[Recorded by Electronic Apparatus]

Tuesday, June 11, 1996

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[English]

The Vice-Chairman (Mr. Valeri): Order, please.

It is ordered that Bill C-5, an act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, and the Income Tax Act, be now read a second time.

I would like to introduce Mr. David Tobin, who can introduce the rest of the witnesses from the Department of Industry.

Mr. David Tobin (Director General, Corporate Governance Branch, Department of Industry): Thank you, Mr. Chairman.

Before I introduce the witnesses from the department, I would call the attention of the chair and the committee to Mr. Gordon Marantz and Mr. Max Mendelsohn, both of whom are practising attorneys, here to assist us and assist the committee in any understanding you may need for the bill.

Perhaps I can call on my colleagues to introduce themselves.

Mr. George Redling (Superintendent of Bankruptcy, Department of Industry): My name is George Redling. I am the superintendent of bankruptcy.

Mr. Marc Mayrand (Deputy Superintendent of Bankruptcy, Department of Industry): Marc Mayrand, the deputy superintendent of bankruptcy.

[Translation]

Mr. Jacques Hains (Director, Corporate Law Policy Directorate, Department of Industry): My name is Jacques Hains and I am Director of Corporate Law Policy with Industry Canada.

Mr. Tobin: Mr. Chairman, if you don't mind, we have a presentation of about 20 minutes.

[English]

The Bankruptcy Act, which we're here to discuss today, is part of a package of marketplace framework laws which are essential for critical jobs growth and innovation within the economy. As in most framework laws, the Bankruptcy Act and the CCAA balance many different and divergent interests. For example, they reconcile the interests of both debtors and creditors and creditors amongst themselves, and they balance provisions on reorganization and rehabilitation versus that of liquidation.

Reform to the Bankruptcy Act has had a long and chequered past. In fact the 1992 amendments, commonly referred to as ``phase one'', were the first in somewhat over forty years.

The focus of the 1992 amendments was very much that of reorganization versus liquidation. It was a question of saving businesses and jobs versus bankruptcy. The main features of the 1992 amendments were a revised commercial reorganization scheme, a new consumer proposal regime, and measures to streamline the bankruptcy administration, all of which were combined with a three-year review clause. Since 1992 there have been over 3,000 commercial reorganizations, of which 50% are still active. On the consumer side, there have been over 6,000 consumer proposals and somewhere between 65% and 70% are still active.

Given the three-year review clause that was put in the 1992 amendments, the department then considered how we would structure and prepare for the three-year period. We wanted to ensure that input for 1992 and beyond was based on private sector initiatives. Hence we established a bankruptcy and insolvency advisory committee to identify proposals for amendments and to assist in the three-year review. All major stakeholders are represented in the consultative process; that is, business, consumers, the lending industry, the legal profession, bankruptcy trustees, and other members of the insolvency community.

Over 100 individuals, representing 50 organizations, provided their time freely to provide input into this review. An overall committee was then divided into eight working groups, with numerous smaller task forces. I dare say, Mr. Chairman, the majority of the amendments proposed in C-5 are based on the recommendations of that private sector group.

We could look at the reforms proposed in Bill C-5 in a number of ways. We've chosen to divide them into four broad areas for the purpose of introducing them to you and your committee. The first would be categorized under promoting fairness; the second, encouraging responsibility; the third, fostering commercial reorganization; and the fourth, improving administration.

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If you will bear with me, I'd like to spend perhaps a few minutes on each of those to present the highlights to you.

On the first one, promoting fairness, there's a provision in the act to increase the protection for spousal and child support orders. The proposal is to make spousal and child support orders claims provable, amounts accrued in the year before the debtor's bankruptcy plus any lump-sum payment order agreed upon.

Similarly, support orders would be given preferred creditor status, making them fifth in ranking priority, behind funeral expenses, costs of administration, superintendent's levy, and wage earners.

Finally, there would be no release of the remainder of the unsatisfied claim once those claims we've just mentioned would have been paid.

The second point is on seizure exemptions. To protect debtors' assets better and to ensure that essential needs are met, Bill C-5 proposes to exempt for low-income benefit payments such things as the GST credit reform. The objective here is to try to ensure that the debtors' essential needs are met.

While the GST is covered in the present act, other types of refunds could be added to by Order in Council.

Petitioning of farmers and fishermen: Provisions in Bill C-5 propose to expand and strengthen the protection for farmers and fishermen from being petitioned into bankruptcy. It would change section 48 of the act from individuals engaged solely in fishing or farming to individuals whose principal occupation and means of livelihood is fishing or farming. Again, this is to try to take into context the reality of the day that very few people actually make their living solely from farming or fishing and in some cases fishermen and farmers have to seek outside income to supplement that.

The second major area would be that of encouraging responsibility. To deal with what is a growing number of recent graduate students declaring bankruptcy prematurely, changes have been made in the act to recognize that at times students may have difficulty in repaying their loans, but at the same time we wish to protect the integrity of the student loans program. Therefore Bill C-5 proposes to make student loans non-dischargeable debts for the first two years following the completion of studies. However, at the end of the two-year period former students could apply to the courts to have the student debt discharged if in fact the hardship can be shown.

There are no special provisions for student loans that have occurred after the two-year period. That is to say, if a former student is bankrupt after the two-year period, the normal rules apply.

Surplus income: Again speaking of the balance I referred to earlier, in Bill C-5 we have tried to ensure that bankrupts will make contributions to the estate in accordance with their ability to pay. Therefore clause 60 of the bill imposes a duty on bankrupts to pay surplus income to the estate. The trustees are to set the amount of surplus income to be paid as per directives issued by the superintendent. If the bankrupt feels that the amount determined by the trustee is not fair, then mediation provisions are built into the act to allow official receivers to try to resolve the dispute between the trustee, the creditors, and the debtor. Finally, if the mediation fails, the matter can be referred to the courts.

Often people say that the discharge of bankrupts has to be examined, so one of the things that the bankruptcy and insolvency committee has suggested is that the trustee could set the terms of a bankrupt's discharge order. In making those recommendations, the trustee is to take into consideration the compliance with the surplus income payments I referred to earlier, as well as the amount of surplus income paid to the estate, taking into account the bankrupt's financial ability to pay and whether or not a consumer proposal should have been filed, rather than a simple declaration of bankruptcy.

Again, built into these provisions are mediation and attempts to resolve any differences between the parties. Again, if mediation fails, the matter can be referred to the courts for final resolution.

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The last area under the theme of encouraging responsibility would be the provision dealing with assault judgments and orders. Bill C-5 proposes to make assault judgment orders in civil cases, non-dischargeable debts and bankruptcies. This is designed to prevent those who awards have been made against...of those types of awards.

[Translation]

The third part will be presented by Mr. Hains.

Mr. Hains: Thank you.

The third main objective of Bill C-5 is to continue to foster the commercial recovery and reorganization of businesses that, though viable, are in a difficult financial situation. The purpose is of course to protect these businesses and the jobs which depend on them.

There are four main proposals in Bill C-5 relating to commercial reorganizations. The first area affected is commercial leases. Bill C-5 purports to change the 1992 amendments to allow the debtor to make a choice among three options when he has entered into commercial leases that cause his financial situation to be particularly precarious. He may repudiate these commercial leases and in so doing will have three choices.

He may offer the landlord compensation equivalent to the loss incurred.

The second option would be to make a special offer to the landlord including him in a particular and exclusive category for landlords. Under such an option, the landlord makes an estimate of his loss based on a formula to be found in Bill C-5, namely one year of rent from the date of the disclaimer of the lease plus 15% of the rent for the remainder of the term of the lease for a total amount not to exceed three years' rent.

The third option open to the debtor is to make no offer to compensate the landlord who, in that case, is entitled to make a claim as an ordinary creditor based on the formula I have just described.

