ES May 7, 2003

UNREVISED / NON-RÉVISÉ

THE STANDING SENATE COMMITTEE ON

BANKING, TRADE AND COMMERCE / COMITÉ PERMANENT DES BANQUES

ET DU COMMERCE

EVIDENCE / TÉMOIGNAGES

ES May 7, 2003

THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE

EVIDENCE

OTTAWA, Wednesday, May 7, 2003

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:00 p.m. to examine on the administration and operation of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act.

Senator E. Leo Kolber (Chairman) in the Chair.

The Chairman: Welcome, everyone. We are here to meet with respect to the examination on the administration and operation of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. Our witnesses today are from Industry Canada.

I would like to introduce Mr. Yoine Goldstein [TSoC1] , who has agreed to become legal advisor to the Banking Committee for the purpose of this study.

Ms. Marie‑Josée Thivierge, Director‑General, Marketplace Framework Policy Branch, Industry Canada: Thank you, Mr. Chairman and members of the committee. I hope that you all have a copy of our presentation today that was circulated to you.

On behalf of the Minister of Industry, let me thank you for taking the time to take on this review of our insolvency system. As indicated in Minister Rock's letter of November 19, 2002, we are pleased to be here today to provide you with any assistance you may require.

As you have noted, with me today are my colleagues from Industry Canada. My colleagues and I have prepared a presentation deck, which Mr. Mayrand and I will present, following which we will look forward to any questions you may have.

Turning to the first slide, the BIA and the CCAA are important elements of the Canadian marketplace framework, which governs our commercial relationships. They serve several purposes. Credit markets and investors need to know the rules under which they advance funds and their certainty to recover. As certainty decreases, interest rates rise and availability of credit is restricted. This can particularly affect businesses that are starting out. Investors seek markets with rules that are clear and fair.

Entrepreneurship is also critical to the Canadian economy, with small- and medium-sized businesses making a significant contribution to employment. If the insolvency risks are too great, it discourages business start-ups. The ability of responsible business people to move on from business failure is key. This fresh start principle is important in consumer insolvency to allow individuals who suffer personal setbacks, such as job losses or illnesses, to recover financially.

Insolvency law is also key to economic productivity. An efficient system that allows assets to remain productive and to be returned to productivity quickly enhances overall productivity, and stronger businesses emerge.

For creditors, the insolvency system is the means by which we can insure that their interests are protected and that fair distribution is achieved. It may not mean full recovery, but it attempts to balance the interests.

Our Canadian system is respected worldwide. Agencies such as the World Bank note favourably how our system accommodates a federal structure, the duality of both our common law and civil law heritage and the reality of the international marketplace.

Canada has two primary insolvency statutes, the Bankruptcy and Insolvency Act, which I will refer to as BIA, and the Company Creditors Arrangement Act, better known as CCAA.

The BIA deals with three types of insolvencies. The first type is personal and corporate bankruptcies, when no other alternative exists. The second type is consumer proposals. Those are negotiated agreements for partial payment on new terms. They may extend over five years. The key is that the recovery by creditors would be greater than if the dealer went bankrupt. Finally, the third type is business reorganizations of all sizes. These are similar to consumer proposals but are for businesses.

As for the CCAA, it deals with large corporate reorganization where debt exceeds $5 million. The act is short and provides a framework within which the debtor and creditors, under guidance of the court, attempt to find the means of returning the company to solvency.

(French follows‑Ms. Thivierge continuing: Parmi ces deux lois...)

ma May 7, 2003

(Following French... Mr. Mayrand continuing – la rédaction du rapport)

Moving to number 10, you will see the grouping of those issues. Time does not allow us to go through each of them but maybe I can give you a flavour of some of those issues. We will be available to respond to questions on the issues that are of interest to you.

Looking at some of the issues that generated a consensus, the area of volume and growth of consumer insolvency has been a question of much debate by stakeholders and beyond, by the general public, in terms of Canada's high volume of consumer insolvency. The debate generally turns on whether the Canadian system is too permissive, too lenient, whether it allows people to take easy advantage of insolvency proceedings, and whether the stigma that normally attaches to insolvency has eroded over the years.

On the other side of the debate, you will hear that much of the volume is linked to the use of credit in the country. If we look at volume, we would see a close relationship between the number of insolvencies and the extent of credit use in the country. There is also a close relationship between volume and the ratio of disposable income to indebtedness.

In the consultation, stakeholders and participants have told us that we should let the market decide how credit should be granted and that the market will discipline itself. That was certainly the substantive majority view expressed during the discussion. The other point raised with respect to volume is that perhaps better prevention efforts are needed to help people avoid becoming insolvent.

Currently legislation provides for counselling programs that take place after insolvency but there is nothing in the act or statute to assist before insolvency occurs.

The student loan issue is a major concern that was raised by many stakeholders over the last years. There is a general consensus that the provisions of the act are too harsh with respect to students.

Looking at the issues where there are significant differences, we look first at contractual rights. This has become a significant issue mostly but not exclusively in reorganization. In this area, the BIA does contain certain provisions that allow for the termination or repudiation of contracts in certain circumstances. One example that comes to mind is the treatment of a landlord during the reorganization of a tenant. The BIA, in its reorganization provision, provides a framework for dealing with the landlord of a tenant who reorganizes.

CCAA does not have provisions dealing with executive contracts. That is left to the inherent jurisdiction of the court. Depending on the circumstances of the case, the court will determine whether a contract should be terminated, repudiated or maintained and under what circumstances. There is some agreement that the rules with respect to those contracts need to clarification.

Intellectual property contracts are becoming more and more significant in the way business is conducted. Intellectual property is the core asset of many businesses. The rules must address how one deals with such contracts during a reorganization. That is true under both the BIA and the CCAA.

