EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 17, 1996

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[English]

The Chairman: Ladies and gentlemen, we shall resume consideration of Bill C-5, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act. We shall resume consideration of clause 1.

Before I begin, I have a couple of items. Before I introduce the witnesses, I would just like to say to members of the committee that there are with us today and will be with us every day four experts from the Department of Industry Canada: Jacques Haines, acting director general of the Corporate Governance Branch, Industry Canada; Mr. Jim Buchanan, senior project leader, Corporate Government Branch, Industry Canada; and two outside counsels, Mr. Gordon Marantz, from Toronto, who is not here today, and Mr. Max Mendelsohn, from Montreal, who is here today. For the opposition parties and the government, these are available to you if you have any questions, because this is very complicated legislation. If there is anything you wish to clarify, these people are here for you during the day and you can just go over and see them.

We have, as agreed upon before we began consideration of Bill C-5, witnesses starting today and going straight through until October 1. Once those witnesses are finished, we have set aside two days for other witnesses to be called if there are some last-minute additions to the witness list. We will do clause-by-clause and finish no later than Wednesday, October 9. If in fact we finish earlier, we'll proceed earlier.

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I believe the government is considering, particularly

[Translation]

for Mr. Lebel, the expert from the official opposition.

[English]

a number of amendments. Most of them are of a technical nature. We'll have them available to you in advance of the consideration of clause-by-clause so you can look at them and speak with the departmental officials if you wish to be briefed on these amendments.

That looks after some of the business that has to be dealt with. The committee also has a couple of motions on business to be dealt with. I'll save those for the end of the witnesses. We agreed earlier to give each of the witnesses an hour. That should be plenty of time for consideration.

Before I introduce the witnesses, I would suggest to them they make their opening remarks brief and leave the committee members a chance to pursue their questions and find out more about their thinking.

Without further ado, I'd like to call on the witnesses. Perhaps they could introduce themselves and proceed.

[Translation]

Ms. Tamra Thomson (Director, Legislation and Law Reform, Canadian Bar Association): We are pleased to present our brief on Bill C-5.

The Canadian Bar Association is a national association representing over 34,000 jurists in Canada, and one of our primary objectives is improvement in the law and in the administration of justice.

This submission includes input from the National Bankruptcy and Insolvency Section, the National Family Law Section and the National Environment Law Section.

[English]

You have received the submission of the Canadian Bar Association. The input of the numerous sections of the association and the approval by the association's governing bodies have ensured, in our view, a submission reflecting a balance of views, both within the profession and across the country.

I am Tamra Thomson. I am the director of legislation and law reform for the Canadian Bar Association. With me today are Mr. Robert Klotz, who is chair of the bankruptcy and insolvency section, and Mr. Daniel Dowdall, chair of the Ontario bankruptcy and insolvency section. We are pleased to present the views of the association to you today.

Mr. Klotz.

Mr. Robert A. Klotz (Chair, National Bankruptcy and Insolvency Section, Canadian Bar Association): Good afternoon, Mr. Chair, hon. members.

The Canadian Bar Association was actively involved in the consultative process of the Bankruptcy and Insolvency Advisory Committee and we support the consensus that emerged from that process. We see this bill as a necessary measure to correct and improve upon the major amendments of the 1992 legislation. We applaud the direction of this continuing process and the degree of involvement the government has seen fit to afford us.

I turn to specific matters that are addressed in our brief. First is consumer debtors. We acknowledge the problem, and it's a serious problem, of increasing numbers of consumer bankruptcies. We agree with the government's efforts to promote the use of consumer proposals to avoid and reduce the number of personal bankruptcies. In this regard, we've recommended that the ceiling for consumer proposals be increased above the current level of $75,000. We note the proposal to establish new facts the court ought to take into account in considering whether to grant a conditional discharge. We suggest the fact that the consumer ought to have filed a proposal ought to be eliminated as one of those conditions. Apart from that, we applaud the direction in which the amendments are going.

About the mediation process that has been proposed, again we differ with the direction of this amendment. We have confidence in the skill and ability of bankruptcy trustees to mediate. That is their function: to mediate between debtors and creditors. We're concerned, and we've expressed this in our brief, about the ongoing cost of hiring, training, and equipping official receivers to perform the proposed mediation function. In our view the advantage would be outweighed by the likely costs of this process.

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Turning to the issue of spousal and child support, the Canadian Bar Association took the lead in putting forward the proposal to bring the Bankruptcy and Insolvency Act into the 1990s by reflecting the importance of support obligations in the act.

When the steering committee of the advisory committee failed to reach consensus on this point, the Canadian Bar Association submission to the Hon. Mr. Manley, as well as the lobbying campaign that we created, clearly brought this issue to the fore and delivered a consensus of creditor and business groups to the provability proposal.

Historically, support arrears were not considered a debt in bankruptcy law. This was a good thing, as it saved them from being erased by bankruptcy, as ordinary creditors are. But, as a result, they could not share in a bankruptcy like normal creditors.

This is now an anachronism. It has been fixed to various degrees in New Zealand, Australia, and the United States, and it should be fixed in Canada.

The Canadian Bar Association has acted as a sounding board for comments and criticisms of the draft amendment. Some of these are technical and they are addressed in our submission.

The first technical problem involves sections 62 and 66. Unless this matter is addressed and fixed, there's a possibility that unknowing support creditors will have their arrears wiped out inadvertently by a bankruptcy proposal. This can easily be fixed, and we've proposed a mechanism for fixing it by amending certain provisions in a simple way.

The second technical concern we have is that this amendment should utilize phraseology to show clearly that the new remedy applies to bankruptcy proposals, which, after all, the government is encouraging in this legislation. It is not sufficiently clear at present.

We have difficulties with the priority amendment to section 136. This amendment goes beyond the equal sharing proposal that was recommended by the Canadian Bar Association submission of February 1995. In many cases, as a result of this amendment as it stands, the support creditor will take all of the assets in the bankruptcy and other creditors will receive nothing, despite the fact that support arrears could be satisfied out of exempt assets or out of post-bankruptcy earnings. In some cases this will significantly prejudice small creditors, who will not receive a dividend.