The purpose is to ensure that landlords have some say in the matter. Not only will they be made an offer based on the loss incurred or on the formula contained in the bill but they will be given a chance to vote on the proposal made to them.

The other main area of activity is to be found under the heading ``The promotion of commercial reorganizations with respect to environmental responsibility". Once again, the proposal of Bill C-5 is to improve the amendments adopted by Parliament in 1992. There are four or five elements in the proposal contained in Bill C-5.

The aim is to provide a better definition of the liability of insolvency professionals and practitioners in order to encourage them to accept mandates where there may be problems related to the environment. It is hoped that this will reduce the number of abandoned sites both for the benefit of the environment and the safeguard of businesses and jobs.

What are these four or five elements relating to environmental liability? First of all, insolvency professionals would no longer be considered personally liable for damage caused to the environment after their appointment unless they are guilty of serious negligence or deliberate misconduct.

Secondly, if the monitor were to receive an order to remedy environmental damage, he would have four options.

First, he could decide to carry out the order and remedy the environmental damage, the costs to be charged as costs of administration from the bankrupt's assets.

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The second option would be to challenge this order to remedy before the appropriate courts; these two options are already to be found in environmental legislation.

The third option would be for the monitor to apply to the appropriate court for a period of stay to assess the economic viability of complying with the order, whether it is worth the trouble and whether the assets are sufficient to cover the clean up costs.

As a fourth option, if he considers that this course has absolutely no economic viability, he may give notification that he has renounced the real property to which the order applies.

It should be emphasized that for the first time in the Canadian history Bill C-5 proposes to recognize that claims for costs of remedying any environmental condition shall rank in priority above any other claim. In other words, they would rank above any contractual charge such as a mortgage or any other right against the property to which the order applies, as well as to any other real property contiguous to the contaminated sites and affected by the contamination.

So as far as the assets are concerned, under this legislation environmental claims will rank above any others, including mortgages and any other contractual instruments.

Lastly, if in spite of the exercise of this first claim there remains money owing to the Department of Environment for work done to clean up the sites if there still is an unsettled claim, then the claim will be recognized as an ordinary claim against the assets of the bankrupt business.

It should be noted that although monitors are no longer personally liable unless they are guilty of serious negligence, Bill C-5 does not exempt them from the requirement to inform the proper authorities when they discover an environmental problem. It is our view that this will make an enormous contribution to a healthy environment in Canada and the cleaning up of pollution.

I repeat that the purpose of such provision is to encourage practitioners to accept mandates and to reduce the number of abandoned sites in the country. If there are any environmental difficulties, there will be someone on the spot to inform the appropriate authority. The other provisions I have described will also apply, including the priority status granted to environmental claims.

A third area under the heading ``Fostering Commercial Reorganizations" concerns the liability of directors. We should remember that the main purpose of the amendments approved by Parliament in 1992 and those contained in Bill C-5 is to safeguard businesses and jobs.

The directors of insolvent companies who are attempting to reorganize and turn around the business are also required to make very important decisions and offer the creditors less than what is due to them. When such decisions are taken, these directors often run the risk, under environmental and tax legislation, of having to pay the difference of the unpaid debt. This of course does not encourage directors to remain members of the board of directors and to make decisions aimed at safeguarding businesses and jobs. So the purpose here is to encourage directors of companies experiencing difficulties not to abandon the sinking ship but to attempt what they can to set it afloat again.

Let me give you a brief description of three elements contained in clause 82 of Bill C-5.

One of the proposals enables the directors of corporations to demonstrate that they have acted as prudent and diligent persons in making such decisions.

Secondly, there is the possibility of suspending procedures against the directors during the reorganization procedures. This does not amount to a denial of the right to obtain remedy from the directors but is simply a suspension, a moratorium for a limited period of time.

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Third, as part of the recovery plan, directors are allowed to propose a compromise with respect to the claims that they might face as directors. These amendments are to be found both in the Bankruptcy and Insolvency Act as well as in the proposed amendments to the Companies' Creditors Arrangement Act.

This brings me to the last main point under the heading of ``Fostering Commercial Reorganization". Clauses 120 to 125 of Bill C-5, on pages 80 to 90, set out to significantly amend the Companies' Creditors Arrangement Act.

The Advisory Committee on Bankruptcy and Insolvency seriously debated the matter of whether we should have a second federal Act relating to business recovery and reorganization, the famous Companies' Creditors Arrangement Act.

The Advisory Committee came to the conclusion that this Act was worth keeping but should only come into play in very large commercial reorganizations, in the case of businesses with debts over $10 million and the most complex reorganization. All others should be encouraged to use the Bankruptcy and Insolvency Act.

We also expect to increase requirements relating to the disclosure of financial statements and financial information enabling the creditors of such corporations to have an idea of where the debtor is heading and to make decisions with full knowledge of the facts.

Bill C-5 also provides for the appointment of a monitor in cases of reorganization under the Companies' Creditors Arrangement Act.

Another proposal sets out to impose a time limit on the initial moratorium period, that is the period of stay of procedures under the Companies' Creditors Arrangement Act to a maximum of 30 days without automatic extension. The debtor must return to the court if he requires more time.

This suspension or moratorium does not apply to those elements mentioned in the Bankruptcy and Insolvency Act, namely eligible financial contracts, letters of credit or other personal guaranties.

With reference to the Steinberg case in Quebec, Bill C-5 proposes that no supplier or creditor is to be obliged to advance further funds or goods without guarantee of immediate payment.

As far as the claims of Her Majesty are concerned, Bill C-5 will make the same amendment to the Companies' Creditors Arrangement Act as remained in 1992 to the Bankruptcy and Insolvency Act for the purpose of uniformity and harmonization.

Bill C-5 also stipulates that when a debtor company begins proceedings for recovery under one of the Acts, it may not decide to switch in midstream and start proceeding under the other Act realizing that perhaps creditors may cause problems.

The Bill also harmonizes the proportions of creditors' votes per category of creditors required under the two Acts to approve a recovery plan, establishing that it is two thirds, and adopt the same forms so that information is standardized for creditors and those involved in the business of recovery process.

Finally, my colleague Mr. Tobin will take a few moments to describe to you the situation of international insolvency. The amendments that we are suggesting with respect to directors and environmental liability apply as well to the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.

As I said, our intention is to have two systems, one for large corporations and more complex reorganizations, while at the same time harmonizing the rules of procedure of these two systems and the information made available to creditors so that they can make an enlightened decision on reorganization plans.

Thank you, Mr. Chairman.

[English]

The Vice-Chairman (Mr. Valeri): Thank you.

Mr. Tobin.

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Mr. Tobin: Just to complete the brief overview, there are two other points I'd like to cover fairly quickly. The first one deals with securities firms.

As you know, with more and more people now investing in the stock market, BIAC was asked what happens in the event of a bankruptcy involving a security firm. So there are special provisions, starting in proposed section 118 of Bill C-5, that outline the proposals for any bankruptcies that would occur in a securities firm.

Briefly, the scope of these is that a regime would apply to anyone who carries on the business of buying and selling securities. The provisions would allow the petitioning into bankruptcy by securities commissions and exchanges, as well as compensation bodies. The provisions essentially would allow for the pooling of the securities of that firm, to avoid problems of tracing ownership in securities.

As you know, in most instances securities are not held by the registered owner but in a pooling arrangement of some sort, so it becomes very difficult to trace actual ownership. These securities would be pooled and vested in the trustee. Securities that are registered in a customer's name that are non-negotiable would be outside that pool, and they would be returned to the registered owner.

Trustees would be able to dispose of these quickly, without the inspector's permission to buy, sell or distribute the securities, to discharge security interest and maintain transfer of liquidated accounts. Given the volatility of the securities market, this is designed to allow the trustee to deal with them quickly and most efficiently, in the interest of the security holder.