Among the several contentious issues is the RRSP issue. RRSPs have become the primary saving mechanism for self‑employed and small‑business entrepreneurs to provide for their retirement. Should those RRSP investments be exempt? Currently the situation again is unclear. Some RRSPs, depending how they are invested, may be exempt. Two provinces have adopted rules that would make RRSPs exempt, namely Saskatchewan and P.E.I. There is a need to look at that matter.

During the consultation, however, there was not much consensus on the anti‑abuse mechanism to be used. If RRSPs were to be recognized as exempt assets, what sort of anti‑abuse mechanism, if any, should be put in place to prevent abuses? The PITF reports include specific recommendations on how to deal with RRSPs, but even those recommendations raised concern with some stakeholders.

There is also the issue of wage earner and pension protection during bankruptcy and reorganization. That is a major issue in any insolvency legislation and must be addressed. Currently, in Canada, there is a protection for $2,000 of wages earned during the six months prior to the insolvency. That is similar to what exists in the U.S. However, many countries around the world have adopted enhanced protection systems. Should Canada take that direction? There are various mechanisms that could be adopted to enhance the protection of a wage earner beyond the current level. Also, we must decide whether this matter is better addressed under insolvency legislation or under labour or human resources legislation, as it is in some countries.

Another contentious issue is debtor‑in‑possession or interim financing. This matter arose during reorganization. How is the business financing protected in order to keep a certain peace of mind while the business tries to reorganize and to develop a plan. What is the relationship between the interim‑finance body relative to other creditors in the process? What is the relationship between the new lender relative to earlier creditors? Then there is the whole issue of priming. Can a new lender have a secured right or a priority over secured rights?

Again, some debtor‑in‑possession financing, or interim financing, is allowed under the inherent jurisdiction of the court under CCAA. Currently the BIA has some provision to provide for interim financing but it is rarely used. Some case law has been issued regarding debtor financing. Should that case law be codified in the CCAA?

There are other emerging issues. One issue that has recently been the object of newspaper discussions is the treatment of collective agreements. That issue probably best illustrates Canada's stand relative to the U.S. and the variation between a BIA reorganization and a CCAA reorganization. I will take a moment on this.

Under the BIA there is no provision that deals with collective agreements. However, there are a number of provisions that deal with various types of contracts. That would lead many to believe that, under the BIA, you cannot reject or repudiate a collective agreement. Under the CCAA, Canada has no such rules, nor are there any rules on executive contracts. It could be argued that the court has inherent jurisdiction when presiding over a CCAA reorganization to suspend, repudiate or terminate a collective agreement.

Recently the Court of Appeal of Quebec provided some guidance on this matter. Ruling was given on a number of points to state that, mainly, when you do a reorganization under the CCAA, the monitor who is appointed to look over the affairs of the company is not a successor or employer. That matter was settled by the Court of Appeal.

(tk 1630 follows‑‑Mr. Mayrand cont‑‑The court affirmed two other points)

DM May 7, 2003

(Mr. Mayrand continuing -- settled by the Court of Appeal.)

The court affirmed two other points in that ruling. One is that a collective agreement cannot be repudiated under a CCAA, suggesting that the monitor or the debtor must carry on with the collective agreement and the accreditation of the union, subject, of course, to any negotiations between the parties. That decision was just released by the Court of Appeal at the end of January, and it is uncertain how it will be interpreted across the country and how it will be applied in other provinces. I am not aware if there is a request for appeal to the Supreme Court of Canada at this time.

The U.S. has clearly set out that, yes, the court may repudiate a collective agreement, subject to certain conditions. You must demonstrate that the collective agreement is burdensome to the debtor. You must demonstrate that, on the balance of equities among all the participants, repudiation would be warranted. The third element is that you must demonstrate that repudiation does not constitute an unfair labour practice. Again, these are broad principles, subject to much interpretation, but they provides some guidance to the parties as to how to approach collective agreements.

In all three systems, Bankruptcy and Insolvency Act, Companies Creditors Arrangements Act or the American system, the incentive for the parties is to negotiate. At the end, that is the core of any organization proceedings. You want to bring the parties around the table and ensure that they negotiate the best agreement possible for the benefit of the company and all the stakeholders.

We are running out of time, so I will pass over the interim receiver appointment issue and spend a moment on the auditor issue, which is the last bullet on that slide.

The question arises as to whether it is appropriate to have the auditor of a reorganizing company become the monitor of the financial affairs of that company for the time of the reorganization. Much has to do with the role of the monitor, which is somewhat loosely defined in the CCAA, and the question is whether having the auditor acting as monitor may raise a question of perception of conflict of interest and whether, in terms of good governance for our insolvency system, this is appropriate. Again, this must be balanced with reasons of efficiencies and practicalities, but that is certainly an issue that is emerging and seems to be quite current in a time where there is so much discussion of good and sound corporate governance principles around the world.

(French follows, Mr. Mayrand continuing, Vos recommendations)

(Following French ‑‑ Mr. Mayrand continuing -- l’équité et la transparence.).

Fairness and transparency are key in an insolvency system. Fairness is about ensuring that all parties have a sense of participating in the process and understand what is happening during the process and why these things are happening. Everybody loses in an insolvency. There are very few winners, ever. Fairness is quite critical, and the appearance of fairness is also critical to the people involved. That is true of both commercial and consumer insolvency.

With regard to transparency, we need the ability to access information quickly -- reliable information, credible information -- so that people can determine their line of conduct during the proceeding. That is absolutely critical.

We also need efficiency. Of course you do not want issues to linger on. You want them to be dealt with quickly at the lowest cost possible. Whenever looking at changes to the system, that must be a primary consideration.

Predictability is also important. It is also absolutely critical for investors and lenders to understand what will happen to their rights or their security or their assets or to their particular contract if and when an insolvency occurs. Predictability is the way that investors and lenders measure their risks and to understand how to price those risks. It is essential to a sound insolvency system.