However, we recognize that the importance of family support is such that the social cost of family breakdown ought to be shouldered in part by creditors. But the proposed amendment does not adequately address the problem of collusion. It is essential in this amendment to distinguish between bona fide claims and those that have been structured with the intent to defeat creditors.

This new priority, unlike all others in section 136, can be created the day before bankruptcy by the stroke of a pen. It requires special treatment.

Take, for example, the Australian experience. They amended their bankruptcy act in 1980 to protect pre-bankruptcy property transfers contained in support agreements. This reform was promptly followed by numerous abuses, where, for example, happily married spouses shortly before their insolvency would enter into agreements conveying all of their assets to the partner, supposedly in lieu of support. These conveyances were upheld because no anti-fraud protection was built into the amendment. It had to be fixed in Australia seven years after the protection was brought in in the first place. There is still lots of jurisprudence coming out of that jurisdiction that tests the limits of the fraud limitation.

We must recognize that these cases will arise and our provision must be designed to distinguish the proper transactions, the just ones, from those that are artificial.

The existing anti-avoidance provisions of the act are not sufficient to address this problem. To ensure that the system will not lose the respect of ordinary creditors, we must have a workable anti-avoidance mechanism built into the provision.

The consultative process has continued since the BIAC process ended.

I understand from your comments, Mr. Chair, that the minister may be introducing further amendments reflecting some of these concerns that we've expressed. We would welcome the opportunity to make further submissions, either orally or in writing, should these further amendments be tabled.

The environmental comments will be addressed in a few moments by Mr. Dowdall.

We have two other significant comments.

The first is on the proposed amendment to the Companies' Creditors Arrangement Act. In our view, the $10 million threshold that is proposed should be fluid. It should allow for regional variation or judicial discretion to permit reorganizing companies to utilize these remedies wherever appropriate, if it's deemed to be appropriate by the judge despite falling below that threshold...and secondly, so these provisions are available in some of the smaller regional centres, where a$10 million threshold will exclude almost all reorganizing corporations.

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Lastly, we propose that the seven-year review period be reduced to a five-year period in order to address the issues that have not been addressed in this bill and to deal with the problems that may arise out of this legislation.

Now I turn to Mr. Dowdall.

Mr. Daniel Dowdall (Member, National Bankruptcy and Insolvency Section, Canadian Bar Association): Mr. Chair and hon. members, I'm here to address simply the issues in the draft bill with respect to environmental protection for trustees.

I might say, with Mr. Klotz, that we are very happy not to have a huge list of issues to bring before this committee, thanks in large measure to the cooperation we've encountered in the BIAC proposal and the high degree of consultation that has preceded our being here today.

However, about the environmental concerns, as you know, the bill proposes to give certain protections to trustees and receivers in their involvement in environmentally sensitive properties. We have struggled with this issue, as our brief would show, and we have not been able to come up with a consensus as between the environmental section on the one hand and the insolvency section on the other in our group, with the exception of one particular item, the question of the standard proposed to be met by a trustee in bankruptcy once it goes into possession of an environmentally sensitive property.

The bill as drafted provides that the trustee, after going into possession, would be responsible only for any further pollution it might cause if it was grossly negligent or if it was wilfully misconducting itself. As a group we had difficulty agreeing to that standard. That's an unusually high standard of protection. It was felt it would be better for all the stakeholders to have a code of conduct defined for trustees. I believe the consensus we had was that this would be best enumerated by way of directives from the Superintendent of Bankruptcy, we hope working in conjunction with the trustees association and the Canadian Insolvency Practitioners Association, who are, I believe, the next set of witnesses you'll be hearing from. Indeed, I understand from the people at the CIPA that they are well under way in drafting such a code of conduct in any event, and have been for some time. The concept here is that this would introduce more certainty into the process for all the stakeholders, including, frankly, the trustees, than the more nebulous standard of gross negligence and wilful misconduct.

In our brief we addressed two other topics on which, frankly, we were unable to create an absolute consensus. We felt it important, however, to put into the brief the varying views of the two different sections in our group so the committee could at least see what the debate was.

The issues that were confronted - they are detailed in the submission and I'd be happy to answer any questions about them - relate to the abandonment of contaminated sites by trustees following the issuance of an order to rectify an environmental condition and to a proposal that a statutory lien given for the cost of remedying environmentally contaminated sites be applied to property that is adjacent to the contaminated site.

[Translation]

The Chairman: Do you have any questions, Mr. Lebel, and if so, could you keep them to five minutes?

Mr. Lebel (Chambly): That's fine with me.

Thank you for your presentation. In your first recommendation, you suggest increasing the limit to an amount over $75,000, but you do not specify what limits you have in mind. Could you make a suggestion? Are you thinking of $100,000, $500,000 or $1 million? In the course of your discussions, did you identify an amount you found reasonable, given that you consider $75,000 to be unacceptable, as you say? In other words, what are the reasons behind this recommendation?

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[English]

Mr. Klotz: We have not recommended a fixed position on this point. We recognize that the number has to be reasonable, less than $1 million. I would suggest beginning somewhere around $100,000, but we do not have a fixed position on what that number should be.

[Translation]

Mr. Lebel: Did the Canadian Bar Association study only Bill C-5 and the proposed amendments, or did it take the opportunity to review the current Bankruptcy and Insolvency Act?

[English]

Mr. Klotz: In the practice of insolvency we are required to appreciate far more than simply the Bankruptcy and Insolvency Act. For example, in the consumer field one must have regard to provincial exemption law, pension exemption law, and so on.

We operate on the basis of the framework of laws, both federal and provincial, although we're focusing on Bill C-5.

However, I'm not certain if I'm responsive to your question.

[Translation]

Mr. Lebel: So you did look at the Bankruptcy and Insolvency Act. Is that correct?