The measures do not change in any way the protection offered to investors under such schemes as the Canada investors protection fund. They simply deal with the event of a bankruptcy and the disposal of the assets held by the securities firm.

Another item is international insolvencies. Given today's economies, there is always a danger and a chance that creditors and debtors will cross boundaries, and the question is how to deal with them. Provisions in Bill C-5 attempt to actually codify, which has always been the practice in Canada. They include the court recognition of foreign representatives; court authority to make orders to facilitate and coordinate international insolvencies; provisions that would make it clear that foreign representatives are allowed to commence proceedings in Canada, as per Canadian rules - however, they clarify that foreign stays of proceedings are not applicable but a foreign representative can apply to a court for a stay in Canada; and Canadian creditors and assets are protected by the bankruptcy and insolvency rules.

Finally, you might classify approximately half of the clauses in Bill C-5 as being technical in nature. They're designed to streamline and improve the day-to-day administration of the act. They include such things as standardizing and specifying the time references in the act, and making it clear that counselling for persons with financial relationships with the debtors is provided for. Joint consumer proposals are provided for.

This concludes our opening remarks. If you have any questions, my colleagues and I are prepared to try to answer them for you.

Thank you.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Tobin.

[Translation]

Mr. Leblanc.

Mr. Leblanc (Longueuil): Your third main principle related to encouraging business recovery rather than resorting to bankruptcy. At the same time, you seem to give lots of opportunities to companies on the verge of bankruptcy. You mentioned for example particular arrangements with suppliers and landlords.

Don't you think that putting such emphasis on business recovery may entail the risk of causing other bankruptcies?

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It would appear to me that you are making people less rather than more accountable. The fact that they have to declare bankruptcy sometimes makes the directors of a company more accountable. There would probably be fewer bankruptcies.

Actually there is a risk that there would be more bankruptcies. You would be causing a kind of chain reaction because the company directors are not being held accountable. That's the way I see things.

Mr. Tobin: Let me attempt to answer your question and then perhaps Messrs. Hains and Redling can add to it.

[English]

I think the provisions of 1992 were crafted in such a way as to try to maintain the balance. Provisions were put in, in terms of reorganizations, that if the creditor feels some of the provisions are being too generous toward the debtor, the courts can intervene, if necessary, to try to ensure that balance is there.

I think you referred in your question to the responsibility of the directors. The thrust here is to try to have the directors remain in place during a difficult time the corporation may be going through. Keeping in mind the members' questions about trying to make sure people are not let out of their responsibilities, the spirit of the legislation is that a reorganization of an ongoing concern is better than a bankruptcy.

We have tried to build measures into Bill C-5 that would allow the director to stay on during attempts at reorganization. I would add that the provisions of directors' liabilities are votable by the creditors. If the creditors feel the provisions that allow stays of proceedings against the directors are too generous, the creditors can vote them down.

[Translation]

I don't know whether Messrs. Redling and Hains have something to add.

Mr. Redling: Let me add a few words.

[English]

The important question of the checks, balancing and timing was something we considered in 1992. The issue was that if too much time is given in the reorganization, it may cause others to fail. The framework for reorganizations was therefore structured in fairly tight time compartments. The proposal is for a 30-day period. That proposal period can be extended by the courts by a further 45 days at each time, for a maximum of six months. If, as Mr. Tobin pointed out, any creditor is materially prejudiced during that time, he or she can apply to the courts to either shorten the time delays or even to cancel the proposal. So the checks and balances were built in.

Over the past number of years we have found that the division one proposals that failed tended to fail relatively quickly - usually in the first two or three months. That was in the framework by design, so creditors would not have to carry those types of proposals that were not viable to begin with. The checks and balances were built into the system.

The Vice-Chairman (Mr. Valeri): Do you want to share your time, Mr. Leblanc? Mr. Lebel, please.

[Translation]

M. Lebel (Chambly): Although we can understand the concern of the Department of Industry, perhaps Mr. Tobin or Mr. Hains could tell me whether this consolidated version of the 1992 Bankruptcy and Insolvency Act does in fact contain any significant new elements? It's odd that the Department of Industry should be responsible for this piece of legislation since the processing of a bankruptcy is a highly legal matter.

It is not really a diriment impediment but I'd like to know whether your statement of principles clearly informs the bankruptcy administrator or the trustee that the responsibility now conferred upon him by the law to represent all creditors will be changed and that he will find himself caught in the middle without knowing whether he represents the bankrupt or the creditors as a whole.

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The trustee may not know who he is supposed to represent. We have piles of recent and old decisions involving trustees, fraudulent bankruptcies and the invalidation of bankruptcies one falling after the other, something which was very infrequent but is becoming increasingly common nowadays. Trustees have been accused of fraud in a number of recent decisions. It would be very difficult for the trustee to define his role since it is not clearly set out in the bill, in the act or the amendment you are making.

I think that two years ago the Canada Gazette published a code of ethics which was to apply to trustees. In view of the broad principles applying to your amendment of the Bankruptcy and Insolvency Act, have you given some thought to reviewing this code of ethics?

For example, there is nothing that says that the trustee may not entrust a criminal with the property in his keeping or that he must have a special trust account for each of his transaction. You will agree that this code of ethics is quite inadequate. It is so summary that in fact it applies to no one.

[English]

The Vice-Chairman (Mr. Valeri): You have about three minutes left. I would suggest the witnesses answer the questions and then we'll come back to your last question after we go to the other side.

Mr. Tobin, please.

Mr. Tobin: I'm going to ask Marc Mayrand to respond very quickly to his opening remarks about Industry Canada being responsible for this piece of legislation. I think it's fair to say it's one of those pieces of legislation that govern the rules of the marketplace

[Translation]

for which Industry Canada is responsible. I could mention many other laws for which the department is responsible, including the Canada Business Corporations' Act, the Canada Cooperative Association's Act and the Patents' Act. I'll ask Mr. Mayrand to give you a more precise answer to your questions about receivers.

Mr. Mayrand: The question you have raised is a sensitive and important one. It concerns the role of the trustee in bankruptcies or insolvency in general, his responsibilities and duties to creditors and debtors.

It should be remembered that under the law, a trustee in bankruptcy is an officer of the court and thus must act in an objective and impartial manner. He must of course maintain the integrity and the authority of the system and the court. The trustee is also subject to different rights and duties set out in the legislation. He holds a licence which grant him certain responsibilities that are also set out in the act.

The code of ethics developed about a year ago sets out in general terms the professional obligations of the trustee both with respect to the debtor and to creditors and third parties who may have an interest in an insolvency procedure. Should it be revised in the light of the amendments we are examining today? It is certainly something that we should take into consideration.

[English]

The Vice-Chairman (Mr. Valeri): Mr. Shepherd, please.

Mr. Shepherd (Durham): Thank you very much.

I have a number of questions that go all over the place, but as a general comment, in comparing our bankruptcy legislation with the United States', say...and I think of chapter 11, where there's been an obvious concern about abuse where bankrupts have used the legislation basically to shelter themselves from prosecution and eventually actually come out of bankruptcy and turn around and start going again.

I was concerned about some of your specific remarks. You talked about environmental clean-up and the fact that those charges are going to rank in priority to existing creditors, such as mortgages. What prevents an abuse from happening here where somebody who is insolvent or threatening insolvency would say, well, I'm going to do just the reverse; I'm going to import some hazardous waste into my site, and therefore I can seek bankruptcy protection from my creditors? How do we ensure that part of the legislation isn't going to be abused?

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Mr. Tobin: To cover your first one, about the international insolvencies, international comparisons are always somewhat difficult, but I think, for example, the reorganization provisions we introduced here only in 1992.... The number of companies surviving in Canada under the Canadian experience since 1992 is at least as good as, if not better than, what has been experienced under chapter 11.