Effective governance is the whole issue of maintaining trust in the administration of the system and in the people that are tasked with administering and carrying out the process envisaged buy the various statutes. Obviously we need to ensure that their duties and responsibilities are well spelled out and clearly understood by them. We must ensure that conflicts of interest are avoided and that everyone understands what to expect from those participants.

Finally, the challenge will be to balance those principles among themselves. Flexibility requires that we have a system that is not too rigid. Not all insolvencies are the same. Many require tailored approaches and solutions. We need a system that allows sufficient flexibility to respond to the needs of the time.

With those principles in mind, we must always give consideration to the need in Canada to maintain a competitive marketplace, not only within Canada but within the North American zone, and also ensuring that Canada maintains its place in the global economy. That is absolutely critical, in our mind.

With that being said, I will leave it to Ms. Thivierge to bring you the final word.

Ms. Thivierge: The review of the Bankruptcy and Insolvency Act and the CCAA presents an opportunity to once again note the importance of insolvency within our marketplace and the need to keep it modern and to have a competitive system. This review, in our view, is an integral step towards fulfilling a recent commitment by the government to ensure that our laws and regulations remain among the most progressive in the world.

On behalf of the Minister of Industry, I would like to take this opportunity to thank you for taking on this task. Clearly we welcome the views of the committee as fresh insights into these challenging issues.

My colleagues and I -- and they are quite knowledgeable of Canada's insolvency question -- will be happy to take questions you may have.

The Chairman: Thank you for your presentation. These hearings will go on for four or five months, especially because there is a summer break, et cetera. We will try to work during the summer. We are taking it seriously. It is part of our mandate to review these acts.

Prior to asking questions, I wonder if you could make, briefly, two explanations. On the question of collective agreements, in the Air Canada case that we read so much about, it would seem that the collective agreements that Air Canada has with its various unions would appear to be ‑‑ I do not know if this is true or not ‑‑ a major cause of their financial difficulties. Yet, I understand from what I read that the court would not agree to cancellation of those agreements but is currently going to have a hearing to decide whether or not they should. Is that true?

Mr. Mayrand: At Air Canada, as with the entire air industry right now, one of the major costs has been labour. It is a labour-intensive activity. One of the focuses for those reorganizations has been to try to restructure those costs.

Initially, Air Canada interpreted the order as allowing them to suspend the application of certain provisions. That brought the parties back to the court to clarify the situation. The justice who was presiding in the court in Toronto indicated that it was not his initial intention to suspend the collective agreement but to force the parties to negotiate. He set a date for them to come back.

(1640 follows, Mr. Mayrand continuing, Currently, the collective agreement)

BA May 7, 2003 (Take 1640 starts here, Mr. Mayrand continuing ‑ back to him)

Currently, the collective agreement is still in place. It remains as is, subject to further discussion between the parties to review it. My understanding is that the court has reserved its final decision on the whole matter.

The Chairman: You brought up the question of student loans. Could you highlight what the problem is there, please? I think it is really politically sensitive.

Mr. Mayrand: I would tend to agree.

With regard to the student loan matter, there were amendments brought in 1997, as a result of the severe losses experienced with the various student programs across the country. Some amendments to the insolvency legislation in 1997 aimed at providing a cooling‑off period before students could enter bankruptcy and be discharged of their debts, including student loans. The provision in 1997 was to ask the students to wait for two years after the completion of their studies, or coming out of school, before they could seek the discharge of their student loan debts.

That was found to be insufficient; and in 1998, as a result of a budget measure, the act was further amended to extend the period from two years to 10 years. As it was a budget measure, there was limited public discussion about the matter before it was announced. I think that created a fair amount of resentment among stakeholders. That is what has been conveyed to me in many forums over the years.

The issue is whether 10 years -- to be eligible for a discharge of a debt -- is fair to students, and whether it is consistent with our insolvency legislation generally. Of course, you will hear from other witnesses that it may be harsh on students. There may be alternatives to dealing with that, but we are looking for your guidance on this matter.

Senator Kelleher: You quite correctly pointed out that we have two acts by which we are governed ‑‑ the Bankruptcy Act and the Companies Creditors Arrangements Act (CCAA). We are probably the only main industrial country that is governed by two acts.

I have a two‑pronged question for you. First, could you explain to the panel how this came about? Second, have you given any thought to consolidating these two acts into one overall act, or should we leave it the way it is? I am aware of the arguments on both.

Mr. Mayrand: On this issue of whether we should have two acts or a single statute to deal with reorganization, I should point out that it is not unusual for countries to have a multiplicity of legislation to deal with insolvency matters. In fact, the United States is probably more unique in that respect because it has put everything under the U.S. Code of Bankruptcy. However, many countries around the world have multiple legislation.

In Canada, how did it happen that we had two regimes for reorganization? Again, there are historical reasons. The CCAA was adopted during the last depression in the 1930s to allow corporations who had debentures to reorganize before they filed for bankruptcy. At the time, the bankruptcy legislation did not provide for such options, so the CCAA was put in place specifically ‑‑ and I understand that it was under pressure from foreign investors ‑‑ to have a system to allow large corporations who had debentures issued to reorganize without a bankruptcy.

Over time, the Bankruptcy and Insolvency Act was amended. In 1949, it allowed for proposals, as they were called at the time, and the CCAA became somewhat obsolete. In the late 1970s and throughout the 1980s, practitioners rediscovered that piece of legislation because it allowed the tailor‑made solutions that the BIA did not provide. The BIA is not set to deal with major, very large restructuring. It could, if it is a simple financial situation; but often those large reorganizations reflect complex financial situations that need more time to be addressed and more flexibility.

