy.
Mr. Whyte: Coming at it from a different direction, there is a gap that we did not anticipate a decade ago, a growth in self-employed persons and small business owners. Your retirement package is RRSPs and the $500,000 capital gains with the hope of selling your business, and that is it. For every one bankruptcy, 10 go out of business. Those are the ones that we never hear about, and it is a kind of recycling that happens. We have a definition of ``entrepreneur'' that is ``body mass divided by scar tissue.'' You try many times. Many times, people will cash in their RRSPs to stay afloat, which you do not hear about.
The other thing with RRSPs is the policy direction has been pushing to say, ``Hey, people, build up a pension for yourself.'' The BIA is not reflecting that. It is saying the opposite.
The Chairman: It does reflect a statistic we were given recently, namely, that very few people in bankruptcy have RRSPs. That is another way you might say, ``have the RRSPs left.''
Mr. Whyte: That is a good point.
Senator Biron: If we amend the provision of the 30-day protection, would this affect the credit granting by the bank? Would they consider it? Could this have an adverse effect on the ability of certain debtors to reorganize?
Mr. Piché: I am not sure about your last point.
[Translation]
Senator Biron: Would such an amendment to the 30-day protection period not make it more difficult for someone in bankruptcy to get back into business?
Mr. Piché: No. In most cases, the amount realized through the seizure will in part go to the banks or to CCRA. I do not believe that that would have an effect on one's potential to get back into business.
[English]
Mr. Whyte: Banks will tell you that it will affect the lending. I am sure we will be coming here in a matter of months on our banking study, which we do every few years and we have about 10,000 responses on bank lending to small business. There is a myriad of factors on why they may not increase debt. Actually, it is not a problem now.
I liked the previous presenter. I happened to hear the tail-end of his presentation, but he mentioned that in the United States it has not been affecting some of the changes that we think would hurt credit if it were extended. I am not sure that is the case. We find that 30 days is quite onerous for unsecured creditors.
Senator Angus: On the Sharon case, I agree with you. In big bankruptcies today where you have a lot of SME suppliers, whether they are going into a restructuring or under liquidation, the little guy has no chance. That is the perception that you mentioned.
Mr. Whyte: Yes.
Senator Angus: You are recommending that the delays and things be changed to give Sharon a bit of a kick at the can here.
What is your experience, and what would your recommendation be when Sharon's business is in software? In this area of high-tech, today, much of the work that is done is intellectual property and software that they might do on the premises of the ultimate insolvent company, and they are struck. They apply for protection to the court or whatever. They have done the work and they have not been paid. Sharon is stuck there, and you cannot repossess it. Would you make an exception there that they have to be paid, or they would have privilege?
I have been thinking hard about how to protect that class of creditor.
Mr. Whyte: That is a tough one.
Senator Angus: Yes, and it is more and more common today.
Mr. Whyte: The salt in the wound is that Sharon knows that Air Canada is under bankruptcy protection but she still has to fix the equipment, knowing that she is not getting paid for it.
Senator Angus: Regardless of what airline, that is the case.
Mr. Whyte: We discussed this a decade ago. Small business was trying to elbow our way onto the table, but it was felt that small business was the problem, that they were the ones going bankrupt. That is no longer so much the case. Small businesses are now major players in the economy, and I do not think the act reflects that. We did not think about the service sector or softwood issues. We did not think about the fact that they account for 60 per cent of jobs and 50 per cent of the GDP.
I have a feeling that you have not heard too many presentations like ours throughout the five months. I have not heard too many people talk about this side of it. The whole reason that we want to review the act is to look at these types of questions.
Senator Angus: As the chairman said in his opening remarks, we are sorry about last week. We were all inconvenienced, not only the witnesses. However, you are here now and that is great.