Mr. Redling: Mr. Chairman, in fact in looking at the division 1 proposals, the business proposals, under our act, what we are finding is that on average chapter 11 reorganizations take approximately two years, and the survival rate of companies coming out of it seems to be between 12% and 17%. That's the anecdotal evidence we're getting from the States.

Our own division one business reorganizations have a six-month time limit on them. They can't go beyond six months. Most of them are approved within that time, or earlier than six months. We're finding the survival rate is about 55% for our business reorganizations. In other words, they get creditor and court approval in 55% of the cases.

It is still too early to tell what the success rate will be, as opposed to a survival rate, because these only started in effect in 1993. But we will be tracking that over time. The first evidence on our reorganizations is actually quite encouraging, compared with that from the U.S.

Mr. Tobin: Mr. Chairman, if the member would like, I would ask Mr. Marantz, who has experience on both sides of the border, to comment on his experience with chapter 11. He can do that fairly briefly, I'm sure.

Mr. Gordon Marantz (Legal Adviser to the Department of Industry): Mr. Chairman, when we were working on the 1992 amendments, everybody was very concerned about importing an American-style reorganization provision which it is generally conceded is too debtor-friendly. You need a fairer balance.

What was put into the Bankruptcy and Insolvency Act in 1992 levelled the playing field, gave the creditors an opportunity to test the legitimacy of what the debtor was trying to do, and established a fair range of balance. You also have to remember that while this was going on, the debtors were taking advantage of the Companies' Creditors Arrangement Act, which had no rules and was entirely open to judicial discretion and the imagination of debtors. As part of this amendment package, of course, more rules are going to be imposed under the CCAA so as to level that playing field.

So we've been very careful to give debtors a reasonable opportunity, but not at the undue expense of creditors. The experience in Canada is very different from what it has been in the United States.

Mr. Shepherd: I understand your specific comment on that. The question I asked had to do with the environmental clean-up proposal and ranking that in priority to other creditors and whether in fact that couldn't be an area of abuse.

Mr. Hains: Mr. Chairman, I don't think the proposals in C-5 to recognize for the first time in Canadian history the importance of a clean environment by providing for first rank in priority for de-pollution cost would necessarily encourage or discourage imports of contaminants or exports of contaminants, if I understood the member's questions correctly. First of all, the BIA, the Bankruptcy and Insolvency Act, doesn't deal at all with imports and exports of contaminants. I understand the environmental laws of the Canadian government and the provinces would have jurisdiction over these imports and exports, and I understand these regulations to be quite stringent.

So to answer your question, I don't think the proposal in C-5 would encourage the kind of strategic behaviour I understood your question to allude to.

Mr. Shepherd: Getting on to students, I guess it is the clause dealing with student loans. In there there's a relieving provision, and it talks about whether the student acted in good faith. It uses the words ``good faith''. Is that a definition? Do you have a definition of ``good faith''?

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Mr. Hains: I'm not aware, Mr. Chairman, that there is a definition of ``good faith'' in the BIA. I think the situation that came under consideration when this was part of the bankruptcy and insolvency advisory committee's deliberations was that there were some concerns that some students perhaps would travel the world and sit on their hands and enjoy life for two years and then they would go bankrupt in month 25, in which case their debts would be dischargeable. They would come under the 24-month period here.

So I think the good faith provision is to provide some arguments, possibly, to an opposing student loans programs administrator to say to a judge that the person really did not act in good faith and wasn't looking for a job during that time period, etc.

I'm not sure that we need to define it in law, but the principle is there and I think it's an important one.

Mr. Shepherd: You also have section 48, which has to do with farming and fishing. I'm mystified, because we have another piece of legislation in the House right now, Bill C-38, which is on a farm debt review agency. Isn't there a significant amount of overlap between those two pieces of legislation?

I know that the Farm Debt Review Agency bill talks about a mediation process, but you define farmers and fishermen in this bill as well. It seems to me that what act he actually falls under is up to a farmer.

Mr. Tobin: I'm not very familiar with the provisions of the other piece of legislation.

George, I don't know if you're familiar with it or not.

Mr. Redling: I believe the Farm Debt Review Act allows farmers a means of renegotiating their loans with their creditors with respect to their farming operations. Section 48 in the Bankruptcy and Insolvency Act simply deals with the ability of someone to petition a farmer into bankruptcy.

What this amendment proposes to do is to expand the definition slightly so that someone can take advantage of that provision even though some of their income comes from sources other than bankruptcy. So they can maintain their status as farmers and fisherman for the protection offered under this bill by that clause.

Mr. Shepherd: I guess what I'm mystified by is the interaction of the two bills. It seems to me that if there's an act of insolvency, a foreclosure, or a power of sale on a piece of property, then a farmer can simply ask for a stay. So a creditor who is trying to get relief under your act would suddenly find themselves tripped up by this second act.

Mr. Tobin: Could we possibly ask Mr. Marantz?

Mr. Marantz: The Farm Debt Review Act provides a means for the farmer mediating or discussing his problem. So when the creditor wants to enforce rights against the farmer, they're automatically bound by the statute. If that process fails, then the farmer is subject to receivership and the bank may repossess the farm and the animals and so forth, but also either the farmer may choose to file an assignment in bankruptcy so as to solve his financial difficulties or a creditor may petition that person into bankruptcy. But that's after the farm debt review process has failed.

So the two pieces of legislation are in fact complementary.

[Translation]

Mr. Lebel: When you refer to a secured claim on real property, ranking even above that of the mortgagee, in cases involving environmental damage, do you realize that you are entering into an area of exclusive provincial jurisdiction? That amounts to changing the status of different types of mortgages.

Wouldn't this provision prove harmful to companies that are sound but could have difficulty obtaining refinancing or mortgaging their property because they deal with substances that may contaminate the environment in which they work?

Such a measure might have a perverse and unexpected effect that would only come to light after implementation.

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Creditors might decide that they would not grant loans to the producer of chemical fertilizers for fear of getting involved in a ruinous affair with a trustee.

Did you engage in talks with provincial and territorial authorities before coming up with this suggestion?

To return to the ill defined role of the trustee, I can remember that some documents we received last fall, I cannot find the passage I'm looking for, it says that henceforth the trustee would have the power to ensure that the bankrupt or his family undergo psychiatric treatment to be paid from the assets.

It seems to me I saw something to this effect. Is it possible? Can you tell me under what clause of the bill it would be? This is what I was thinking about when I asked you on whose behalf the trustee is acting.

I'd like you to answer my first question. You've just turned provincial property law upside down along with civil law. I realize that it is an ancillary jurisdiction but it is likely to have harmful effect on the funding of business.

[English]

Mr. Tobin: On your first comment, about the environmental issues, what the bill proposes is to reorder certain privileges or certain priorities in environmental responsibilities or environmental problems. Those provisions were discussed with the Canadian Council of Ministers of the Environment at the time, as they were discussed with trustees. The objective of the exercise was to try to prevent orphan sites. It wasn't in the interest of trustees, it's not in the interests of the debtor, nor is it in the interests of the environmentalist to see the sites left unattended. Again, the objective was to try to step in and make sure those sites are attended to, and that's what they ordered done.

The second part of it, of course, is to try to deal with where society feels environmental clean-up should rank. The decision, or at least what the bill proposes, is to say it should have a certain ranking for the assets or some of the assets that are on that site.

[Translation]

That was the purpose of the bill.

[English]

To turn for a minute to whether or not the trustee would be willing to handle some of these sites, I think we've tried to build in here measures that would enable the trustee to feel comfortable in going in and dealing with environmentally polluted sites. In fact, what we found before 1992, and to a lesser degree after 1992, was that trustees didn't want to go into areas where there were environmental damages because they would run the risk of becoming liable for them, and no one wanted that.

As to the question of financing, the Bankruptcy Act doesn't deal with the problems of financing certain types of industries. If environmentally sensitive industries are more difficult to finance, it's perhaps because of the nature of the industry, not because of the Bankruptcy Act.