[English]

Mr. Klotz: We can't isolate the Bankruptcy and Insolvency Act from what's going on with other legislation, what's happening in society.

I think we haven't proposed a specific figure because there is a lot of statistical information that the Ministry of Industry has available to it to ascertain credit trends and so on. This is something that has to be determined on the basis of those consumer statistics, in which we are not expert in any way.

[Translation]

Mr. Lebel: Did the Canadian Bar Association do a legal analysis of the trustee's role in dealing with a bankruptcy?

[English]

Mr. Klotz: We've examined that role. We're familiar with it in connection with our practices.

[Translation]

Mr. Lebel: You were not struck by the role of the trustee as defined by this bill, because the same legislation on bankruptcy and insolvency has been in place for a long time. Does the trustee represent the bankrupt, the creditors generally or the Department of Industry and Commerce? I think this role should come under the Department of Justice. So I'm asking whether you looked into the legal nature of the role of the bankruptcy trustee?

[English]

Mr. Klotz: There are a number of responses to that. Let me try to answer on a number of different levels.

One finds that the role of trustee is comparable to a role that's played in many different legal systems, both common law and civil law.

It's my understanding that the purpose of this legislation is not to rewrite the bankruptcy act. To some extent, Bill C-5 is designed to address the problems that were presented or residual problems from the 1992 amendments.

The issue of the trustee's role as such - in effect the essence of the system that revolves around administration by the trustee of a variety of functions - is not something that was before the BIA Committee, nor is it something that I think is of urgent import.

There is no doubt that the system can be improved. However, we didn't go back to first principles when dealing with this issue.

[Translation]

Mr. Lebel: I have to say I disagree with you there. In light of your answer, how can you reach the conclusions set out in the second recommendation if you did not specifically study the legal nature of the trustee's role? You must admit that this is a rather surprising conclusion.

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[English]

Mr. Klotz: Yes, with respect, certainly from a creditor's perspective the sense is that the trustee is very much aligned with the debtor. In the consumer setting the trustee meets with the debtor, gives counselling to the debtor, and assists the debtor in coming to terms with credit difficulties, ushering the debtor through the bankruptcy process. There are a number of functions the trustee must perform purely from the debtor's perspective.

By the same token, there are other functions in which the trustee is a fiduciary for creditors. By the same token, the trustee is licensed federally and has to abide by a code of conduct that is independent of both debtor and creditor.

So there are a variety of roles here. I think the trustees very much feel themselves in the middle of this process. While the road is sometimes difficult, it's a road they must follow to try to fulfil their duties to the various different interests, creditor, debtor, and societal.

Perhaps my colleague, Mr. Dowdall, has a further comment on that.

Mr. Dowdall: Only to add that I don't believe the trustee community views its role as being an adversarial role. There is a role outside the trustee's involvement, which involves the courts and where adversarial issues that arise can be adjudicated. I think the issues here relate to the consumer context, where, generally, economics and business efficacy are a dominant concern. I think as non-trustees but as people who are obviously involved in working with trustees on a day-to-day basis we feel because of this middle role the trustees find themselves in they are able to achieve mediation and find solutions to problems in an economically viable manner. We're concerned about the cost of the duplication of that effort.

[Translation]

Mr. Lebel: You raise the issue of the professional code of ethics in the area of insolvency. Have you read it?

[English]

Mr. Klotz: Yes.

[Translation]

Mr. Lebel: Could you tell us something about its provisions? Do you think it is satisfactory in all respects if we compare it to the codes for lawyers, notaries, pharmacists and all the other professional corporations? Do you think it is satisfactory and that it will ensure that these professionals can play the neutral role they are assigned in managing bankruptcies?

[English]

The Chairman: I'll give you a chance to think about it while I go on to the next member.

Mr. Schmidt.

Mr. Schmidt (Okanagan Centre): I have a number of questions. The first one has to do with the first recommendation. You definitely want to change the amount to much more than $75,000. Why?

Mr. Klotz: I think there's a consensus in the credit community that we have a problem with the number of consumer bankruptcies. There is an alternative to bankruptcy that is a responsible alternative, and that is the consumer proposal. The consensus in the creditor community would appear to be that it is better to encourage debtors to take a responsible step of addressing their creditors on a consensual basis through a proposal, and therefore to encourage the use of proposals rather than the bankruptcy option. This is seen as one of the ways to address the skyrocketing statistics. I think we can only do this by, in part, increasing the availability of the proposal route. One of the ways to do that is by raising the ceiling.

Mr. Schmidt: What are the long-term social and economic implications of doing that?

Mr. Klotz: Obviously there's a political decision to be made here. However, proposals proceed by way of consent. If creditors don't like proposals, they can vote them down. The debtor can then proceed to bankruptcy, if that's the appropriate solution. If there's abuse of the system, proposals will be rejected.

I think creditor groups like proposals because they show responsibility. To encourage that kind of responsibility is probably a good thing. I don't know if there is a big downside in this.

Mr. Schmidt: Isn't that option available now? What difference does changing the number make in practical terms? Can't an agreement be made between a creditor and a debtor at any time? How is that related to a number?

Mr. Klotz: Under the act, someone who falls over the $75,000 threshold can always proceed by way of a commercial proposal. The cost is far more substantial, in my experience starting at perhaps $4,000 to $5,000 as opposed to a cost of under $1,000 for a consumer proposal, with its streamlined process.

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That's the short answer - cost.

Mr. Schmidt: I want to move on to your next recommendation.

You suggest that putting in a mediation process is a duplication of effort as between trustees and mediators. Is there not a staging here between the trustee doing whatever they can and, when that process breaks down, a mediator being brought in?

Mr. Klotz: We've made the assessment that we're concerned that the resources that have to be devoted to have a proper, functioning, sophisticated mediation process are not worth the benefit, because in our experience we have confidence in the professionalism of the trustees.

Mr. Schmidt: But isn't your association aware that there is a growing development within the law profession itself of mediation rather than confrontation within the courts and that we all would save a lot of money if we went by the mediation route rather than a confrontational route? Isn't it about time for us to go into the sophisticated mediation process, not only in this area but in all areas? We'll limit it to this area today because that's what's before us.