Earlier this evening, we heard from Mr. Mel Zwaig and from two prominent insolvency experts from the Toronto law firm of Cassels Brock and Blackwell, Mr. Leonard and Mr. Ward. They referred to the new law in the United Kingdom that was proclaimed on September 15, I believe. In that law, government privilege, the secure claims for all Crown rights, is out. For all assets of an estate subject to a floating charge there would be a carve-out of 20 per cent. One fifth is set aside for the unsecured, for the Sharons of this world.
Have you had a chance to review that?
Mr. Whyte: We have not, but we heard about it here and it is very interesting to us.
Senator Angus: We get into some philosophical questions with regard to a kinder, gentler society and whether we are more debtor-friendly or creditor-friendly. Our tradition has been to try to strike a balance and have good, fair laws. The committee will be debating this, I am sure. This new U.K. provision is new to me and it seems to make a lot of sense and it seems to be in tune with the times.
Mr. Whyte: We are not here with our hand out and we do not want to see abuse. If the United Kingdom is trying this, they can do the research and development for us. It will be interesting to see how it works, to see what happens on lending, abuse, and fair allocation of assets. It sounds interesting in principle and we will certainly watch that.
In this case, I think it would be worth it to see what happens with the U.K. example. As you said, it is 10 days old.
Senator Angus: You might have a look at it.
One of the things that I find attractive about your brief is that you are focusing on five specific areas and making concrete recommendations. That is helpful to us if we are to recommend to the department in question to make specific amendments.
I would be interested to hear your thoughts on the United Kingdom legislation. I believe that the answer to some of your questions is in there.
The Chairman: We are working to a tight deadline, so we would appreciate getting anything you wish to provide to us very quickly.
Mr. Piché: Further to what Mr. Whyte said earlier, if we are to foster entrepreneurship in Canada and risk-taking among our businesses, it is critical to have fair rules of the game.
Senator Angus: Fair and predictable rules.
Mr. Piché: Exactly.
[Translation]
Senator Massicotte: My question flows from what Senator Angus and Senator Biron have said. You indicated that in your experience your clientele never had any difficulty obtaining bank loans. This statement certainly flies in the face of several articles and of the opinion of some of my acquaintances who operate SMEs. If such is the case, particularly with regard to bank loans — and as far as high-risk loans are concerned, there is really no market in Canada — that will certainly have an impact on job creation and the economy in general.
Some are suggesting that employees or others should have a priority over secured or unsecured creditors. If we were to allow such a priority, I presume that that bankers would be less inclined to grant loans. These are obviously rational people. If the value of the guarantee is smaller, than less money will be loaned. Will the creation of new SMEs not be hindered if we reduce the guarantee per say and if we, for example, grant employees priority for unpaid wages or pension plans? What comments could you make in this regard?
Mr. Piché: It is very difficult to predict the way in which the banks will react to legislative changes. We do not know how the banks would react to such a situation. Would there really be fewer loans granted to SMEs?
The results of your survey reveal that already certain SMEs no longer do business with the banks. They are able to manage without the banks as far as loans are concerned, because they were burned by the banks during the latest restructuring. There already exists a problem in that area. It is difficult to predict the banks' reaction to such a situation whereby priority would be given to employee wages. In this regard, it would be interesting to look to CCRA, where such a priority has already been established.
[English]
Mr. Whyte: When we talk about the protection of employees, you must realize that the shortage of qualified labour is our fastest growing issue. The labour shortage is huge, so many of those employees will be picked up. When Nortel dropped a lot of employees, one of our members picked up 40 engineers. When you think of this policy change, do not think of other policies in isolation. The shortage of qualified labour is an issue we are grappling with, with regard to whether these workers will be picked up and protected.
Finally, over 50 per cent of employment insurance currently goes to non-EI uses. It goes to training, parental leave and a lot of other things. The employment insurance program is for protection. There is a fee being paid there, plus the $2,000 that is in the act. When we get into a debate on this one principle, we must think of all of those things.