Is it time to integrate those statutes? Again, we will be looking for your guidance and direction in that regard. There is far from a consensus among stakeholders on this. There are significant differing views.

However, I think there is recognition that we still need two regimes ‑‑ one to deal with the streamlined reorganization and one to deal with the more complex one that, again, requires that flexibility. Whether it should be in the BIA or in separate statutes, your guidance will be appreciated.

(French follows, Senator Prud'homme)

(Following French, Senator Prud'homme).

The Chairman: It has been suggested to us that we keep the two regimes and perhaps incorporate them in one act. I don't know if that does anything.

Senator Kelleher: If I do proceed under the Bankruptcy Act, to a certain extent I am under the supervision of the superintendent; whereas if I proceed under the CCAA, and this is no disrespect, but it is a bit of a crapshoot when you go into court under that act. It pretty well depends upon the judge who is hearing the cases.

We are in pretty good shape in Ontario. We have sort of set up a separate division in that respect, and we generally have the same judge, Mr. Justice Farley [TSoC2] , who handles the cases and gets through them. However, there is no supervision as such; there is no supervisory structure as there is under the Bankruptcy Act.

Should we have some sort of a structure? For certain instances under the CCAA, should we give the Superintendent of Bankruptcy some jurisdiction? What is your thinking there?

Mr. Mayrand: It is a point raised in the report in terms of the systemic issue, or an issue surrounding the whole system of insolvency. The first thing about CCAA, from a supervisory point of view, is that there is no central public record -- hence the difficulty to bring to you accurate and fulsome information about CCAA. It is because there is no central registry of CCAA in this country, as we speak. The other thing that is mentioned in the report as a systemic issue is that there is no other mechanism for aggrieved parties to complain and then appear in court. In some cases, it is a very busy court at those hearings.

(Take 1650 follows, Mr. Mayrand continuing ‑ There is no simple)

ma May 7, 2003

(tk 1650 begins‑‑Mayrand cont‑‑ it is a busy court at those hearings.)

**There is no simple mechanism to address the concerns that may emerge during reorganization. There is no supervision.

It has been suggested, in the report and by other witnesses, that monitors should be licensed trustees. Trustees are governed by their code of ethics which is set out in the BIA. They are subject to certain standards, including accountability standards. The report also suggests that if there is to be supervision, in addition to the three points I mentioned, that the superintendent, as under the BIA, be allowed to intervene in proceedings before the court generally where there is an issue of national interest. We use that provision from time to time.

Senator Kelleher: There is a Private Member's Bill ‑‑ I think it is number 253 ‑‑ which seeks to amend the BIA to make unpaid wages a first priority. I think we faced that back in the 1980s; I recall discussing the issue in cabinet at that time. What are your comments on that proposed legislation?

Mr. Mayrand: I must admit that we are not familiar with that matter. Is it a motion or a bill?

Senator Kelleher: It is a bill. Knowing the process that is used in the House, that bill will probably never see the light of day. The fact is that it keeps rearing its ugly head in this type of legislation.

Mr. Jim Buchanan, Senior Project Leader, Policy Sector, Industry Canada: I must confess I have not seen that particular bill but I have seen earlier versions of the same bill. Such bills purport to give to the claims of wage earners a super‑priority status, ahead of all other creditors' claims, sometimes even ahead of the claims of the CCRA.

Senator Kelleher: Heaven forbid. What a tragedy!

Mr. Buchanan: The wage protection issue is one of the main issues discussed in the report. The option of giving wage earners super‑priority protection is discussed there. The stakeholders in the consultation had different views on it. A majority of stakeholders appeared to favour a super‑priority protection over other means of enhanced wage protection. By no means was there a consensus on that. As Mr. Mayrand indicated, wage protection is one of the contentious issues in the report.

Senator Kroft: Good afternoon. I suspect this is the beginning of what may be a rather long relationship. I have some questions about process. This is our first session with you and our first session of any kind on this task. I want to pick up from where Senator Prud'homme was to help me understand the process and the task before us.

From everything I can see, you have done an extensive and very fine piece of consultation with stakeholders on a broad range of subjects. We are already receiving presentations from various interest groups on specific points and on wide‑ranging points.

I am looking at page 10 of your presentation and I sense that this as close as we will get, with your help, to organizing our work. You have set out categories like consensus and significant differences and, in the red column, contentious issues.

You have made no effort, and I gather from your response to Senator Prud'homme that you have no intention of making any such effort, to give recommendations on any point. Is there any point today or in future meetings in pressing you on that subject? Would that be a hopeless question?

Ms. Thivierge: We did consult on the issues and we tried to portray the responses in the report before you. We wanted to provide you with a good sense of the legitimate policy options or the legitimate policy solutions.

As Mr. Mayrand mentioned, primarily because of what happened 1997, we have not gone as far as to say "and therefore the government recommends the following policy direction."

As I noted earlier, the consultations took place in 2001 and early 2002. Already a year has passed. Some issues are being seen in a new light. There are some emerging issues. Stakeholders made some substantive submissions after the report was tabled. We plan to continue monitoring the work of the committee, dialoguing with the stakeholder community and refining our thinking on some of the issues. Hopefully we can factor in the recommendations of the committee into the policy development process.

Do I have a policy direction on these issues today? No, I do not. If this is a long partnership over many months, perhaps we will come to a view down the road as you also articulate your thinking. Up until now, we have not, for all these issues, established a policy direction or policy decision of any sort.

Senator Kroft: I will pursue my questioning. We have this smorgasbord of items here. Beside the lack of any recommendation nor even a discernible point of view, there has been no effort to rank these 30 or 40 items in terms of importance. Do you have a list of hot items from all of these? Are there three or five or ten which are most critical, which seem to cause the most problems for Canadians in accessing these procedures in our law? As of now, we could take it this way or that way. I am not sure if there is such a list. Can you give us any guidance on that?

