Honourable senators, I rise to speak as the critic on Bill C-280, An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (deemed trust — perishable fruits and vegetables).

I realize I have as much as 45 minutes today. I want to tell you that my speech is 21 pages long. I could call out the pages as I go, if you like.

I want to start on page 0. When I came to the Senate, I confess that I was surprised that I had, almost by accident and by experience in my career, bumped into many of the issues that we are addressing here, and I used to sit over in that corner in the nosebleed seats. I was there with former senator Judith Keating. We would compare notes on, remarkably, the kinds of things that we knew and perhaps didn’t even know that we knew.

One of the things I learned from former Senator Keating during those conversations was why she had asked Senator Percy Mockler to be her sponsor. I am sorry that he is not here at the moment. Some of you who are new to the Senate may know that former Senator Keating unfortunately passed away after only serving here for a couple of years. The temerity of the question was on my part, to ask her why she had asked Senator Percy Mockler to be her sponsor. She told me the reason was that, although she may not have agreed with everything that Senator Mockler stood for, she wanted to be a senator just like Percy Mockler.

In the four years that I have been here, I too have wanted to — as much as I can, both as a senator and in life — be like Senator Mockler. That is the shortest tribute Senator Mockler will receive this week.

Returning to this bill, if I may, as you will see from my remarks, I am a friendly critic and support this bill. I urge you, colleagues, to do the same.

The legislative path of this bill commenced on November 22, 2021, in the other place. Hopefully, we are close to the finish line. My remarks are in four parts.

First, I intend to speak for a few minutes about the bill itself, its general objectives and why it is needed.

Second, I will speak at some length — this will be the most fascinating part of my remarks — about how the bill works and the way in which it fits into a generally complicated and, in some respects, inadequate public policy structure related to creditors in bankruptcies, insolvencies and restructurings.

This is a complicated area of law into which we are wading. I want to offer some thoughts that I hope can explain its nuances and why a somewhat unusual and artificial technique is being legitimately pursued to protect the interests of perishable fruit and vegetable growers.

Connected with this, I will highlight four shortcomings — or, at least, virtually inevitable limitations in the effectiveness — of the bill and its hopes of protecting perishable fruit and vegetable producers in situations where their buyers have gone bankrupt or become insolvent.

Third, I will say a few words about the issue of unsecured creditors more generally, of whom fruit and vegetable producers are an important subset.

In this discussion, I hope to identify for you a consistent set of vulnerabilities experienced by unsecured creditors — vulnerabilities that are pervasive and that call out for a more comprehensive, organized study of the public policy shortcomings inherent in the present bankruptcy and insolvency structure when it comes to how unsecured creditors are placed and not much compensated.

Fourth, and finally, I will say a few words about this bill in the context of international trade and the way in which it can be a constructive olive branch between our country and the United States, benefiting both Canadian and American fruit and vegetable producers and generating economic benefits for both.

To begin, as the sponsor of the bill in the House of Commons has highlighted, and as Senator MacDonald — its sponsor here — pointed out in his second reading speech, specific events associated with the insolvencies of grocers have generated significant adverse consequences for perishable fruit and vegetable growers.

The way these consequences come about is that when somebody sells fruit and vegetable products to a wholesaler or retailer but has not yet been paid, and the wholesaler or retailer becomes insolvent and unable to pay their bills, the fruit and vegetable seller has a low place in the totem pole of compensation. They are, in the language of the bankruptcy and insolvency laws, unsecured creditors.

“Unsecured” means that they do not have any kind of property or security in what they sold or in the assets of the person who bought the produce. As it turns out, unsecured creditors are at the low end when the distribution of insolvent estates takes place.

Second, I will speak about how the bill works. As I said, this will be the longest and most fascinating part of my remarks. To put the bill in context, it is necessary to talk about the situation of creditors generally and the ways this plays out in bankruptcies and insolvencies.

In another life, I used to give these talks in another capacity. I used to use props. Oh, for a prop today.

When businesses go into operation or expand, they nearly always need capital. While sources of capital vary, borrowing from financial institutions is the most common way of attaining it.

Financial institutions in this country make significant investments in loans to business enterprises every day. They put a lot of money at risk, and they are not stupid. They know better than most that a significant number of enterprises in a wide range of industries are liable to fail. For that reason, they wisely secure their investments as best as possible.