To get back to banks, we will be able to monitor what they did because now, thanks to the Senate and Industry Canada, the banks must go before the industry committee every two years to give an accounting of their lending to small business. We monitor the trends very closely and they are now on watch. It can no longer be an idle threat that they will reduce their lending, because we can monitor it.
Finally, I would like to compliment this committee. You will be writing your report soon. You have brought this matter to our attention and the House of Commons. We will be looking at it. You have alerted us to alternatives such as the United Kingdom solution. Through the good work you are doing, you are setting the tone for future work with which we will get involved. Much study will be going into this in the future.
The Chairman: I welcome that remark. This committee must keep in mind that this is an ongoing process. We are doing now a study that we have undertaken. Presumably, in the near course of events, there will be legislation, either amendments or an act, and we will, as a committee, together with witnesses, have a chance to look at that product. Your ongoing participation in that process will certainly be very welcome.
If there are no further questions, I wish to thank you again for coming before us tonight.
Senator Angus: If you have any thoughts on the United Kingdom legislation, I would be interested in hearing them.
The Chairman: Our final witnesses for the day are Mr. Treusch and Mr. Cogliati from Human Resources Development Canada.
Gentlemen, as you are aware, but just for the record, one of the significant policy issues before us in this review relates to student loans and the provision that they are not available for discharge through bankruptcy for a 10-year period. It is our understanding that in 1997, with the last amendments to the Bankruptcy and Insolvency Act, there was a two-year limit put in place. Then, not within the terms of the bankruptcy legislation but within the terms of a budget provision in 1998, those two years were changed to 10 years. This is a matter that has been raised by many witnesses before the committee.
We have heard from a wide range of expert witnesses. We have heard from students' groups, consumers' groups and trustees. We have heard the personal story of a bankrupt with that story in her life. One of the comments that has been made frequently is that the change from two years to 10 years appears to have been made abruptly without too much preparation and certainly, in retrospect, without too much understanding as to the exact basis for it being made.
We have also heard evidence as to the number of bankruptcies. We decided with some effort that we better get to the source as best we could and find out exactly what went into the decision, and the policy basis for the decision, so that we could have that knowledge in doing our review.
With that background, I invite you to make your comments.
Mr. Andrew Treusch, Assistant Deputy Minister, Human Investment Programs, Human Resources Development Canada: I hope our remarks will address those very issues. I am certainly pleased to be here, as people involved in the administration of student financial assistance through our department, Human Resources Development Canada. I am accompanied by Mr. Cogliati, who is the Director General of the Canada Student Loans Program.
In addition, we have developed a background paper for committee members on bankruptcy, student loans and the 1998 Canadian Opportunities Strategy. It provides more information than I intend to take you through tonight. Obviously, we are pleased to provide any other information committee members may wish as a follow-up.
The Canada Student Loans Program is a Canadian success story. For almost 40 years, the program has provided financial assistance to students who need help meeting the costs of higher education. Canada student loans are provided interest-free while students are in school. They remain interest-free for a six-month grace period after leaving school before repayment is required.
[Translation]
A lot has changed over the past 40 years, both in the cost of education and the needs of students, but the Canada Student Loans Program has continued to meet its twin objectives of providing students with financial assistance while ensuring the responsible use of public funds.
[English]
Over one third of a million students typically use the program each year. The vast majority of student borrowers, over 80 per cent in fact, repay their loans on time. Unfortunately, some do not. The public policy challenge is how to provide for the use of debt management measures for students who are having trouble meeting their obligations while at the same time ensuring public funds are used responsibly.
I note here that the liability of the Government of Canada on direct student loans is somewhere in the neighbourhood of $5.5 billion.
Let me go through some recent history going back to the early 1990s, the time leading up to the legislative changes made in 1997 relating to bankruptcy. Prior to 1997, student loans were treated like other consumer debt under the Bankruptcy and Insolvency Act. The bankruptcy process could result in student loans being discharged along with other consumer debts through an absolute order of discharge.