So why would you maintain that mediation is less desirable than using the trustee route?

Mr. Klotz: We agree that mediation is desirable. Cost efficiency is also desirable. If sufficient funding is devoted to developing a mediation process at the official receiver level, then we will have a good system. Is that cost warranted? Our view is that because ADR mediation is so integral to the function of the insolvency function, this is something that can be delivered by trustees with integrity at far lower cost, and without the necessity of creating a new level of administration, training, staffing, and so on.

Mr. Schmidt: I'll rest my case with this next question on this issue, which has to do with the trustee. If they're so good at mediating now, couldn't there simply be a designation? Let's say there's a group of trustees that can't get a particular solution, but there's a trustee over there who hasn't been involved in this case. Couldn't that skill come in and help in this case? So it has a different name but it really performs that function.

Mr. Klotz: I think that would be similar to what is being proposed in this legislation, except that you would have an independent trustee instead of an OR, an official receiver. I don't know if that really solves the problem we've addressed, which is that this can be done by the trustee on the file.

Mr. Schmidt: I want to go into your other area now. On page 9 you have a series of proposals with regard to technical amendments. Do you have specific proposals in these areas? It's one thing to say that there should be changes, but what should they be?

Mr. Klotz: Proposal 5 is specific. We refer to specific wording here that can be placed into subsections 62(2) and 66.28(2). Those subsections at the moment provide that if a creditor assents to a proposal, then that creditor's claims, even if they would survive bankruptcy ordinarily, will not survive the proposal. That's a problem. Instead of having the word ``assent'', which is ill-defined and one has to go back to English case law or antiquated case law to determine it, we can simply define what that assent is. It's specific written consent that section 178 will not apply.

In recommendation 6, again we've provided the specific wording that we propose, which is consonant with other changes that are being made in this legislation.

Recommendation 7 is much more problematic. I might indicate that we've had significant communication with Ministry of Industry representatives. We have proposed wording, proposed concepts. Likewise, they've bounced ideas off us. We have very much appreciated this kind of involvement. We're working toward solutions. We have no specific proposal there, other than to point out the principles and the abuses that we're both aware of and that should be taken into account.

Mr. Schmidt: Mr. Chairman, does that mean that we will get those amendments before the committee before -

The Chairman: Yes. I didn't want to give an exact day.

Mr. Schmidt: That's all right, as long as they're coming before we do the clause-by-clause consideration.

The Chairman: Absolutely, and in time for you to meet with officials to make sure you understand them.

Mr. Shepherd.

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Mr. Shepherd (Durham): I believe your brief touches on the concept of differences between RRSP products and insurance-related products as opposed to non-insurance products and how they're treated differently under the proposed act. How would you make a definition? Are you suggesting all RRSP products be exempt?

Mr. Klotz: This matter was addressed in the consumer working group of the BIAC, the Bankruptcy and Insolvency Advisory Committee, where I was a member, and a number of different ideas were put forward.

The bar association does not have a formal position. There are a number of possibilities. One possibility, and again it has no official sanction at this point, is to say all contributions up to a certain number of years before bankruptcy are exempt, no matter what kind of RRSP it is, and any contributions within that certain look-back period are not exempt. That's one possibility. There are other possibilities that again could harmonize the treatment of different kinds of RRSPs. The important thing is that the exigibility or non-exigibility of these RRSPs not be so dependent as they are now on the sophistication of the debtor and whether the debtor has a good lawyer. There's something artificial about that.

Mr. Shepherd: You feel some people arrange their affairs in such a way that these products would be exempt, as opposed to investing in other fashions.

Mr. Klotz: Absolutely, and the insurance industry markets these RRSPs on the basis that they're creditor-protected. It's a great marketing tool.

Mr. Shepherd: I see.

Another section of the act that I don't think you've touched on and I would like your comments on is environmental clean-up taking priority over mortgage debtors and whether you see that as a legal problem.

Mr. Dowdall: In the position we've developed, and as in the brief, we do not have a problem with a priority being established against the contaminated land. Functionally, the fact of contamination already operates as a priority for the clean-up costs, because if you have a mortgage on contaminated land and you try to sell it under a power-of-sale proceeding you're going to end up getting the discounted value of the property; in other words, discounted by the value of the clean-up. So at a functional level there already exists a priority in the land for the clean-up expense.

The issue that we address in the brief, and on which there was not a clear consensus, is the question of whether or not the priority the act seeks essentially to codify, the practical priority that exists today and that is going to brought into a lien...whether or not that lien shouldn't extend to other property the debtor owns. There were two poles. The environmental section felt on the principle of debtor-pay the priority lien ought to apply to all property of the debtor, wherever it was situated. The insolvency section looked on that as really third party-pay as opposed to debtor-pay, because the priority would essentially come out of the hands of those who had charges on the other property, and it resisted the view on the basis that the conveyancing costs that would be associated with dealing with that priority in the normal course of conveying thousands and thousands of properties every year would probably outstrip any real practical benefit that would apply to environmental groups.

The proposal you have in front of you is smack in the middle of those two poles. It's that there would be a priority extending to non-contaminated property, but only the non-contaminated property that was immediately adjacent to the contaminated property owned by the same person.

Mr. Shepherd: I see. I guess I'm looking at the economic aspect - I don't know whether you've put any thought process into that or not - the effect that has on lenders per se. In other words, it creates this great uncertainty. Somebody may pollute ten years from now. If I'm giving you a mortgage today, that means I have to go out to your property and have some kind of control over what you're doing with it to protect my mortgage, my hypothecation of the property.

Mr. Dowdall: There's no question that has an environmental impact. But from my observation the lending community has learned to deal with that problem. At the point of lending, it's quite common for them to do an environmental review on a property. They assess what activities are going to be conducted on the property. They've learned to deal with that risk with individual properties.