I choose the word “secure” advisedly to make a particular point. Financial institutions generally secure their investments through a range of what are often called in law “security interests.” These might be mortgages — or hypothecs in Quebec — floating charges, assignments of receivables or, in the case of banks, Bank Act securities.

The effect of nearly all of these forms of security interest is they give the financial institutions the equivalent of an ownership in many, and often most, of the assets of the enterprise to which they are lending the money. This is a perfectly reasonable business proposition, as Senator Loffreda would remind us. Indeed, a significant amount of the vibrancy of our economy and society depend on access to credit that is provided by these financial institutions. They also have the leverage to acquire these very powerful security interests to protect their investments.

When a bankruptcy or insolvency occurs, the particular attractiveness of these security interests becomes apparent. What happens in bankruptcies and insolvencies is that a neutral third party, a trustee or receiver, becomes responsible for gathering in all of the assets of the insolvent debtor and dividing up the proceeds among the creditors in accordance with a particular structure of distribution — for example, the one set out in the Bankruptcy and Insolvency Act.

The financial institution’s protection is in the form of, essentially, an ownership interest in the insolvent debtors’ assets to the tune and extent of the indebtedness to the financial institution.

As a result, the legal understanding is that, to the extent of that lender’s claim, the assets of the insolvent debtor essentially belong to the financial institution. In law, then, to the extent of that claim, those assets are not part of the insolvent debtor’s business to be shared among other creditors.

Indeed, secured creditors often proceed to recover their investments without reference to bankruptcy or insolvency proceedings, since the terms of their lending arrangements nearly always entitle them to recover those investments by seizing and selling the assets of the debtor when the debtor defaults on the loan payments.

You may be familiar with the movie Repo Man or a person who has had their car repossessed for not making payments. Well, think Repo Man writ large.

In many of these cases, the financial institutions themselves lose money. It makes another option, particularly in the case of fairly large insolvent debtors, attractive.

This is an opportunity, if sufficiently agreed upon by creditors, for the company to restructure and enter into what are called “arrangements” under the Companies’ Creditors Arrangement Act. This is intended to create the opportunity, under guidance, for the company to be revitalized for the benefit of all, including the creditors. It is what the Companies’ Creditors Arrangement Act makes possible. I will say more about one aspect of this act in a few minutes.

Returning to your standard bankruptcy or insolvency, after the secured creditors have asserted their claims, there is often not much left for the remaining unsecured creditors — and sometimes nothing. One of those remaining unsecured creditors is the category of perishable fruits and vegetable producers, in many circumstances, who will have sold their product to a company that is now insolvent, and will have done so without having been paid.

At this point, you may be inclined to say, “Well, too bad. They should have assessed their risk better when they began selling their product to the company that ultimately went under.” Or, you might say, “They should have taken better security in relation to their credit claim, like the banks.” Ironically, though, they are in the position that they face partly because they do not have access to the kind of financial information about their buyer that financial lenders are entitled to require. And they do not have the bargaining power to leverage security interests from their customers in the same way that financial institutions do when they lend money to the enterprise.

The same dilemma applies to workers who are — until they get paid at the end of their pay period — unsecured creditors in similar positions to the fruit and vegetable growers. Let me give you a small example at this point on this access to financial information and lack of leverage in the context of employees.

Earlier this week, my partner’s 16-year-old granddaughter was offered a job at a clothing store. She has no idea about the financial viability of the clothing store. I suggested to her that prior to taking the job and in order to secure her pay at the end of each month, she demand the store’s financial information — its revenues, expenses, payroll, debt load, profit and loss and — I am not done yet — a mortgage on all the assets of the clothing store to secure her part-time wages. Can you imagine how that conversation would go? I don’t quite know how it would go, but the last sentence in the conversation is likely to be, “I think we’ll hire someone else.” At 16, even she found this proposition to be preposterous and laughable. Well, it’s not quite as dramatic for fruit and vegetable producers, but the lack of leverage prevails in their industry as well.