[Translation]

Mr. Mendelsohn might have something to add on this.

Mr. Lebel: Let's take the example of an important producer of chemical fertilizers or any other substance likely to cause pollution.

I agree with you that the company will not consult the Bankruptcy and Insolvency Act at the beginning but it will need to see a banker to borrow $1 or $2 billion in start up money. When the banker finds out that the business is producing chemical fertilizers, he will answer that he is not willing to grant the loan because of the risk of causing inadvertent environmental pollution and the fact that he would have no remedy but would be legally liable for any clean up costs. This is a responsibility that the trustee would hasten to pin on the banker.

So there would be a refusal to lend money to the business. The intended effect would thwart the efforts of the company that is attempting to set up. This is a point I'd like you to deal with in your answer.

Mr. Max Mendelsohn (Legal Adviser to the Department of Industry): The problem is already in existence. Contaminated sites are already mortgaged and if this is not done legally, it is done in practice. In any case, banks will not make loans until they've carried out a soil analysis. They do not take possession of the land without conducting such a soil analysis.

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From a practical point of view, nothing can be done with this land in any case. By giving a priority guarantee, it is my impression that there is no change made to the availability of credit margins assigned to such land.

Mr. Lebel: We're not talking about land this is already polluted and in the hands of a trustee. In a chapter of your reform, you say that you wish to encourage businesses that are able to bring about a recovery.

I would go even farther and say that a business wishing to start up is unlikely to find a mortgage lender, any security or substantive entitlement. If the business is likely to cause pollution one day, may be in ten years, the creditor will not grant a loan because of the imminent passage of the Bankruptcy and Insolvency Act, knowing that if a barrel of 45 gallons of potassium chloride were inadvertently released into the environment, he is the one who would be stuck with the problem rather than the trustee or the group of creditors as a whole. Why would he be willing to make a loan since he is exposed to a greater risk? This is what I am attempting to make you understand.

Mr. Mendelsohn: In the case you describe, I don't think the situation will change because the mortgagee knows that changes will be made to the Bankruptcy and Insolvency Act. The mortgage holder knows from the beginning that if the land is contaminated, there is a problem and his asset will lose value, whether there is a mortgage or not.

Mr. Lebel: I agree with you but...

[English]

The Vice-Chairman (Mr. Valeri): I'm going to ask you to come back to that. You can probably rephrase the question so it can be a little clearer, since you're going back and forth. I think you're trying to give the answer, but it's not quite what Mr. Lebel is looking for.

Mr. Hains.

[Translation]

Mr. Hains: I'd like to remind committee members that in the consultations leading to the proposal, the Canadian Council of Environment Ministers, insolvency practitioners and bankers were all represented. So they did act with full knowledge of the facts.

We do not think that the proposal will result in any changes at all to the funding of environmentally sensitive businesses. Bankers were involved in the development of this proposal.

Thank you, Mr. Chairman.

[English]

The Vice-Chairman (Mr. Valeri): Mr. Ianno.

Mr. Ianno (Trinity - Spadina): Thank you, Mr. Chairman.

I have a couple of questions. I would like to see if you've addressed them in this amendment to Bill C-5. First, when one goes bankrupt.... What I find with a lot of small businesses in my riding is that the frustration they feel.... If it's a legitimate bankruptcy and the person closes down, they can live with that. That happens, unfortunately, and people understand when integrity is involved, etc. What they can't stomach is when someone closes down and the next day, or however long it takes, all of a sudden it's a new company, with the same people, and all of a sudden the creditors and the people who dealt in good faith are left holding the bag.

What have you done to address that? If very little has been done, why? What can we do to make sure legitimate business people are not left holding the bag when scammers are around?

Mr. Tobin: I think we have to understand that the Bankruptcy Act provides for situations where people can't pay their debts, and at the end of day it's very unlikely all creditors will get paid the entire amount owing to them, because if they did then there probably wouldn't be a bankruptcy. The Bankruptcy Act doesn't address whether or not someone can get into business or can't get into business. Those things are dealt with in other provisions, but they're certainly not part of the bankruptcy regime. The bankruptcy regime simply sets out rules for how borrowers, lenders, and creditors behave when a situation arises where someone can't pay their debts.

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In the situation you described, I'm not sure whether the person, as you described it, left holding the bag under your scenario is worse off than they were before. In other words, are they worse off before or after the business has folded and reopened under a different regime? I'm not sure if the bankruptcy act deals with that situation - nor is it designed to deal with that situation.

Mr. Ianno: Who is supposed to deal with that?

Mr. Redling: I can understand the frustration that is referred to here: so-called flips of businesses that go bankrupt. If it is a question of fraud on the part of whoever is doing that, or if it's a question of collusion to avoid paying back on the loan, then there are measures to deal with that under the Criminal Code, and there may also be offences under the Bankruptcy and Insolvency Act. I believe what Mr. Tobin -

Mr. Ianno: You say possibly under the Bankruptcy and Insolvency Act.

Mr. Redling: Yes.

Mr. Ianno: Is there something in the Bankruptcy and Insolvency Act?

Mr. Redling: Well, there are fraudulent preference provisions under the Bankruptcy and Insolvency Act. For example, if a fraudulent preference is being given by a debtor to some related party in this kind of a transaction, then that would be reviewable. So there are some measures in the law.

Mr. Ianno: I'm not talking about when you have one out of ten that is given preferential treatment. What I'm talking about is you're in business for twenty years. All of a sudden you decide that you're going to go bankrupt. Your wife opens up a similar business across the street with a different name, and the people who are owed $500,000 are no longer owed. You're setting up business and you're still operating the next day, but it's not under your name. How should we deal with that?

Mr. Marantz: The question has a great deal of validity. It was a question used on a trustee examination some years ago when I was doing the exam.

The Vice-Chairman (Mr. Valeri): I hope that you answered it correctly.

Mr. Marantz: It's a question of perception in the marketplace, which is always a difficult one.

Mr. Ianno: Are we saying that it's your interpretation that's a perception?

Mr. Marantz: No. This is a key issue, but you then have to go beyond that and ask why John Smith is still running the same business in the same location with the same employees and inventory but none of the creditors are getting paid.

The Bankruptcy and Insolvency Act doesn't say who can or cannot carry on business, so you have to look at the underlying facts that led to these circumstances occurring. This is not a justification for anything, but it's an explanation of how you get there.

Mr. Ianno: Let's assume that it is a scam and it's not a perception. How should the Bankruptcy and Insolvency Act be changed to protect the innocent?

Mr. Marantz: I think it becomes a question of Criminal Code activity. You're now looking at a question of fraud. Certainly if you have a receiver or a trustee who takes possession of the assets under a proper proceeding and then turns around and sells them, and if the principals of the old business form a new corporation and tender to buy them, then, provided they pay a fair price for them, there isn't anything in our law now that says that they can't buy them.

Mr. Ianno: That's the point. How do we change it? What do we do? Is it in your act, or should we find another act to ensure that there is a penalty?

If unfortunately you had the circumstance that you weren't able to keep the business going, then we all understand that, but it's my understanding that in most legitimate cases they won't be able to open up next door next day with their spouse or with a relative, because they have tried in every way possible to keep that business afloat. But now, having seen that there are scammers, what should we do to put a provision in either this act or some other act to ensure that someone who is in effect directly or indirectly related will not be in that business, without taking away the right of the individual to work?

Mr. Marantz: But you're talking about two different things. You're talking about a scam, and then you're talking about the relative buying it. The relative buying it may be a perfectly straight-up, honest obligation. If the relative had money and gave a guarantee to the bank and that relative has to pay the bank off, then the relative is entitled to stand in the shoes of the bank and get the business. That is not a scam.

Mr. Ianno: Yes, but my point is why would it be the bank?