[Translation]
In 1997 however, that changed with the enactment of Bill C-5 and the new rule preventing debtors who filed for bankruptcy from discharging their student loans within two years of leaving full or part-time studies. The following year, the period was further extended to ten years of leaving full or part-time studies. To understand the background of this change, it is instructive to look at what was happening with student debt and bankruptcies in the years leading up to it.
[English]
During the early 1990s, the number of individuals with student loans filing for bankruptcy began to increase rapidly. In 1990-91, over 5,600 borrowers with $40.5 million in student loans declared bankruptcy. By 1995-96, some five years later, the number of borrowers filing for bankruptcy had doubled to approximately 11,000. The total amount of loans more than doubled from $40.5 million to over $100 million.
Between 1990 and 1997, approximately 53,000 Canadian student loan borrowers declared bankruptcy or participated in a bankruptcy-related event. These borrowers held approximately $445 million in federal student loans at the date of the bankruptcy event. I am excluding the value of any provincial student loans.
Since individuals filing for bankruptcy receive an accompanying bad credit rating, federal and provincial governments issuing student loans incur millions of dollars in losses. This rapid increase in the number of student loan borrowers filing for bankruptcy is a cause for concern.
[Translation]
Certain facts are worth noting. Approximately 75 per cent of students filed for bankruptcy protection under the Bankruptcy Act within the first two or three years of finishing their studies.
[English]
The overwhelming majority of borrowers, 95 per cent, filed for bankruptcy within seven years after leaving school, with an average amount of about $10,000.
There is also the issue of the nature of student loans, which are, by definition, non-commercial, being treated through the bankruptcy process the same as commercial loans, which are typically made on the basis of collateral or other security. Since there is no security for a student loan other than an anticipated future earnings stream, it was concluded that comparing student loans with other forms of consumer credit under bankruptcy proceedings was like comparing apples and oranges. The two are different.
In addition, the Canada Student Loans Program provides a means for students with permanent disabilities who are experiencing exceptional hardship to apply to have their debt extinguished. Borrowers with permanent disabilities whose loans have been transferred to our collections services and who meet certain income criteria may apply to have their loans written off under the Financial Administration Act.
It is against this background that the government introduced Bill C-5 as well as other student debt management measures in the 1997 budget. That was followed up by additional relief measures that were part of a broader strategy in 1998 and then again in the 2003 budget.
[Translation]
For example, the 1997 Budget extended the period in which eligible borrowers, those who meet certain income requirements, could receive interest relief for 18 to 30 months. This measure was made available throughout the loan repayment period. No payments on interest or capital are required when receiving interest relief, and interest does not accrue.
[English]
This means that borrowers experiencing difficulties in repaying their student loans could apply for debt management measures through the Canada Student Loans Program instead of filing for bankruptcy.
In 1998, the Canadian Opportunities Strategy, as part of the budget, continued to build on this approach. The government extended interest relief so that if a student's income fell below the established income thresholds, they could be eligible for up to 54 months of interest relief within the first five years of completing study. Combine this with the six-month grace period I referred to earlier, and this allows the borrower to defer payments on interest and principal for the first five years after leaving school.
Income thresholds for interest relief eligibility were increased by 9 per cent. Income tax credits on interest paid on student loans was introduced, and we introduced as well a debt reduction and repayment measure that allows for a reduction of the lesser of 50 per cent of the principal or $10,000 of the borrower's loan.
The last budget, in 2003, extended interest relief and debt reduction in repayment measures further. The proposed improvements include amending interest relief to enable borrowers to backdate their application for the benefit by six months from the two, and to add three months of accrued interest to the loan principal once in their lifetime. This amendment will enable borrowers who are in arrears of payments nine months or less the ability to receive payment relief, as well as amending the debt reduction in repayment to provide greater access to the measure by increasing qualifying family income levels as well as the amount of the debt forgiven.