Ms. Thivierge: From our discussions with the minister, it is fair to say that guidance from the committee on those contentious issues certainly would be truly welcome. Regarding the issues in the first column, there is consensus on how to modernize the Canadian statutes to deal with those realities. Your support for going in those directions would be helpful. Guidance from this committee would be particularly helpful with regard to the list of contentious issues. Many of these issues have been around for a while. Recent events are shedding new light. We will spend quite a bit of time on that list and we would very much welcome the advice of committee.

Senator Kroft: Again recognizing that we are at the beginning of a process, I read, in advance of the meeting, your various reports and statistics over the years about rates of growth and rates of decline in proposals, in bankruptcies, on a consumer level and on a corporate level. The picture is not completely clear. It is all there, I am sure. As a background or an overview, I want to reduce it to a simple question: On both the consumer and the corporate sides, is the picture getting worse or better?

(tk 1700 follows‑‑Kroft cont‑‑Is a growth in number of)

DM May 7, 2003

(Senator Kroft continuing -- getting worse or better?)

*** Is a growth in number of proposals good news in that people are resorting to the mechanisms to solve the problems, or is it bad news that more people have more problems? You can look at all these statistics from either side. I do not know if you would venture a comment on that.

Mr. Mayrand: It seems that the rate of growth has come down significantly. Obviously, consumers especially are still very vulnerable because of level of indebtedness, and we always have a concern that should the economy slow down in a significant manner, we would see a substantial increase of consumer insolvency filings. You see the peaks and valleys that follow the economic cycles. We are in a period right now that has been unique. If you look at the last 30 years, we have had five years of relatively stable volume. That is why we are suggesting that things have levelled off. Yet, many consumers are vulnerable, and hence the notion of looking at prevention.

On the business side, I should point out that the situation has improved substantially in the last decade. Our rate of business insolvencies has come down significantly in the last decade, and especially in the last part of the 1990s. As we mentioned, it compares favourably to the U.S. It is very comparable. In a market economy, when you want to foster entrepreneurship, you have to tolerate a number of insolvencies. In that sense, it is not alarming.

One other point about the statistics that you have seen and that have been presented is that one of the important pieces of the story here is that there has been a significant shift in both consumer and commercial insolvency toward reorganization or proposals. Reorganization in the commercial world preserves jobs and commercial relationships between the parties, and they are efficient. Successful reorganizations are efficient in enhancing the productivity of a particular business.

Similarly, for the consumer, there were no arrangements 10 years ago for consumers. Now, close to 15 per cent of all filings by consumers are arrangement proposals. That is beneficial to the debtor who has a sense of meeting obligations. It is a much-reduced sense of failure when you are able to enter into an arrangement with your creditor. On the debtor side, there is a positive thing. On the creditor side, it is a better return. We have figures that show it is as much as seven times the return of bankruptcy, so financially it is better for creditors. As well, it allows them to preserve the relationship with those debtors.

Reorganizations are seen as much more effective ways of achieving fresh starts and rehabilitation than liquidation, and they are beneficial to all parties. That is a positive story. It was a deliberate intention of the amendments in 1992 and 1997, and we are just beginning to harvest the benefit of those legislative policies. It always takes time.

I want to ensure that it is understood that, in terms of consumers, they are still quite vulnerable. I would not be surprised to see another peak two years from now, depending on the economic situation, of course.

Senator Oliver: In view of the fact that you are really not here to answer specific questions about changes, amendments and proposals, I will, like the others, put general questions to you. You mentioned the types of stakeholders you canvassed and talked with in 2001, 2002, and you ended by saying that you hope that the acts that we will end up with will be the best in the world. I am interested to know what you have done about gathering information about what is being done in other major jurisdictions such as the U.K., United States, Germany and Australia and so on. How did you go about getting that information, and where does Canada stand now in relation to those other jurisdictions in relation to bankruptcy and insolvency legislation?

Mr. Mayrand: I will let my colleagues answer for the policy sector. We are a member of an international association of regulators that brings together 23 countries from around the world. We meet once a year to exchange information on major development, economic development, market development, legislative development and things of that nature, which allows us to maintain a network where we can get information relatively easily about other systems.

My office is part of the initiative of the World Bank to design the principles for legislative reform around the world. My office is part of it, but many Canadian practitioners are also part of it, and judges. The World Bank is promoting reform in other countries and using our expertise or the Canadian expertise to design systems and also train officials or private sector parties in other parts of the world.

We also monitor development in the main countries like U.K., Australia and the U.S. Again, insolvency reform has been very active in developed countries, but also developing countries in the last 10 years. The amount of reform we have seen in the last 10 years is quite astonishing. We are keeping track of the main ones.

For example, one thing that may come up during your deliberations is the issue of discharge of debtors. Should it be one year, nine months, two years or three years? This is an issue for personal insolvency, but it is often discussed. Just to give you an illustration of how the target is not fixed, Australia reduced its time for discharge from five years to one year at some point in time and just recently amended its act again to bring it up to three years. The U.K., at the same time, in parallel, brought it from five years to one year in that most recent reform, and they are looking at Canada and how we do with our nine-month discharge period, how that is working and how we deal with surplus income and all the issues. There is a lot of exchange going on, but it is not a science. Especially in personal insolvencies, we are dealing with individual consumer behaviour, so finding the right point is often the object of much discussion.

Ms. Thivierge: I can add that, on the policy side, our people are monitoring what is happening. We have developed a few charts. Some of this information can be shared with this committee. For all of the issues outlined in the report, we have looked at what is happening in the U.S. as a benchmark.

Mr. Mayrand just mentioned recent developments. In some countries, there are proposed bills, and in other countries laws have been passed. We have looked at those and the changes that were brought about. We have matrices and summaries of what has been happening internationally. We do monitor what is happening internationally in like‑minded countries to ensure that, as we look at what options might be available for us, that we are mindful of the global environment and some of the trends that are happening elsewhere.