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Mr. Marantz: That's normally who is there first in line, with most of the assets. Ninety-nine times out of a hundred the bank is -

Mr. Ianno: So what you're saying is there is nothing we can do to prevent that.

Mr. Marantz: No. Governments can impose laws to preclude certain people from carrying on business if they have been bankrupt.

Mr. Ianno: And it's not in the Bankruptcy Act. Is that what you're saying?

Mr. Marantz: The government can choose where it proposes to put it.

Mr. Ianno: Where would you recommend it be put?

Mr. Marantz: Probably in a separate piece of legislation.

Mr. Ianno: Similar to this, in Industry? Where should we put it?

Mr. Marantz: A great deal of discretion is involved. I'm only advising government on the statute. I can't make government policy.

Mr. Ianno: But you are also paid to advise government on how to run more effectively, are you not?

Mr. Marantz: I wish it were the case.

Any number of pieces of legislation -

Mr. Ianno: Maybe I'm missing the boat here. What is the bureaucracy paid for, then?

Mr. Tobin: I'll just clarify Mr. Marantz's role. Mr. Marantz has been engaged by the department to advise us on bankruptcy and insolvency legislation.

I'm sorry. I should have made that clear before.

To go back to one of your earlier points, about the bank getting it, generally I think Mr. Marantz was referring to.... The assets available from this company you described are the assets the bank has registered some security in. That's why the bank is getting money for those particular assets. If there are assets over and above the ones the bank would have as security, the provisions of the Bankruptcy Act would come in and those unsecured creditors would have some provision -

Mr. Ianno: I'm not talking solely about the assets. I'm talking about the ability of someone to put their spouse in place, set up with the same client lists, all the way through, and basically set up another business, and there's no protection for the people who gave the materials or the goods or supplies, all the way down the line. I'm not talking solely from the perspective of the law, but how do we change the law to try to prevent this scam from being in place?

Mr. Tobin: What you're getting at, if I understand it, is there are a number of factors. I'm not sure what type of legislation you would want to come up with. I'm not sure you would want to come up with, and I'm not sure whether you could come up with, a piece of legislation. I'll say that right off.

Factors to consider are such things as do you legislate who or who can't be in business? Do you legislate what type of business? You have to get into such factors as how you deal with relatives of people who may have been involved in scams. Some of those factors would have to be dealt with. I'm not sure if I'm in a position today to say it should be in this type of legislation or that type of legislation.

I don't think it belongs in the Bankruptcy Act, because of those issues I mentioned before. I think the Bankruptcy Act makes it clear that if you sell an item to somebody, if you have a security in it, you have certain rights. If you don't have a security in it, you have other types of particular protection involved.

If you're talking about, to use your words, a scam, where somebody comes along and says, well, I'm going to reopen and therefore not have to pay my debt, my point would be if the person didn't reopen and start a new business, I don't think they would have paid those debts anyway. The bankruptcy would have resulted in non-payment of those debts anyway, wouldn't it?

Mr. Ianno: They're not going to be paid anyway, so what's the difference? At least there's a moral obligation on behalf of someone who is in business to ensure their creditors are paid and they're running a legitimate business so other people will go into deals with people so in effect they're not feeling, well, I have to watch because this guy has a reputation for being a scammer.

Mr. Tobin: That's part of it, though. If a person has a reputation for being a scammer, people can protect themselves in the marketplace normally, because they have -

Mr. Ianno: I gather you're not going to answer that part of the question. That's fine.

Mr. Tobin: No, what -

Mr. Ianno: From your recommendation, because yours is solely bankruptcy, which is the best avenue to use to try to put something of this nature in place so in effect Canadians are protected?

Mr. Tobin: I'm not sure what piece of legislation I'd put it in, sir, I'll be honest with you. I'm willing to consider it, but I don't think I could answer right now what piece of legislation it would belong in. Mr. Mendelsohn may have some comments from a practical point of view, if the member wishes.

Mr. Ianno: Sure.

Mr. Mendelsohn: I don't think the Bankruptcy Act was intended to be penal in nature. It's regulatory in nature, and it doesn't deal with the categories of people who can engage in various categories of business. There are certain penal sanctions within the Bankruptcy Act dealing with situations where people commit offences.

The Bankruptcy Act is intended to be business person driven. I guess the major force that would control whether somebody could open next door and succeed is the creditor community, which can decide to deal or not to deal with the person or related people with whom they've had bad experiences.

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What tends to happen is the supplier community shuns people for a while, deals with them on a COD basis for a short while after this, and then extends them credit a little while later. They don't have to do this, but there is a tendency for them to do it.

The Vice-Chairman (Mr. Valeri): Mr. Lastewka, please.

Mr. Lastewka (St. Catharines): I'll be quick. My question was along the same lines asMr. Ianno's, so I'm not going to repeat. But could you tell this committee how many of those in the bankruptcy numbers per year are repeat bankruptcies?

Mr. Redling: Mr. Chairman, according to our records approximately 8% to 10% are repeaters.

The other factor worth noting is those same repeaters don't repeat every other year. It takes on average, based on anecdotal evidence, approximately 8 to 15 years to repeat. There are cases where it happens in the second, third or fourth year. But those are rare. The average repeat rate is over a much longer period.

Mr. Lastewka: Well, Mr. Chairman, I think Mr. Ianno's questioning was apropos. On the one hand, we as an industry committee have been looking to help small business, but we don't want to be tarnished by the fact that we do have repeat bankruptcies. I think it would be apropos for us to find an area in which to face this item Mr. Ianno has brought forward.

My concern was back on the issues related to the students. I became involved in a situation where we started to have accounting firms advising students on how to do it. And, I am sorry to say, it became a profession.

I'm not sure I understood what, in this day and age, your two-year clause is. Could you give us a little bit more information on this? I want to understand it.

Mr. Tobin: Sure. I'll just try to walk through it one more time. The provision is that once a student ceases to be a student, for two years following that date, even if he goes bankrupt, the student loan is non-dischargeable. This loan is not forgiven, so to speak. He still carries the loan with him.

If at the end of a two-year period the student loan has still not been repaid, the student can apply to the court to have the loan discharged. As one of your colleagues pointed out before, there are certain tests he has to meet to have the loan discharged. One of them is that he has acted in good faith. Another is that there is evidence of continued hardship. Then at this point the court can discharge it.

Now the creditor can intervene, of course, and argue the opposing point of view. If in fact the person has been a student and two years or later down the road after he completes his studies he then declares bankruptcy, the normal rules apply.

What this is intended to deal with is those cases where it appears to people when they graduate that one way of getting out of the loan is to declare bankruptcy immediately or shortly thereafter. It is assumed that if he still has the problem within the two-year period or it occurs two years after, then there may be a longer-term problem and it is not a convenient thing for him to do.

Mr. Lastewka: What made you decide on two years and not four or five?

Mr. Tobin: To a degree the figure was arbitrary. But we also looked at provisions of the Canada Student Loans Act, which provides some measure of comfort for students during the two-year period. There are measures that allow the students to either have the interest paid by the creditor or for the payments to be deferred for a certain period of time.

As in all situations, this was a balancing act. Some people felt we were being too hard on students. Others preferred a longer period of time. The two-year period seemed to be a reasonable one given the provisions of the Student Loans Act.

Mr. Lastewka: Can you give me some information on your consultations? You mentioned a number of groups. Have they been part and parcel of coming up with this regulation? I am not sure of your consultation. Is there agreement?

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Mr. Tobin: There was general discussion with the bankruptcy and insolvency community. Frankly, they were somewhat split on the issue. Again, some thought perhaps there shouldn't be special provisions for creditors. This is, in some ways, a special provision for a creditor, for the people who finance the loan. Why shouldn't it be treated like other loans?

By the same token, the people who run the Canada student loans program felt there were instances where there was non-discretion in the loans. They could not refuse to give the loan to a person if he or she met the criterion of being a student.