The priority the lien creates here already exists functionally, as I say, because of the impact of provincial legislation, which can require not only the present owner but future owners to clean up contaminated sites. So in just about any province in Canada if you have a mortgage on land and it becomes contaminated, your mortgage is functionally going to be subordinate to the cost for the clean-up.

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I don't know how much can be done in the context of the bankruptcy act to reverse that process, which has really been put in place through provincial legislation.

Mr. Shepherd: Another area you touched on is the preference of spousal and child support measures. You go on to talk about how to prevent abuse. You mention people splitting up one day prior to a bankruptcy declaration.

How would you see clarifying that? You would have to get into a definition of separation and how long people have been separated and so forth. Do you have any way to define or resolve that problem?

Mr. Klotz: This is the nub of the problem, because when we deal with anti-abuse measures we're addressing the creativity of human beings. In this area people are very creative.

There are a variety of ways in which to do it. Many, if not all, of them have been explored and probed. None are wholly satisfactory.

One idea would be to provide that this priority would be subject to a judge's discretion to eliminate or reduce it based on a variety of factors: collusion, how soon it was before the bankruptcy or the proposal, and so on. This would be an uncertain standard, which would give rise to litigation costs that no one is particularly interested in bearing. That would reduce the dividend available to people. It's not precise, and there's a problem with that.

If we want a provision that establishes time lines, one idea that has been proposed and discussed is that the priority would be granted only if the separation agreement was at least three months prior to the bankruptcy or the proposal. The problem with that, of course, is that once lawyers and practitioners understand this they will make the separation agreement three months and a day before the filing. It's not hard to enter into an agreement and wait three months and a day and then file. It's quite easy. You can plan to do it.

Some of the consensus that I think has been reached and that we would support is first to ensure that there is indeed a separation of the spouses. What we don't want is happily married spouses being able to enter into an agreement for support when that is not ordinarily done between happily married spouses, saying ``I will pay you $100,000 in support'' and as a result $100,000 goes to the spouse by way of support priority. So having a separation requirement would be the minimum.

Second, there should be some kind of limit. I think a consensus may be growing that that limit is appropriate. If the limit on priority is applied, it will still be arbitrary. There may still be abuse up to that limit, but it will certainly cap the degree of abuse that can occur. Whether that's appropriate or not is a political decision.

Those are two instances.

I can assure you that, from my vantage point, many of these issues are being considered, and I continue to supply further ideas in the course of my involvement.

[Translation]

Mr. Lebel: I would like some clarification about your third recommendation. When you refer to the tax treatment of RRSPs, you are necessarily referring to a particular amount. You said in response to Mr. Shepherd that RRSPs that weren't insurance products would be recognized up to a certain amount. You do not refer to a particular time period. Was that intentional? Is this an attempt to try to please everyone, particularly the trustees, the bankruptcy administrators, or is it a response to some legal requirement? That's the important issue.

[English]

Mr. Klotz: Historically most exemptions have been determined under provincial legislation. This is not something where the federal government has intervened in too many areas, except perhaps pensions.

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I think the problem is artificiality. The concern is that whether an RRSP is or is not exempt ought not to be solely dependent upon the expertise or sophistication of one's legal advisers or whether one has purchased an RRSP from a bank or from an insurance company. That's the primary concern.

About advocating a specific amount, I think we recognize this is an issue in which there is a great deal of provincial involvement, both under the insurance acts and in terms of provincial exemptions, which vary quite dramatically from province to province. So this is a matter that requires provincial consensus, I would imagine.

[Translation]

Mr. Lebel: You responded to a question asked by Mr. Shepherd about the rights of mortgage creditors as compared to environmental clean-up considerations.

Is there anything in the bill that would lead you to say that recovered debts, that is money collected elsewhere and therefore independent of the bankrupt's property assets, are compartmentalized? Will the proceeds from the sale of the bankrupt's car, some of the assets or the RRSP be used to pay for the environmental clean-up, so as to leave the mortgage creditor with a first mortgage on a property that has been cleaned up? Or will the environmental clean-up be done first, without jeopardizing the assets recovered elsewhere? Have you studied this aspect of the bill?

[English]

Mr. Dowdall: As it's drafted and as I read it, the bill would provide that the environmental clean-up costs would come first out of the contaminated land but would also be obtainable from land that is immediately adjacent to the contaminated land and is itself not contaminated. If there are other assets of the debtor, say land somewhere else or perhaps even in some other province, the proceeds from liquidation of that land would go first to those having a claim against the property by a mortgage or charge. It would only be in the event there was a surplus from the liquidation of that property that moneys would be payable to the trustee in bankruptcy, who would then distribute them to the creditors generally...which would include the claim for environmental clean-up.

So the charge, the first priority, for environmental clean-up will apply to the contaminated and the adjacent sites. After that, if that's not sufficient, the environmental authorities can claim as unsecured creditors, ranking behind secured creditors -

[Translation]

Mr. Lebel: Is what you just told me taken from the bill?

[English]

Mr. Dowdall: Yes, that's in the bill.

[Translation]

Mr. Lebel: Could you give me the appropriate clause numbers?

[English]

Mr. Dowdall: Yes, it's in subsection 14.06(7). That's the section that creates the lien on the environmentally contaminated site and what was referred to as a ``contiguous site''. The following subsection, (8), provides that environmental clean-up costs are provable in the bankruptcy, which really means as an unsecured creditor claim, to the extent that they exceed the amount achievable as a result of the lien.

The Chairman: Mr. Schmidt.

Mr. Schmidt: I'd like to go back to the environmental part, and in particular the due diligence of the trustee and the relaxed standard, if you like, that applies to trustees when they take over the property and are running it as compared with directors who own the property. The text is reasonably clear, yet it seems to me as if there are some difficulties with this concept of determining personal liability on the part of (a) directors and (b) trustees who would take over in the case of a bankruptcy. You come somewhere in between those positions. I'm wondering if you could clarify the practical difficulty of coming in between those two positions. Both of those positions were taken for very definite reasons, so somehow you must share some other view of the world.