Returning to the fruit and vegetable business, there is no doubt that the financial injections provided by financial institutions are an indispensable element in creating and building enterprises. But keep in mind that in that sector, and in the food sector generally, the providers of the basic product that will be sold by that grocery company or that manufacturer are no less critical to the company’s success. I am sure you would agree with this: It doesn’t matter how beautiful the grocery store or the factory processing the fruits and vegetables is. If there is no fruit or vegetables, the business is going nowhere. In circumstances where the grocery business or other buyer becomes insolvent, it is not immediately obvious that the fairest distribution of proceeds to creditors’ claimants should privilege financial institutions. Indeed, that privilege is based on the market power available to those institutions when they lend money.

There is one other factor worth considering when we look at this insolvency picture. I wouldn’t try this out, except I tried it out on Senator Robinson and she seemed to like it.

When financial institutions take a loss on investments like this, they have strategies available to address and balance risks across their lending portfolios. Furthermore, they have the ability to adjust the interest rates at which they lend money, by small amounts, to guard against this risk. However, it is rare, at least to my knowledge, for a financial institution to become insolvent just because one debtor went under. By comparison, most fruit and vegetable producers are not operating at such a high level of size, expertise and resourcefulness. In circumstances where significant amounts of fruit and vegetables have been advanced on credit, and suppliers are not paid, it becomes a significantly greater risk to them that they might become insolvent. This is a financial tragedy, and it has consequences for their own creditors, workers and so on.

When a tree falls in the forest and nobody is there to hear it, does it make a sound? I don’t know. But when a tree falls in the forest and knocks over another tree, and that tree knocks over another and another, whether anybody hears it or not, a lot of trees will have fallen down. Trying to reduce the risk of that first tree falling over so that a whole line of trees doesn’t bear the impact seems like good public policy to me. It becomes easy to see why a public intervention is appropriate to try to rebalance this situation.

As to that intervention, Bill C-280 passed in the other place by a vote of 320 to 1.

Now that we have seen the way in which financial institutions, perfectly legitimately, seek to protect their interests when lending money to a financial enterprise, you can see the way in which Bill C-280 attempts a slightly modified version of the same strategy in order to protect unpaid producers of fruit and vegetables.

Here is how it works — I need another prop at this stage.

This bill creates what is known as a statutory deemed trust in favour of fruit and vegetable producers. To understand this slightly better and to understand its limitations, we need to appreciate the concept of a trust.

Let me give you an unrelated example. Some of us have been asked to serve as executors in other people’s wills — family members’ or close friends’. When that happens, the executor takes over the assets of the person who died and acquires what is often called a bare legal interest in that property. You might have to sell some of the assets of the person whose estate you are executing. In order to do so, you need to have the legal ownership facility, but in law, you hold the property in trust for the beneficiaries of the will. This means they are known — you are not — as the beneficial owner of the property, not the trustee.

As well, in the law of trusts, trustees are expected not to mingle their own personal property, such as their bank accounts, with the assets that come into their hands as executors, that is, separate bank accounts, for example. Co-mingling of assets is not allowed. Indeed, in standard trust law, co-mingling puts the existence of the trust in jeopardy, partly because you can no longer figure out what the trust property is and what isn’t. In legalese, you can’t trace the trust property.

This bill seeks to create, on behalf of the perishable fruit and vegetable growers, who are creditors in this situation, essentially, a legal fiction. The bill establishes a deemed trust so that the supplier of the fruit and vegetables acquires, at a certain point, a beneficial interest in the fruit and vegetables or the proceeds of the sale of them, even though the legal ownership might have been transferred to the now insolvent buyer. The legal effect of this trust is to seek to prevent the buyer of the fruit and vegetables — the one who didn’t pay, that is, the insolvent buyer — from acquiring the complete legal and legally enforceable interest in the fruit and vegetables. This bill holds back from the acquirer the beneficial ownership of the product or the money that the product might have generated.

You can see at once that this is tricky, but legislation can do a lot of tricky things to achieve good public policy.

Essentially, the idea is to prevent the asset, namely the fruit or vegetables and their proceeds, from becoming the beneficial ownership of the buyer until such time as the fruit and vegetable seller has been paid, thereby preventing the property from falling under the security interest of the financial institution. This enables the fruit and vegetable producers who supplied the product to have the first claim on those assets in the bankruptcy, insolvency or restructuring because, by virtue of this bill, the product or the proceeds are their property and not the property of the debtor who bought the property.