So it was a balance between the consultations. It was pro and con. Some were for it, some were against it. Some felt we should go further. The American situation allows non-dischargeability for seven years and some were even arguing it should be that long. Hence the two years was very much a compromise.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Lastewka.

Mr. Lebel.

[Translation]

Mr. Lebel: In my previous comment, I mentioned that it was strange that this legislation was not the responsibility of the Department of Justice. You have heard the members' concerns. There is constant talk about bankruptcy fraud but very little about protecting the public. We talk about protecting the bankrupt as well as the creditors. One of the officials answered that the trustee acted on behalf of both and that he was an officer of the court.

Do you not think that the creation of a professional trustee's corporation with an appropriate code of ethics would eliminate a great many of the difficulties you encounter in attempting to regulate events through legislation? That is my question.

Would this not be a preferable approach rather than attempting to correct all sorts of situations with a legislative bandage and patching up all the cracks? Because that is exactly what we are doing with this reform. First of all, we should create a professional code or a professional corporation for trustees with internal audit powers, it would be a kind of trustee monitoring trustees. It maybe a funny way of putting it but I think this would enable us to achieve many different aims.

As I understand it, the bill gives the trustee two choices in dealing with polluted or contaminated land; he may carry out a clean-up operation using the realizable or realized assets and charging the costs to the mortgagees if he considers that to be to his advantage; otherwise, he tells the mortgagees to take back the contaminated land and to clean it up at their expense. He would give up the land.

Mr. Redling: Mr. Chairman, I'll attempt to answer the first question.

[English]

There is a code of ethics for trustees that is prescribed by the Bankruptcy and Insolvency Act. I take the point that it is important to have the trustee community involved in investigations and in the integrity of the bankruptcy process. I'm not certain having a bankruptcy code by trustees and only for trustees would, however, solve the kinds of problems being identified here, namely the flip-flop situation. This goes beyond the trustee community.

The issues we were discussing concern where individual debtors may be attempting to avoid their obligations. I'm not sure a code of ethics for trustees would solve this problem. This is more of a potential criminal problem and a fraud matter. It may be a preferential treatment problem under the Bankruptcy and Insolvency Act and I think there may be measures in place to deal with it. I'm not sure a code of ethics by trustees alone would help solve that.

Having said this, Mr. Chairman, I should point out that my office is in discussion with the trustee community. There is a national association of trustees. The purpose of those discussions is to see how we can involve them more in the integrity of the system, in terms of the licensing and in terms of the discipline. Those discussions are ongoing.

Thank you.

The Vice-Chairman (Mr. Valeri): Thank you.

Mr. Hains, do you have something to add?

[Translation]

Mr. Hains: As for the second question, the trustee or the practitioner has at least two choices. He may comply with the order and this would become a cost of administration from the assets; he may contest; he may ask for more time to study the economic viability and lastly, he may decide to give up the land.

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When he gives it up, does the land revert to the mortgagees? That is your question. Technically it's an abandoned site and the mortgagees would not be interested in getting too close for fear of being caught up in the requirement to carry out a clean-up. So it would not revert to the mortgagees because there is no one looking after it. It is abandoned.

If I may...

Mr. Lebel: You're taking my time and I have another question.

Mr. Hains: Good enough.

Mr. Lebel: When a trustee decides to give up the land and realized assets elsewhere, for example by making a profit from the sale of assets, having released himself from the obligation to clean up the land, he would be sharing a dividend realized from other profitable assets and telling the creditors to manage as best they can with the real property. If the creditors are not willing to touch it, he will then tell the government to clean it up. In such a case, each of the bankruptcy creditors would also to stand to earn a small dividend, as it is referred to in Bankruptcy Law.

Do you not think that your bill should require the trustee to carry out a clean-up from the assets of the bankruptcy before the dividends are distributed?

Mr. Hains: It's an excellent question that was put to me only three weeks ago by colleagues from the Department of the Environment of Quebec, whom I was meeting to discuss this subject. There were a number of matters of interest to them, particularly the one raised by Mr. Lebel.

When a site is abandoned, the trustee may decide to realize the other assets and start disposing of them. In the present Bankruptcy Act, I'm not talking about Bill C-5, there is a provision enabling a creditor to file a contingent claim. The Department of the Environment could say to the trustee that you have abandoned this site because you do not think it is economically viable to clean it up, we have done a preliminary estimate and here our temporary claim on this particular site.

The trustee would receive the temporary claim and may ask that it be assessed in detail and confirmed. Would it amount to $70 million or $25 million?

While this is being done, the trustee who is realizing the other assets would have to put in thrust a certain sum to satisfy the temporary claim in recognition of the fact that if Parliament were to approve this bill, the claim is a priority one, not only for the realization of the contaminated site which he abandoned in any case but also for any contiguous site. If he were to realize the contiguous site, the total sum of the realization of such contiguous sites would have to be put in trust. Since any sums resulting from the realization of the contaminated site and the contiguous sites would be an ordinary claim on the assets as a whole, he would also have to keep this amount in reserve. He would not be able to distribute all the dividends.

My colleagues from the Department of the Environment also asked me what would become of the abandoned site. The Department of the Environment would be responsible for cleaning up the land and confirming the cost of such a clean-up. The contaminated land would then recover commercial value, it would be sold and the amount would first of all be used to refund the Department of the Environment.

[English]

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Lebel.

We will go to Mr. Bodnar please, and then to Mr. Shepherd.

Mr. Bodnar (Saskatoon - Dundurn): I will be very quick on this. Maybe you can help me out, since I don't have a copy of the act before me. You've made reference to the two-year waiting period for attempting to discharge student loans. Is there a definition of student loans in the act?

Mr. Tobin: I believe in the act the definition is that used and referred to under the Canada Student Loans Act.

Mr. Bodnar: Is this the only definition for student loans?

Mr. Tobin: It says the Canada Student Loans Act and a corresponding provincial program.

Mr. Bodnar: In other words, if a bank gives a credit card to a student, they could not claim that because the student is using this money to get through university this is a student loan. Family loans cannot be claimed as student loans either.

Mr. Tobin: No.

Mr. Bodnar: Thank you. This is all I wanted to cover.

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Mr. Shepherd: I'm back at the priority of environmental clean-up. I find it incredible that some of these financial institutions didn't raise some exception about the way this is being implemented. I can hardly think of too many businesses that don't pollute or don't have the potential of polluting: marinas, gas stations, and steel fabricators. I have constituents in my riding who now have polluted sites and can't get institutional financing.

This takes it one step further, doesn't it? It says you have a clean site today, but if you want to file your mortgage, I don't have the slightest idea what you're going to be doing in the next three or four years. You may well pollute that site. We're talking about the potential for pollution. I would conclude that this would have a traumatic effect on commercial lending in this country.

Mr. Tobin: I'll ask Mr. Mendelsohn to give it from his experienced point of view, but I can say that the provisions that are in Bill C-5 were discussed at length with the lending communities, the environmental people and the business community.

What you have before you is very much a compromise. I would argue that some of the environmentalists would have liked to have seen a larger or wider priority or a priority on a wider range of goods or assets. The lending community might have wanted to see a narrower one or one that was in the bill as it is right now. The trustees, those who are ultimately going in, found that the provisions in the existing act didn't allow them to go in.

Both sides, creditors and environmentalists, felt that was not good. They wanted someone to go in at least to turn the taps off. It does two things: it means that the site is not further damaged and it allows at least a creditor to say that we'll get some sort of idea of how bad the damage is.

Before I go further, I'd like Max to just comment on it from his perspective, if that's all right.

Mr. Mendelsohn: I believe that the tradition of security for environmental clean-up is not as dramatic as it would first appear. The reality is that right now, in some provinces, there is no security for environmental claims. In others, security exists, such as in Ontario, where the ministry, as I understand it, does have security against a contaminated site and contiguous sites.