Senator Oliver: Those charts would be useful if they could be laid before the committee.

Ms. Thivierge: With pleasure.

Senator Oliver: I have a question about public policy. In terms of the liability of directors on bankruptcy, one of the problem that has occurred is that if a company is getting ready to go bankrupt, the board of directors will immediately all call their private lawyers and say, "Look, I thought I had an insurance policy. What is my coverage? What should I do? Should I resign? Should I run and hide?" At the same time, this board of directors are the people who you really need to help work through the negotiation process to try to save the company and the jobs.

(1710 follows, Senator Oliver continuing, I wonder, from a public policy ...)

DC May 7, 2003 (Senator Oliver continuing...and the jobs.)

I wonder from a public policy point of view how far should this committee go in trying to protect members of the boards so they do not have to resign. There are now in law a number of automatic payments that must be paid and submissions to be made to Revenue Canada and so on. Apart from specific payments, how far as a matter of public policy should we go in trying to ensure that something as important as a board of directors can stay in place to help work through these troubling problems?

Mr. Mayrand: That is an issue that is part of the report. It is one where we have noticed significant difference in terms of the approach. I am sure you will hear from other witnesses, but one of the challenges with respect to director liabilities and the other item which is sanctions to directors and officers, is how do you distinguish proper versus wrongful conduct?

Clearly, you want to attract competent and honest directors and keep them in the reorganization. That is critical for the success of the reorganization and the management of the business. At the same time, you have to have the ability to displace those who do not display the same level of competence or the level of conduct that you would expect normally in the corporate world. One of the challenges is how do we go about making that distinction.

Senator Oliver: There is ongoing peer review being brought into a number of boards where, on an annual basis, they will do peer review and cull out those who are not performing; is that not enough, or are you recommending more?

Mr. Mayrand: Again, I will wait for your discussion and deliberations.

The Chairman: We have an impasse here. It is like, "After you, Alphonse."

We hope at some point in life that you will be more forthcoming with your recommendations. You have been at this for a number of years; you are world‑class experts. I cannot speak for everybody on this committee, but I am certainly not a world‑class expert; Mr. Goldstein is. We will come up with what we think are good recommendations, but you have to hold our hands a little.

Senator Kroft: In case it was not clear, we will not be shy about disagreeing with you.

The Chairman: I do not know what word to use, but to say, "The ball is in your court, ladies and gentlemen," is not good enough. You will have to help us.

(French follows ‑‑ Senator Prud'homme ‑‑ Je vois mon rôle dans le présent...)

(Following French) (Senator Prud'homme continuing)

We could go on the wrong track and you will be there, knowing exactly that we are on our way to the wrong track. However, you are duty bound, as a high civil servant, to try to help us how to do it. I know with diplomacy and all that. Maybe it would be good to hear from you after you listen to others who will come and tell us what to do with the experts that we have there.

It is this shyness that I see from people, "Well, you know, I could not do that, but, boy, is he on the wrong track." I have been told that for 40 years in Parliament: "You were so close to asking the right question, but you did not ask and I was not duty bound to answer you. I was obliged to answer you if you ask a clear question." However, the question is to know what question to ask. I would hope that my chairman will continue along the path he is going.

The Chairman: The way we will leave this is that I am sure we will get along wonderfully well. As we get more into the subject, we will have some sort of off camera meetings to bring you up to date on where our thinking is going. Then we can have an exchange of ideas. In other words, we will not catch you barefooted with a recommendation of which you are not aware. We ought to have a chance to exchange ideas. We will not belabour the point.

Senator Moore: I have a couple of policy questions, so I do not think you will mind trying these on.

One of the big expenses in a bankruptcy or insolvency matter is the accounting and legal fees that are taken out. Do you think there should be statutory provisions regulating the amount of any special fees, including waiver fees, retention fees, staff bonuses or some other fees?

Mr. Mayrand: Are you referring to in bankruptcy reorganizations or generally?

Senator Moore: Should there be statutory limits?

Mr. Mayrand: Perhaps I can respond by explaining how the system is set up currently.

The Chairman: Could you could you be more specific, Senator Moore?

Senator Moore: We heard from an earlier witness that the fees charged by professionals like lawyers and accountants in some of these proceedings are quite onerous. That is the evidence we heard before and I would like a response from the witness.

The Chairman: As a follow up, someone told us the other day that they were at a hearing for Air Canada in a Toronto court and they counted 150 lawyers.

Mr. Mayrand: That is my understanding, too, maybe 160.

Senator Prud'homme: There is not much left for the little people after that.

Mr. Mayrand: Maybe we should start with the BIA, because there may be some clearer rules there.

In regard to personal insolvencies, if it is a certain type of simple administration, there is a tariff that governs the cost and fees of administration of the file. Roughly, in Canada, to administer a consumer bankruptcy, it is around $1,500 including all disbursements and GST. It could vary, but that is the approximate amount. That is what it costs to cover a summary administration, which represents over 90 per cent of the proceedings under the BIA. There you have a tariff.

(Take 1720 begins, Mr. Mayrand continuing: If the tariff on a file...)

LP May 7, 2003 (Mr. Mayrand continues)

If the tariff on a file appears to be excessive or unfair, it is possible to go before the court and require taxation of those fees and have them reduced. That does happen from time to time. The authority to intervene before the court belongs to any of the creditors on the file, as well as to representatives of my office. That takes care of summary bankruptcy.