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Mr. Dowdall: I think that with a group of lawyers it was difficult to see a fairly unusual provision in terms of it being okay to be grossly negligent - or okay to be negligent. It's not okay to be grossly negligent.

The big problem we have here is that what the insolvency community has been seeking to find is a mechanism to make sure that responsible individuals are not going to be afraid to take on problem sites. I think we all benefit by having that. Similarly, we don't want to have a situation develop wherein lenders are afraid to lend to environmentally sensitive businesses, because then the latter are going to be underfunded, and we all know that insolvent or underfunded businesses are higher candidates for pollution than well-funded, healthy businesses. That's what our experience as an insolvency practitioner tells us.

We felt it was better for all the stakeholders, including the courts that might ultimately have to take a view as to the sufficiency of the actions a trustee took with respect to a property, to have a fairly detailed code, almost a checklist or a series of responsibilities for a trustee with respect to the handling of environmental property. There was a sort of to-do list: if you do this, this, and that, then you will know that you will be immune from potential liability. What had to be done would be clear for everyone who had to take a view of the situation, and after the fact there wouldn't be the vagueness of whether something done was negligent or not.

Even from the trustee's perspective, we, as lawyers, wonder whether a court would really recognize a difference between gross negligence and negligence and whether or not this might create a false sense of security for both the lending and the trustee community in any event.

So we'd like to build on the initiative that we think is already on the go with the trustees, and that is the question of codification of exactly how they ought to proceed.

Mr. Schmidt: That's a very reasonable position to take.

On the other hand, I would like to ask you this. You said right from the beginning of your remarks that some of these businesses that are environmentally sensitive may be underfunded and may in fact be the very cause of the insolvency that later develops. Who's responsible in this case?

Mr. Dowdall: The concern we have is if lenders are uncertain about what rights they have to get repaid in the event that a business falters, then they will be reluctant to lend to those businesses where that doubt exists. When it is difficult to convince people to lend you money, you're going to end up being underfunded.

Mr. Schmidt: Precisely.

Would the provision you're making here give sufficient assurance that that danger or that resistance on the part of the lending institution would in fact be met? The way things stand now, that is exactly how the lenders operate: they tend to underfund businesses that are environmentally sensitive vis-à-vis other businesses.

Mr. Dowdall: The lending community can speak better than we can for its practices, but there's no question that lenders like certainty. In our view, the greater the certainty that's created, the better off all the stakeholders will be at every level.

Mr. Schmidt: There is the potential for a conflict of interest on the part of the trustee when they act on behalf of either the creditor or the debtor, that they will act on behalf of one or the other. Technically they should be operating for both, but realistically could they operate in the best interests of both parties when in fact agreements are made and they may be privy to information that might influence their advice to a debtor that perhaps would otherwise militate against a resolution of the issue?

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Mr. Klotz: You're not referring to the environmental issue at this point, are you?

Mr. Schmidt: I'm sorry. I've changed subjects now.

Mr. Klotz: I understand your question. Fair enough.

The trustee is in the middle.

Mr. Schmidt: He is, right in the middle.

Mr. Klotz: He's clearly right in the middle.

Mr. Schmidt: So how does he avoid the conflict of interest?

Mr. Klotz: Through professionalism; through a complaints procedure any participant in the system can pursue; through the Superintendent of Bankruptcy; through a licensing process that is quite rigorous; through developing case law that identifies duties the trustees have. Our trustees are considered to be quite professional, and one of the hallmarks of professionalism is the ability to balance these various duties. But clearly it is a conflict.

Mr. Schmidt: If that is the case, then there would be a great variety of trustees who would be licensed. Is that correct?

Mr. Klotz: I don't understand the question.

Mr. Schmidt: There would be many different firms that could qualify as trustees.

Mr. Klotz: There are licensing exams every year and more and more trustees are licensed. There are a fair number of them, yes.

Mr. Schmidt: There would be a considerable range of competition among them?

Mr. Klotz: There is significant competition, which has the effect of driving down the cost of consumer bankruptcies particularly. There is a lot of competition among trustees.

Mr. Schmidt: Thank you very much.

The Chairman: Ms Skoke.

Ms Skoke (Central Nova): Thank you, Mr. Chairman.

My questions are very brief. They concern the child and spousal support. I direct your attention to the amendments to subsection 136(1) and your comments about the priority amendment and the potential for abuse and your recommendations there. Would you recommend that a specific distinction be made in our amendment between spousal support and child support rather than to lump them in this one particular proposed section?

My other question is about a court order on occupation and possession of a matrimonial home, where the matrimonial home is registered jointly and occupied by the spouse and children. What provision, if any, do we find in our bankruptcy act to protect the wife and children where there is a legitimate separation and has been in respect of the matrimonial home? Do you think our amendment has gone far enough by just talking about support, or should it also include the matrimonial home, and should it have a specific provision to provide for that where there is a provincial court order allowing for that?

Mr. Klotz: These questions are tweaking my pedagogical instincts, but I'll try to keep this brief.

The United States has not distinguished between child and spousal support. Neither has Australia in its amendments. New Zealand has applied a provability provision solely for child support. The provincial legislation of which I'm aware - and I don't claim to have all of that legislation in my mind - to my understanding does not distinguish between child and spousal support.

There is no reason, in my view, why we ought to do so. Notwithstanding that I recognize in other areas there is now a distinction between child and spousal support, I do not see that it is appropriate or necessary or advantageous. I must say I haven't specifically turned my mind to it, but neither has Australia nor the United States.

England, for your interest, hasn't made any change to this effect. It's behind the times.

About the matrimonial home, a variety of protections apply. It depends on who owns the home. If the home is solely owned by the non-bankrupt spouse, let's say the wife with the children, the home is hers. If the home is jointly owned, there is what is known as ``the hardship test''. The home will be sold and the half interest owned by the bankrupt realized unless undue hardship is caused to the wife and children. That's a judicial test, and in my view it is fair.