More significantly, environmental legislation provides that the owner of the site, from time to time, including future owners who are not involved in the process of polluting and mortgage creditors who take possession of those sites, is responsible for the clean-up in any event.

That being the case, whether or not there is a mortgage or a prior charge on the site, as a practical matter there is a charge on the site. If the pollution exists, the value of the site is diminished accordingly. Whether there is a prior charge for clean-up or not doesn't change the fact that somebody on the site is going to realize less to the extent of the cost of the clean-up.

For example, a mortgage creditor who has a million-dollar mortgage on the site, if it is discovered that there is a $600,000 pollution problem on the site, knows that the value of that site has been diminished by $600,000 in any event. The next person who contemplates purchasing it will pay $600,000 less, whether or not there is a mortgage or a priority in favour of the environmental authorities. It really doesn't change all that much.

Mr. Shepherd: It changes a lot because it makes the assumption that they're going to clean up the site. The reality we're talking about is the potential. We're talking about mortgaging the potential for pollution problems.

When people go into a financial arrangement, certainly they assume the worst. The worst usually is that I can realize on my collateral. Now we have to take that one step further. For all I know, we don't even have the scientific knowledge to know what polluting acts you're undertaking today.

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As a result of that, one of the concerns of the government is financing small and medium-sized businesses. What is the effect of this legislation on small and medium-sized businesses for arranging financing in this country?

Mr. Mendelsohn: Typically, there are two categories of situations if we're talking about new financing being put on a property. Either there already is or there isn't an existing problem situation at the time of the financing.

Typically, financiers, such as bankers and mortgage companies, require environmental reports before lending on properties. So if there is an existing situation, they will not lend, or they will reserve for the cost of the clean-up. So that situation exists already.

They also know that if, in the course of a financing, even if there does not exist a situation at the outset, a contamination problem arises, the value of their security will be diminished. That has already been factored in to the lending equation.

Mr. Shepherd: Are you telling me that property doesn't trade hands in this country with pollution problems on those sites while still trading at a fair market value that would not indicate the clean-up problem?

Mr. Mendelsohn: No, I would suggest that properties trade from time to time without environmental assessment. Properties are seldom financed without environmental assessment at the present time.

Mr. Shepherd: To me, creditors and mortgage lenders are risk averters by definition. So you've added one more element of risk, the unknown, as they're ranking insubordination to a clean-up order.

Mr. Mendelsohn: Our experience has been over the past number of years that at the stage of enforcement of security, if we can move on to that stage, mortgage creditors, as part of the due diligence before they will agree to take possession of their security, do an environmental assessment. If at the time when they are contemplating the enforcement of security they find that there is a major environmental problem, they will walk away before they will take possession. We believe that will not change because there is a legal charge on the property. That situation exists today.

Mr. Tobin: I have one point that perhaps we have not made clear enough, Mr. Chairman. The priority is only on certain parts of the assets. It's only on the real assets of that property and the contiguous properties that are related to that one. So if in fact the concern has properties elsewhere, those are not subject to the priorities proposed here in Bill C-5.

I think you've raised a valid point in terms of the government's interest in the financing of small and medium-sized business. I would agree with you that this obviously is a priority.

I think what Mr. Mendelsohn was saying is that environmental concerns with respect to financing are there already. What this bill tries to do is also respond to another concern governments also face, which is when you've got a polluted site and there is a bankrupt. This is not when you have a polluted site and the person is insolvent, but only if you have a polluted site and the person who owns it is bankrupt. It concerns the best measures you can take to try to ensure that the site gets cleaned up in some way.

So it very much is a balance, but I think the problems of financing and environmentally sensitive sites are there regardless.

Mr. Marantz: Mr. Chairman, the amendment was designed to deal with a situation in which there was a business failure in a situation that could have an environmental problem. Banks and other institutions are always financing paper mills, oil refineries, paint factories and fertilizer plants. They know there's a certain risk. As long as the business continues and operates, the risk is maintainable - the environmental ministries have standards and the businesses maintain them.

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When you run into a default situation, the lender has to make the decision whether to take possession of the property to realize his or her security. Those of us in the profession have been involved with defaulting oil refineries and paper mills, where somebody has to ask whether we should bite the bullet. This removes the uncertainty and enables the lending institutions, which are at risk because they have the deep pockets, to have an assessment made of the site to determine whether or not it's worth their while to take it over, and try to rehabilitate and sell it.

It has a neutral economic impact as far as the creditor recovery is concerned, because in every case the environmental authorities have the right to demand whoever is in possession, care, and control of that property to remedy it if there's a problem. This only recognizes the fact that this exists, but it makes it a little easier for the environmental authorities to take control of the property where the property has been abandoned and there's no one to do the remediation.

Mr. Shepherd: If you're making some selection in your portfolio of management - if you're the Royal Bank or whoever - you're going to shift away from commercial lending and do more residential and so on.

Mr. Marantz: No. The lending institutions have been very much in support of this proposal because it enables them to get out. They make their lending assessment on one situation, but now they know that no one's going to come after them because they have deep pockets. They may not be responsible for the problem, but they're targets if they take possession.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Shepherd.

Just before we adjourn the meeting, I want to follow up on what Mr. Lastewka and Mr. Ianno talked about earlier. I've been approached by a number of individuals in the housing market, who have indicated that as sub-trades in the housing market they are often left on the hook for materials and work unpaid because developers or contractors extend the payments that are owed to them and subsequently go into bankruptcy. The bank then takes over the property and sells through power of sale. These are the small one-person, two-person, or three-person operations. As an industry committee, we are concerned about that particular market.

They often come to the offices of members of Parliament asking us to change the Bankruptcy and Insolvency Act to help protect them in those instances. I heard you say earlier that it's not in the Bankruptcy and Insolvency Act to protect these types of situations. Am I correct in that?

Mr. Tobin: The Bankruptcy and Insolvency Act is designed to deal with the disbursement of assets in the case of a bankruptcy. But I think your colleague was asking whether the Bankruptcy and Insolvency Act is designed to deal with a situation where somebody has flip-flopped - somebody has closed under one name and opened on the same site with a different name.

The Bankruptcy and Insolvency Act is designed to deal with that if there has been some sort of fraudulent activity involving the transfer of the assets. There are certain provisions of the act that can deal with that. Similarly, provisions of the Criminal Code can deal with fraud.

I'm not sure whether any piece of legislation says that somebody can't open up a business - other than those that are regulated already, such as securities and things of that nature that are governed by different types of legislation. But I don't think general legislation provisions deal with where people can open up businesses or not. That would be one of the challenges one would face in trying to regulate it.

So it's not in the Bankruptcy and Insolvency Act, and some of the issues you'd have to deal with would involve how you govern, who can and can't open a business, and how you could expand that to dealing with relatives who may or may not want to get into the same type of business.

I think I can appreciate some of the problems you're dealing with when constituents come knocking at your door, because there's not an easy answer to it.

The Vice-Chairman (Mr. Valeri): Mr. Marantz.

Mr. Marantz: Mr. Chairman, you made reference to the building situation. There is, of course, provincial legislation for builders' liens that enables them to take certain steps to protect themselves. I think you're looking at the operation of the marketplace here - which level of legislature should be involved, how much protection there is, and how do trades act in a prudent manner in terms of extending credit. It's a very complex issue.

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The Vice-Chairman (Mr. Valeri): Thank you.

I'd like to thank the witnesses very much for their presentation today and for answering the questions of the members. We could ask the officials to come back at some point when we're looking at the bill. We have a list of witnesses that we will be looking at tomorrow at the steering committee meeting, which I'd like to announce before we adjourn.

Tomorrow, June 12, at 4 p.m., the steering committee will meet to discuss Bill C-5 with respect to the list of witnesses. The location of that meeting will be Room 307 West Block.

Thank you. The meeting is adjourned.

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