In ordinary bankruptcies, which would be the larger commercial ones, the act says that the trustee is entitled to 7.5 per cent of the amount realized. This is one area of the act that is obsolete and needs to be modernized, because those provisions are no longer of much assistance. At the end of a commercial file, the trustee will present a statement of receipts and disbursements, which, in most cases, will be supported by time sheets and work in progress documentation and will claim a certain amount for the work done on the file. That will be taxed by the court based on the result, the effort and the amount returned to creditors. Again, at that taxation any creditor can intervene and make comments on the appropriate level.

Commercial proposals under the BIA are normally set between the debtor and the trustee tasked with administering the proposal. The prevailing view now is that such an agreement is a private agreement. There could be a debate on that, but that is the prevailing view.

In consumer proposals there is also a tariff that predetermines the amount that the trustee will receive for the proposal. Under the CCAA, there are again no rules with respect remuneration of any of the professionals involved. It is my understanding that it is left to the court to approve the fees and that it is common practice in CCAA to get orders that would prime those fees in the reorganization.

Senator Moore: Could you explain what that means?

Mr. Mayrand: Often the court will issue a charge on the assets to guarantee the payment of the fees and the administrative costs on the files.

Senator Moore: Ahead of other creditors?

Mr. Mayrand: Yes.

As to the amount, there is no taxation per se in CCAA. Again, at the end of the day there is agreement between the parties, and much consideration must be given to that agreement.

That is a brief overview of these matters.

Senator Moore: I want to ask about the assets that can be exempted. Should there be a statutory list of assets that are exempt from seizure in bankruptcy? If so, should a debtor be able to choose either federal exemptions or provincial exemptions in their totality? Did you have any discussions about that in the course of your deliberations?

Mr. Mayrand: That is an issue that was identified in the departmental report. It is also an issue addressed in great detail by the Personal Insolvency Task Force that produced a report that was conveyed to the committee.

Historically, Canadian legislation has always deferred to provincial legislation to determine what assets should be part of the estate and what assets should be exempt. It has been like that ever since we have had insolvency legislation for individuals.

Income is an exception to this. Income is treated separately from provincial legislation. How income is dealt with in bankruptcy is set out exclusively in the BIA without reference to provincial legislation.

The issued was raised again during the PITF. Canada's system is not unique. Many countries, including the U.S., have a dual system whereby states may opt to establish their own exemption for bankruptcies. The question is being raised by the PITF and the recommendation made is to the effect that we should have a federal list of exemptions with the debtor having the choice of statute, either federal or provincial, should the debtor elect to file under the BIA.

This is unique. It aims at recognizing the local circumstances, the vast geography and the diversity in economies and social structure across the country. At the same time, it provides a baseline of exemption across the country. It tries to balance fairness at the same time as recognizing local circumstances.

Again, this has been offered as a possible solution by the PITF. This is also a contentious issue. I understand that it will be contentious with provincial governments. Also, I think it is important that you hear what creditors have to say. I was surprised myself when I heard them say that they prefer the current system. Most creditors prefer the provincial exemptions as they are. Their systems are adapted to assess their risk and factor in the variations in exemptions across the country.

Senator Moore: They have been working with the system and it has become a structure with which they are happy.

Mr. Mayrand: It seems to be ingrained in their system and they are familiar with it. The message we heard from them is that the situation is fine as it is. Again, looking at it from another angle, it may seem unusual to see such a variety in exemptions from province to province.

The Chairman: Your brief describes the role that the Office of the Superintendent of Bankruptcy plays in placing bankruptcy estates, business reorganizations, consumer proposals and receiverships and, additionally, your brief suggests that reorganization under the CCAA should be subject to the supervision of the superintendent.

I have three brief questions. First, are you recommending that the Office of the Superintendent of Bankruptcy play a role in CCAA restructuring similar to the role it plays in matters under the Bankruptcy and Insolvency Act? Second, have you considered whether more personnel will be required at the Office of the Superintendent of Bankruptcy? Third, do you know why this additional responsibility of the Office of the Superintendent was not defined and placed in the revisions of the CCAA in the 1997 amendments?

Mr. Mayrand: With respect to supervision of CCAA, that is mentioned in the report. The suggestion from this office is that it is time to consider having a national registry and to consider offering a mechanism to allow participants in the system to express or bring their concerns out, other than through court proceedings.

The third element, which was supported by practitioners, is that monitors should be licensed trustees, because there are standards with respect to trustees that are well known across the country and the community.

We must be cautious. This is an area in which I can express an opinion more freely, because as the supervisor I should have some thoughts on the system I supervise.

(Take 1730 follows ‑‑ Mr. Maynard continues: We must be cautious...)

BA May 7, 2003

(Take 1730 starts here, Mr. Mayrand continues ‑ system I supervise)

We must be cautious on how far we want to push the provisions in the CCAA. I do not see a need for a full‑fledged regime. I think it is supervision similar to the BIA. I would like to get some direction from the committee as to whether it should be more than the four items that are identified in the report. I am sure you will hear from practitioners in that regard.

Anything more than what is in the report raises certain issues about resources and funding the supervision. That is a point that has to be made. If we were to extend the same level of supervision that exists in bankruptcy, I am not sure it is warranted. In the CCAA, you have large players that can self‑discipline the system to a large extent; in bankruptcy and BIA proceedings, it is the opposite. You often find vulnerable participants, ill‑informed participants that need the benefit of a more aggressive supervision.

In the continuity of incremental approach to insolvency reform, I think the four points that are identified in the report would establish a sound basis for having a supervisory regime in the CCAA proceedings, which will not impede the ability of parties to come out with the best agreement at the cheapest cost possible.

I think I may have missed the third point, Mr. Chairman, for which I apologize.

The Chairman: Why was it not done in the 1997 amendments?