If the home is solely owned by the bankrupt, we have a problem. There is no protection, although as a practical matter the courts will be lenient, will grant some lead time, and so on.

Britain has amended its legislation to provide for protection of the home for one year regardless of who owns it. It may be that's something that should be addressed in the next round of reform. However, I'm aware of no urgency in that respect.

Ms Skoke: I beg to differ. In my twenty years in the practice of law this is a situation that arises quite often with respect to the matrimonial home. Are you suggesting that the Canadian Bar Association would not recommend that we look at it from a legislative perspective and include protection in these amendments for the matrimonial home?

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Mr. Klotz: Let me answer this way. When this proposal was put forward by the bar association it was not intended to cover all the issues that should be addressed in a comprehensive analysis of the interplay between bankruptcy and family law. That was not proposed here. Clearly other issues can be addressed and perhaps ought to be addressed. We would be delighted to have an opportunity to participate in that study, which we would hope would be within a five-year timeframe.

The Chairman: Thank you very much. I'd like to thank the three witnesses from the Canadian Bar Association -

[Translation]

Mr. Lebel: Mr. Chairman, you cut me off rather hastily earlier. I wanted to ask a question of the environmental representative, who misled me.

The Chairman: You can do that on your next round.

Mr. Lebel: I am going to have to watch you just like the others.

[English]

The Chairman: I'd like to thank the three witnesses very much. I know you've been involved with this process through the Canadian Bar Association for many months - in fact years, I believe - and part of the consultations. I think I speak for all the committee in saying we very much appreciate your taking the time to go this extra step and let us know where you still have reservations and differences of opinion. As I said, I know you're in constant contact with the department. If amendments come forward you should make sure you see those amendments and if you have further comments, please let us know. Thank you again for your participation.

Mr. Klotz: Thank you for the opportunity, Mr. Chair and hon. members.

The Chairman: Our next witnesses are from the Canadian Insolvency Practitioners Association.

I would like to welcome the witnesses from the Canadian Insolvency Practitioners Association. Perhaps the lead witness could introduce himself and then introduce his colleagues.

Mr. Ralph Peterson (President, Canadian Insolvency Practitioners Association): Thank you, Mr. Chairman. My name is Ralph Peterson and I am the president of the Canadian Insolvency Practitioners Association. With me today are Bill Drake, a past-president of CIPA, and Alan Spergel, one of our members who practises extensively in the consumer bankruptcy area. Bill, Alan, and I are all licensed trustees, chartered insolvency practitioners, and chartered accountants. I'm also pleased to advise that our submission has been endorsed by the Canadian Institute of Chartered Accountants, which represents 60,000 chartered accountants practising in Canada. We welcome this opportunity to appear before your committee and to provide you with the views and insights of insolvency practitioners across Canada on Bill C-5, the bill to amend the Bankruptcy and Insolvency Act and related statutes.

The 820 general members of the Canadian Insolvency Practitioners Association represent the majority of professionals acting as trustees in bankruptcy and as receivers, agents, and consultants in insolvency matters. We are on the front line each day, implementing the provisions of the Bankruptcy and Insolvency Act. Our members have been involved in discussions with Industry Canada and other stakeholders, and in general we support this legislation.

CIPA participated in the Bankruptcy and Insolvency Advisory Committee through seats on the steering committee and on most of BIAC's working groups and task forces. In addition, several of our members contributed their time and expertise to BIAC's deliberations as representatives of other organizations.

We have prepared a detailed technical brief, which we are submitting today. That brief addresses a wide range of specific issues and provides some recommendations for refinements in the bill that we believe will better serve its overall purposes.

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We do not propose to go through that entire submission before you today. Rather, we would like to comment on a few issues that from our unique perspective, as that of people who work daily with the practical realities of bankruptcy and insolvency in Canada, seem to be the most important.

As we comment on some of the main issues raised by the bill you are considering, we will be recommending changes we believe will improve the ability of this legislation to meet the social and economic purposes for which it exists. The basic purpose of this legislation is to provide an orderly, fair, and efficient way to manage insolvency situations. It meets that purpose by providing debtors and creditors alike with the clear ground rules that are needed to operate in an economy where sometimes bad things happen. It does so by striving to balance the need to rehabilitate and protect the individual's integrity with the need to protect the interests of the creditors involved. In the absence of a bankruptcy and insolvency system, the normal kinds of business and financial risks that are essential to the proper operation of the economy would be intolerable, both for individuals and for companies. We stress this broad purpose of the legislation because we believe it is important to understand that an orderly, fair, and efficient bankruptcy and insolvency system has implications not just for those who become involved in bankruptcies or insolvencies but for the community as a whole.

As we look at the changes proposed in Bill C-5, it is useful to look briefly at the last set of major amendments to this legislation. The 1992 amendments aimed to achieve greater efficiency in the system. The greater the cost in time and resources involved in resolving an insolvency the less is left to satisfy creditor claims or to permit the insolvent person to become re-established. Also, the 1992 amendments aimed to encourage insolvent individuals - and we're talking here about consumers - to submit proposals to their creditors through which they would undertake to make payments to satisfy their creditors rather than declaring bankruptcy. The assumption was that the creditors would be willing to respond by working out compromise solutions with the debtors.

Proposals were seen to be desirable because they provide a means for people to meet their financial obligations, at least in part, and because they would result in greater recovery by the creditors than would have resulted from a bankruptcy. But it hasn't worked out that way. Last year, out of almost 79,000 consumer insolvencies in Canada, only about 4,100 were resolved through proposals. The rest went bankrupt.

Since Bill C-5, like the 1992 amendments, aims to promote the use of proposals to resolve insolvency situations, we believe it is useful to examine some of the reasons those earlier amendments were not more successful in encouraging wide use of proposals. My colleague,Alan Spergel, will now comment on some of the barriers to these proposals.