[Translation]
Once these latest changes have an opportunity to work their way through the system, we expect the following: the interest relief benefit will assist an additional 4,500 borrowers at a cost of $5 million annually; the debt reduction in repayment benefit will be $30 million annually at maturity and will assist an additional 2,500 borrowers.
[English]
In addition, eligibility for these debt management measures will be extended to borrowers who declare bankruptcy.
These are significant changes, still to come, and the government remains committed to helping student borrowers address their loan obligations without having to declare personal bankruptcy.
Mr. Chairman, I have outlined the principal changes over the years to the Canada Student Loans Program, with emphasis on the interest and debt relief measures. Time does not permit me to outline 11 other initiatives whereby the Government of Canada assists students. I am referring to various other forms such as scholarship programs. These range from the Canadian Millennium scholarships to Canada study grants to tax relief for part-time students. As well, we continue to work closely with provincial and territorial governments to find further ways to improve opportunities for post-secondary students in Canada. This completes my submission.
Senator Massicotte: I gather that all this is executed or distributed through the banks and financial institutions. Are there any risks or costs for the loan going back?
Mr. Treusch: Sir, since the year 2000, through service provider contracts, the Government of Canada has been directly providing — direct financing is our term — for Canada student loans, for the federal portion of student loans. There were two previous arrangements that involved financial institutions, and the terms of them varied. If you wish, my colleague has greater experience in those.
Mr. Dave Cogliati, Director General, Canada Student Loans Program Directorate, Human Resources Development Canada: I could walk you through it briefly. From 1964 to 1995, the banks issued the loans, and the loans were guaranteed by the federal government. All the loans were federally guaranteed, and the risk then was borne, in effect, by the government. In 1995, we went to risk premium where we paid the banks a 5 per cent risk premium. The banks were still lending out bank money, but defaults and bankruptcies and what have you were borne by the bank. In 2000, all the money that is lent out, in fact, are tax dollars.
Senator Massicotte: Do you think the current proposal, given the balancing of getting your money back with the whole issue of social responsibility, allowing insolvent people to get on with their lives, is adequately balanced with the revised provisions you have made in the last couple of years?
Mr. Treusch: I would like to make it clear that I am coming to bring information before the attention of the committee about the Canada Student Loan Program, information about the growth of bankruptcies in the period leading up to the changes in the law. I think relevant to the committee's consideration are changes made to the Canada Student Loan Program, in particular the introduction and extension of both interest relief and debt relief and other measures.
It is our view that bankruptcy is an undesirable consequence for the individual student, as well as for taxpayers who face the liability or the consequences of it. It is our view that there is a material difference between a student loan and other forms of loans. I am drawing to the attention of the committee that we have taken measures in interest relief and debt relief that we believe is a far preferable course than bankruptcy per se. Indeed, since the introduction of these measures, and it is relatively early, we have seen an increase in the use of interest relief. We have seen a significant decline in the default rate among those receiving interest relief.
We are providing some $77 million to about 140,000 student borrowers now. That is the backdrop for the law as we have it today. Obviously we will follow with great interest the proceedings of the committee and the testimony that you receive.
Senator Massicotte: I understand the statistics, but my question is very clear: Is your opinion such that the current 10-year provision in bankruptcy should remain, in light of all programs?
Mr. Treusch: That legislation is under the purview of the Minister of Industry Canada. Within my competence, I have provided as much commentary as I am available to provide.
Senator Angus: He is not going to tell you anything more.
Senator Angus: Let me try it another way. I was going to say that, in 1996, it was zero; then it went to two years; then it went right away to ten, an eight-year increase. In other words, the amendment of 1997 and then the amendment of 1998 made quite a substantial jump. Now, all the evidence we have been hearing is suggesting we go back to five. Regardless of what you think is in your purview, I have the sense you are here to tell us not to go back to five and to leave it at ten.