To some extent, you can see why it needs to be done in this fashion. Once the full ownership of the property reaches the soon-to-be-insolvent buyer, a lender’s security interest latches onto it, and any priority for the fruit and vegetables is lost. The ordinary structure of the provisions of this bill achieves this outcome. However, to make that perfectly clear, subclause 2(2) of the Bankruptcy and Insolvency Act amendment and 3(2) of the Companies’ Creditors Arrangement Act amendment state — and you get the point here:

For greater certainty, once the perishable fruits or vegetables, as well as any of the proceeds of sale, are deemed to be held in trust by the purchaser for the supplier in accordance with subsection (1), they are not included in the property of the purchaser.

Let me emphasize, “they are not included in the property of the purchaser.”

The second part of this conversation, though, is that however powerful that trust is, to be honest, there are four aspects of the bill that might limit its effectiveness. I think it would be important to share them with you.

First, by virtue of the structure of the bill, the trust itself, and those assets, does not kick in until a series of procedural things have happened. The fruit or vegetable supplier has to give notice under the relevant section of the act of its intention to rely on the trust provision, and it is necessary that a period of time pass — up to 30 days — during which the buyer fails to pay the entire balance owing for the fruits or vegetables.

Here is the problem: During this short period of time, the trust has yet to land on the property, and it is almost a sure thing that a financial lender’s security interest will land on the fruit or vegetables and their proceeds during that interregnum and essentially out beat them to a property claim against the fruit or vegetables before the trust has the ability to kick in.

I spent years studying and writing about the ways by which such “deemed” trusts and other vehicles could try to get ahead of commercial interests of financial institutions to protect unpaid wages in bankruptcy, and it’s fair to say that it is almost impossible to do absent watertight and highly interventionist — and to some extent, highly fictitious — assumptions in legislation.

Let me give you one example. Provinces have been the most active in trying to protect employees’ wages in circumstances of insolvency. They have tried deemed mortgages and deemed trusts, with super-priority, to protect these situations. Take statutory trusts for wages as an example. Here is what often happens: You start work today and begin to earn wages to be paid at the end of the month. You’re a creditor of the employer until you are paid.

We are actually creditors of the Government of Canada today, as we speak. Some of us have worked hard and earned nine days’ worth of pay for which we have not yet been paid. We probably have an employer that is stable enough that we’ll get paid at the end of April.

A statutory trust in the situations I was just describing — created by a province, let’s say — immediately attaches to the employer’s assets to secure your pay. That’s great. It’s given priority in many jurisdictions over any other creditor, including any secured creditor. When you get paid, though, you are no longer a creditor, even for a day. The trust ends, to be started up again on Monday when you start work for the next month. But, during that weekend, your statutory trust has come to an end — in legal language, the trust was vacated by payment — and automatically, the secured creditors’ secularity kicks in.

So, on Monday, when your trust starts up again to attach to the employer’s property, it applies to property the employer owns, which is the property less the value of that security interest from the financial lender, because, over the weekend, the security interest plopped down on the property when you weren’t looking.

The courts have been diligent in protecting these conventional rules of priority with respect to commercial security interests when the conventional laws and the facts on the ground make it possible. It’s not evil; it’s just a competition among claimants and, quite frankly, the “littler folks” have little leverage and tend to lose out. Having to wait for the trust to kick in pursuant to this bill might actually be fatal to its overall effectiveness.

Second, since it is common for the goods that are being supplied in these situations to be mixed together with other goods, and certainly the proceeds mixed together in bank accounts or cash registers or wherever, co-mingling is sure to occur. As I mentioned earlier, in the law of trusts, co-mingling of trust assets with other assets can be fatal to a trust. This is made more complicated since those rules are governed by provincial jurisdiction and the legislation is specific in saying it does not upend the basic laws of trusts in provincial jurisdiction.

Third, a narrow slice of the law to which this bill applies — and this should emphasize for the chair of the Banking Committee some concerns about the structure of the distribution of the assets or their value in bankruptcies and insolvencies.

In this narrow slice of the law relating to corporate restructurings of larger companies under the Companies’ Creditors Arrangement Act, CCAA, another impediment arises. When these initiatives to restructure a company are pursued to rescue a failing company through a financial restructuring, people with talent need to be retained to do the heavy lifting to try to get the company back on its feet — business people, accountants, wise financial people and the like — and they need to be paid; that seems to be fair. The Companies’ Creditors Arrangement Act allows courts to protect the payment arrangements for these people. Otherwise, many would not, in some cases, even take on the work — fair enough.