Mr. Mayrand: I believe things have evolved quickly. The market is changing quickly. Issues are moving very quickly. It becomes a little bit more apparent that the lack of having a national registry is a flaw in our system. It will impede one's ability to have a full review of those proceedings. That is becoming more obvious. As CCAA secures more importance in the insolvency system, those issues now emerge ‑‑ like the issue of the monitor. Should the auditor be allowed to be a monitor? That was not seen as a major issue in 1997; but in these days, with all the discussion on corporate governance and the importance of ensuring public trust ‑‑

The Chairman: This committee would probably think it is a bad idea.

Ms. Thivierge: I may certainly add that, as we were trying to prepare for this review, one of the questions I asked early on was: Have the amendments that were introduced in 1997, as they relate to the CCAA, been working? The answer was that we would have to try to go out and do a bit of an inquiry as to where those cases are and try to study them. In fact, from a public policy point of view, we do not have access to the data and some of the facts that come out of a restructuring. These are public; but we have to go out and try to find out in which court these cases were tried, what came out of them, go through the documents, et cetera.

The point that Mr. Mayrand has raised is valid. A registry gives you access to information that allows you to establish whether or not your policy outcomes are those that you set at the front end.

The Chairman: That is what we have been told.

Senator Kroft: For a point of information arising out of that last answer, you were saying you do not have access ‑‑ you are on the policy side and do not have access ‑‑ what is the status of the documents in these proceedings?

Ms. Thivierge: What I meant to say, and I tried to correct it‑‑

Senator Kroft: They are not part of your files.

Ms. Thivierge: They are not, and we have to go and check in all the courts across the country to try to find out where those cases were tried and where the information is, et cetera.

(French follows ‑‑ Senator Setlakwe: M. Mayrand, vous avez parlé…)

LL/07-05-03 (après anglais)

Le sénateur Setlakwe: M. Mayrand, vous avez parlé des enjeux qui préoccupent les intervenants et parmi ceux‑là vous parlez de l’adéquation de voir les vérificateurs d’une société agir en qualité de contrôleurs. Est‑ce que cela découle de préoccupations au niveau des conflits d'intérêt suite aux agissements de quelques sociétés depuis un certain temps, aux Etats-Unis et au Canada?

M. Mayrand: C’est une préoccupation, particulièrement dans le domaine de l’insolvabilité où il faut que l'administrateur du dossier soit au‑dessus de tout soupçon. Tout repose sur la confiance que l'on peut accorder que ce soit au syndic, au contrôleur ou au séquestre intérimaire qui sont impliqués dans l'administration des dossiers. Cela a toujours été une préoccupation, il y a un code d'éthique pour les syndics qui établit des règles ou des paramètres en matière de conflit d'intérêt. Une des difficultés qu'il y a, et il faut le reconnaître, c’est d’équilibrer l’efficience des impératifs économiques de gérer efficacement un dossier avec les impératifs qui sont tout autre d'inspirer une confiance publique et d'avoir des règles en matière de conflit d'intérêt qui vous élèvent au‑dessus de tout soupçon.

La loi prévoit qu'il est possible qu'un vérificateur comptable agisse comme contrôleur d'une entreprise. La question se pose davantage aujourd'hui compte tenu des développements dans le milieu corporatif.

Le sénateur Setlakwe: Il me semble que c'est bien le cas.

Le sénateur Biron: Pour se prévaloir de la loi sur les arrangements avec les créanciers des compagnies le seuil d'endettement doit être de cinq millions. S'il devait être augmenté est‑ce que certaines règles ou certains pouvoirs pourraient être accordés dans la loi du BAI, accordés à l'autre pour pouvoir faire un règlement semblable?

M. Mayrand: Est‑ce que le seuil devrait être augmenté? Encore là normalement ce sont les plus grandes entreprises qui se prévalent de ce que l’on appelle en français C-36 la LA2C. Maintenant, il existe plusieurs entreprises qui se prévalent de cette loi même si elles ont un passif entre les cinq et dix millions. Est‑ce que ces entreprises doivent être exclues? Si on augmente le seuil cela veut dire que ces entreprises n'auraient plus le choix entre le régime et vous avez parfaitement raison. Il faudrait à ce moment s’assurer qu’on harmonise les règles. Si jamais on élevait le seuil, il faudrait que ces entreprises qui se trouveraient exclues du C-36 puissent bénéficier d'un régime assez flexible pour leur permettre de se réorganiser. Je pense que dans tous les changements qui sont fait en matière de réorganisation il faut toujours avoir à l'esprit si le changement doit être fait uniquement dans le C-36 ou le LA2C ou s'il doit être également copié avec des modifications dans la loi sur la faillite. Il faut éviter qu'il y ait trop de choix qui soient faits pour d’autres raisons que le meilleur résultat possible pour les intervenants. Cela doit être une préoccupation constante.

Le sénateur Biron: Et s'il y avait un seul statut pour les deux cela serait inclus?

M. Mayrand: Vous avez raison, sauf comme je l'ai indiqué, même si tout était dans la même loi, cela va prendre un régime spécial. Tout le monde acceptera assez rapidement qu'il soit impossible de réorganiser Air Canada sous la loi de la faillite.

(M. Mayrand: Les très grandes entreprises ont besoin d’un régime…)

(français suit)

ML/07-05-03 (après français) (M. Mayrand)

Les très grandes entreprises ont besoin d’un régime différent de celui de la Loi sur la faillite qui, lui, fonctionne très bien pour les PME. En fait, plusieurs milliers d’entreprises se prévalent de ce régime à chaque année au pays et avec beaucoup de succès quand on compare avec ce qui se passe aux États-Unis. Il faut donc préserver ce régime pour les petites et moyennes entreprises.

Le régime de la Loi sur la faillite n’est pas approprié pour les entreprises cotées en bourse car il n’offre pas la flexibilité attendue. Même si tout est intégré dans la même loi, un régime sera nécessaire pour traiter de ces circonstances exceptionnelles.

(Président: First, thank you for being with us…)

(anglais suit)