Mr. Treusch: In weighting the testimony that you hear from different sources, senator, and the difficult judgments you must render in coming to your final recommendations, I am asking you that you take these factors into consideration. Insofar as I am able from my departmental position, I think it is quite germane that interest relief is available to students facing financial hardship. That relief can last up to five years after completion of their study. They do not pay interest in school. Debt relief measures effectively allow students in financial difficulty to write down the loan.
There are, as well, extra measures available to persons with disabilities. I offer the opinion that it is preferable, both from the interest of the Crown and the taxpayer, but as well from the perspective of the student, to avoid bankruptcy if possible and to use these more constructive measures.
If there were a change to the ten-year bankruptcy rule, it would need to coincide presumably with a review of some of these measures. That may be an implication.
Senator Angus: That is helpful and thank you.
The Chairman: This issue has been a major preoccupation for a lot of people. I am glad we have had a chance to get the complete picture. You also seem anxious to say that we should make sure we understand the complete picture before we arrive at a conclusion. I am glad we have had the opportunity to do that.
For the committee, this is not an either/or proposition. We are not saying either cut back or do the interest and relief on debt. Presumably, still, even with five years, a judicious balancing of provisions will be in order.
We would certainly agree that the best thing is not to have any bankruptcies. On the other hand, we have lots of evidence that some student debtors did not finish school or completed courses that did not yield a large-earning situation. Their student loan is not usually the only thing causing the bankruptcy. We could spend hours talking about this but we obviously will not.
We do not want to get into a position of saying, is the approach of these other provisions an alternate — somewhere we want to blend them, and it is all going to be a matter of balance. I am triggered to say that because of your last comments. I know you did not want to make it sound threatening, but if the period was reduced, you said we would then have to look at the other provisions. We would hope again that balance could be sought and that the objective of staying out of bankruptcy would still be the objective to be pursued.
Senator Kelleher: I sat here and listened to the students and other groups who were advocating the reduction from ten to five years. Maybe I went deaf during that period but I do not recall those advocates of the reduction telling us about ameliorating efforts of the government in the interest areas.
The Chairman: No, and I think it is valuable to now have the complete picture. However, just on the balancing, I had been left with the impression that some of this was triggered by an overwhelming epidemic of student bankruptcies almost on the morning after graduation day.
To be sure I understand the figures, you were talking about 350,000 students as a typical annual number. You spoke of bankruptcies over a seven-year period of 57,000. That is roughly 8,000 a year. So 8,000 out of 350,000 is not quite the epidemic that I, incorrectly perhaps, had understood. I may forget the detail. Am I roughly in an order of magnitude that is correct?
Mr. Treusch: Mr. Chairman, I will not give any adjectives but will let the numbers speak for themselves. I was underscoring the rapid change in the number of borrowers. If you will recall the figures, over a five-year period, the losses shouldered by the Government of Canada more than doubled. When we looked over a seven-year period, we had federal student loan losses that mounted to some $450 million.
The Chairman: That is a big number.
Senator Massicotte: One could look at this graph here and say that there is no problem; the number of bankruptcies is way down. If any student were insolvent in 1995 or 1996, he or she would probably have declared bankruptcy. It is not unusual that the number went down because now they are not allowed to file for bankruptcy protection. Does the graph tell us anything? You expect it to go down because the students cannot file for bankruptcy.
Mr. Cogliati: The important part of that graph is the first half of the right-hand graph with the upward trend. You are absolutely correct. Students still can file for bankruptcies; they just cannot discharge their student loans. The graph might indicate there is no problem today, but you have heard the witnesses. We have been following the testimony closely. Some students are hurting very badly. We have seen the testimony. We would not leap to the conclusion that there is no problem with student debt.
I think we are pleading for a balance between wiping out the ten-year provision and taking into account the measures available. Again we hope bankruptcy would be the last step.
The Chairman: This is the place of sober second thought, so we appreciate the information we have received. We will be able to address the subject much more intelligently now. Thank you very much for coming.
The committee adjourned.