Under the CCAA, the courts can order that they be paid ahead of secured creditors and the most super-prioritized trust of all in federal legislation, the statutory trust in the Income Tax Act for the remittance of income tax deductions from employees’ pay that the insolvent employer was supposed to retain and remit but didn’t. The Income Tax Act gives this claimant claim under the Government of Canada as a true super-priority.

In 2021, the Supreme Court of Canada, in a case entitled Canada v. Canada North Group Inc., ruled in a five-to-four ruling that a judge could order security against a company’s assets to pay the restructuring team, and such an order was a super-priority that took precedence over everything, including the super-priority of the income tax statutory trust, a bigger, more powerful statutory trust than is contemplated in this legislation. It seems likely that the deemed trust for perishable fruit and vegetable producers created by Bill C-280 will have to give way to similar claims for compensation when a CCAA restructuring occurs.

Fourth is a more general limitation. There are a lot of official statistics in relation to bankruptcy proceedings and official receiverships. To give you an idea of where the story lies, during and after COVID the number of official bankruptcies and receiverships declined. You might ask yourself how that could possibly be. The Government of Canada, supported by all of us, was supportive of a lot of those business enterprises, but there were real economic struggles during that period.

At this point, you will see the answer: Those official statistics disguise the true impact of not getting paid by insolvent companies. This is because a vast number of small companies simply fold up shop, unable to pay their bills. In those circumstances, unsecured creditors receive next to nothing on their claims.

As many of you will know, if an individual is unable to pay his or her debts, the only option is to go through a formal process, either through bankruptcy or the processes the Bankruptcy and Insolvency Act authorizes to get back on your feet. You really do need to get back on your feet.

I taught a course on bankruptcy and insolvency for a period of time, and I used to refer to this as the process of taking a “financial shower,” where your debts are washed away but you lose everything except the most basic — “financial underwear.” Everything else gets turned over to creditors. Without that “financial shower,” you are essentially stuck.

With incorporated companies, it is different. To begin with, they are not natural persons. If they get into serious financial trouble, secured creditors repossesses the assets, and the unsecured creditors can go after them or put them into bankruptcy, but it is often not worth the cost of doing so and unsecured creditors just swallow their losses. The insolvent company can essentially drop dead financially and walk away from its debts. This is the part of insolvency that is below the official numbers but the tip of the proverbial iceberg, so to speak.

It is nearly always the corporate buyers, large and small, who are engaged in buying and selling products. The trust works, but to make it work, the creditor might have to actually initiate a claim against one of those debtors recognizing that if there are secured creditors, they will have swooped in and claimed the assets of the debtor — the buyer of the fruits or vegetables. It is not as simple to do this as it is to assert a claim in a bankruptcy because you have to initiate the process at some financial risk to yourself. In light of what I have suggested about some of the delicacies around the quality of this deemed trust, people may be reluctant to do so.

I come now to my third, much briefer set of remarks, I’m sure you’ll be relieved to know. I want to say a word or two about unsecured creditors, generally. As I noted earlier, these folks are at the bottom of the pile when it comes to recovering unpaid bills in bankruptcies and insolvencies. My point here — and this bill emphasizes one part of it — is that there are serious questions to be asked about whether from a public policy point of view we have the compensation priorities right in the cases of bankruptcies and insolvencies.

Each of the claimants in these circumstances has a legitimate claim. The priorities for these claims, however, tend to be determined by market power on the one hand and government‑structured priorities on the other. Let me highlight one incongruous example.

The recovery of employees’ income tax deductions at source from an insolvent employer seems to me to be perfectly legitimate. People need to pay their taxes, otherwise, how will senators get paid? It is given a legislative super-priority in the recovery scheme, these employees’ income tax deductions. Well, I would have thought that employees’ unpaid pay, the part where employees actually earned, would deserve at least the same protection. As far as I know, the Government of Canada has not gone under due to the failure to recover some of these source tax deductions, but employees, particularly those working in low‑end, low-paid positions, are extremely vulnerable in circumstances where they do not get paid. It is an injustice, in my opinion.

Second, in trying to address this question, the Government of Canada has structured modest compensation for unpaid employees under the Wage Earner Protection Program. This ensures that employees will receive a portion of what they are owed, but only part, and rarely get much of the remainder. Does it actually make sense on this point for taxpayers to be subsidizing the claims of larger creditors who could easily restructure their priorities and in exchange give workers a better claim status or to protect perishable fruit and vegetable producers in a similar way? There are many more anomalies and, of course, implications for these changes if we were to make them. The point is that the whole regime cries out for careful study and reconsideration.

Admittedly, such a study was done by Parliament a decade ago. What did it produce? A parliamentary report and nothing else. Elephants laboured mightily to produce not even a mouse. We must revisit this. It would be an honourable and ideal project for us — perhaps for our Banking Committee — and I use this opportunity to urge that it be taken up.

Finally, an important trade policy dimension of this bill, about which Senator MacDonald spoke as well. The absence of the kind of protection that this bill would provide to perishable fruit and vegetable producers has denied them access to this kind of protection when they sell perishable fruits and vegetables to buyers in the U.S. The U.S. has a comparable form of protection for these sellers in the U.S., which had previously been available to Canadian sellers. The name of this legislation is the Perishable Agricultural Commodities Act. The absence of reciprocity for U.S. fruit and vegetable sellers into Canada for this kind of protection has resulted in the denial of similar protections for Canadians who sell perishable fruit and vegetables into U.S. markets.

Aside from the cooperative and constructive trade policy that this bill represents, it also has the ability to facilitate expanded trade for our perishable fruit and vegetable sellers. It reduces the risk that when they sell into the U.S., and it will no doubt encourage the expansion of our producers into those markets. It is, in that respect, a win-win trade measure.

In conclusion, despite concerns that I have about the bill’s ability to achieve all that is hoped for, as I have mentioned, it is a significant step forward, strongly supported in the other place and, if I may say so, good interim public policy. I urge you to support the bill and see it to proceed through the Senate expeditiously. Thank you very much.

Senator Simons, do you have a question?

Yes.

Let me answer your second question first. You can protect your working capital by paying your bills. One of those bills is to the fruit and vegetable producers who provided you the product that makes you successful. My sympathy is pretty limited there.

On the first point, I think it’s the reason why I somewhat unjustifiably, I think, included what I called “section 3” and encouraged the Banking Committee to give this some consideration because your point is an extremely accurate and valid one.

We tend to do this in various areas in the Senate. We work on individual provisions of the Criminal Code, and you and I at the Legal Committee participate in that work, and there is some risk that by doing that we aren’t being very effective and thinking more comprehensively. What we tend to do is say that until the comprehensive initiative comes along, we should make a small improvement, and I think that’s what this bill does. But this whole area calls out for reflective public policy consideration of who needs better protection and who is more vulnerable in these kinds of circumstances.

I don’t know if I’m a capitalist, but I respect markets, including capital markets. I respect the need for people who make financial investments to try to see those financial investments protected. But the consequences for the most vulnerable here — and the most vulnerable in this particular context are significant and we should be working hard to see them addressed, Senator Simons. I hope that beyond this specific bill and the work we did with respect to pensions, we look at this in a richer and more complete way, weigh the pros and cons throughout and actually take action in accordance with our findings. Thank you.

Will Senator Cotter take another question?

Certainly.

Senator Cotter, would you comment on the relative merit of other protection tools for these producers, such as accounts receivable insurance or factoring, which separate the risk away from the buyer of the product to a third party?

Senator Woo, I think you would be much more knowledge about the various tools available to a seller in this context. Essentially, it invites them to spend money to insure themselves against the risk of not getting paid. That’s a fair enough proposition. Indeed, it is in a way what we ask the financial institutions to do when they have to measure risk.

It’s a lot tougher if you are a little guy, where you have so little access to information to know what kind of risk you have, because you may not know very much about the viability of the person to whom you are selling the product. I use the little example of the granddaughter wanting to know the status of the company that she is going to work for part-time. It’s not quite the same with fruit and vegetable growers, and some of them are quite substantial in their operations. It’s harder for them to facilitate and implement those kinds of risk management measures, I think. You would know better. I wish Senator Robinson were required to answer this question.

It’s a legitimate point, but I don’t think it solves the problem for so many of the suppliers in these circumstances.