Mr. Alan Spergel (Member, Bankruptcy and Insolvency Act Task Force, Canadian Insolvency Practitioners Association): Three main barriers prevent insolvent individuals from making proposals and inhibit creditors from accepting them. Sometimes, when not much money is in play, with small debts, limited assets, and limited ability to repay, proposals may simply not be cost-justified for either the debtor or the creditor. In certain instances the debtor has already exhausted all of his or her assets before acknowledging insolvency. Higher costs are involved in proposals than in summary bankruptcies. Efficiency would suggest that where the costs of arranging and monitoring a proposal outweigh the value of the debts involved, it simply makes no sense.

Secondly, some creditor behaviour also acts as a barrier to proposals, although banks and other lenders are becoming more responsive to the needs of small and medium-sized enterprises. Managing a proposal involves extra work and costs for the lender, and especially where the creditors are not familiar with the concept it has been simpler to call the loan, force the bankruptcy, and take the write-off, because creditors are not always convinced there's a net benefit in accepting the proposal.

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A last barrier is that credit rating agencies tend not to acknowledge any difference between a successfully completed proposal and filing for bankruptcy. Bankruptcy wipes the slate clean seven years after the nine-month administration period. People who have completed proposals, which normally take two to three years instead of months, continue to receive bad credit reports for another seven years. This is a clear disincentive.

Like the 1992 amendments, Bill C-5 aims to encourage consumer proposals. Many aspects of the bill will result in current barriers to successful proposals being perpetuated. As we have said, one of the greatest barriers to consumer proposals is cost justification. It becomes important that the procedures be as simple and straightforward as possible.

The reporting requirements in Bill C-5 can be improved to meet that test better. In our detailed brief we volunteer to work with the Office of the Superintendent of Bankruptcy to streamline the reporting and notice requirements further. Bill C-5 does nothing to address the credit rating impact of proposals. In fact, it introduces a risk that in cases where a debtor who has attempted to develop a compromise solution finally opts for bankruptcy, he or she may ultimately find themselves subject to a conditional discharge order. In other words, they may be worse off than if they had simply declared bankruptcy: once again, a disincentive where an incentive is what should be called for. Our detailed brief includes recommendations to address this problem.

We also note a good change proposed in the bill, permitting joint consumer proposals. However, this change needs to be extended to include non-consumer proposals, which would be especially beneficial in the small business sector, where the main assets backing loans are often marital property.

The dollar limits established in the bill may still be too low. In its effort to encourage proposals, Bill C-5 would make the failure to make a proposal a fact that could lead to a conditional discharge for the bankrupt. That's simply the wrong approach. It undermines the predictability that is an essential feature of bankruptcy and could stretch a process that is intended to be clear and quick into a long and uncertain affair.

In a similar vein, Bill C-5 would require the trustee to give his or her opinion to the court as to whether or not the bankrupt person ought to have made a proposal. That requires a moral judgment after the fact, and it's an inappropriate onus to place on the trustee. The statute provides debtors with the option of choosing between proposals and bankruptcy, depending on such myriad circumstances as a state of mind. This requirement would compromise that option.

We make recommendations in both these areas in our brief. Basically, we recommend that failure to make a proposal should not be a fact that may compromise the discharge of a bankrupt.

Another area in which we believe the provisions in Bill C-5 actually work against their stated goals is the proposed changes to section 68 dealing with surplus income. The intent here is fine. It is to make sure that where circumstances allow, a bankrupt person will continue to work to reduce his or her debts prior to discharge. The specific changes called for in the bill, however, won't achieve that goal. The recommended process itself is cumbersome and wasteful of resources, both the resources of the estate and those of the official receiver's office.

The process is in danger of being inflexible. For example, the current requirement that 100% of earnings over a set limit be considered surplus and paid into the estate may or may not make sense, depending on circumstances. It can certainly be seen as a disincentive to any effort to earn income above the established limit. The idea that the amount the bankrupt ought to pay should be fixed in dollar terms is simply unrealistic and fails to recognize that circumstances can change during the period of administration. In our brief we make a range of recommendations for improvements, including a strong argument that rather than setting a specific amount to be paid we agree on a formula that will apply. Our experience is that it is the most effective and beneficial approach for debtor and creditor alike.

My colleague, Mr. Bill Drake, will now discuss additional comments contained in our association's brief.

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Mr. William J. Drake (Chair, Bankruptcy and Insolvency Act Task Force, Canadian Insolvency Practitioners Association): In our view, one of the characteristics that mark some of this bill is a tendency to introduce additional steps and additional processes into the system. The law works best, in our experience, when it is simple, straightforward, and cost-effective. We don't think there's any clearer example of this tendency to add unnecessary steps than the proposed section 170.1, which would introduce a new mediation step through the official receiver at the time of discharge of the bankrupt. It complicates the process. It introduces additional uncertainty. It costs money.

The courts, we believe, are fully competent to apply the law without this bureaucratic intervention, provided those courts recognize the responsibility. At present, however, courts in some provinces deal with bankruptcy matters quickly and efficiently. Others do not. The extra level of mediation proposed in this bill may be intended to address this problem, but it would apply equally in all jurisdictions, both the jurisdictions where there is a problem and the jurisdictions where there is no problem.

The potential conflicts of interest it imposes on official receivers and the unnecessary complications to an already complex process more than outweigh any conceivable benefit. As the Canadian Bar Association pointed out just a little earlier, to be effective these proposed changes will also require the delivery of new skills and new courses of study to the official receivers, at additional cost to the taxpayer. If there is a problem with the courts in some jurisdictions, we would recommend a more direct approach to correcting those problems where those problems exist.

We therefore recommend that this section not be included in the final act.

To turn to property that is exempt from seizure, the property varies from province to province, and that is a problem we believe Industry Canada should be working on by negotiating with the provinces to achieve greater equity, while recognizing the need for and the likelihood of regional differences.

It's interesting that this is one of the areas where BIAC was unable to reach a consensus. But on one issue BIAC did reach unanimity. That was that all registered retirement savings plans and similar retirement savings plans should be exempt from seizure in a bankruptcy, subject to appropriate anti-abuse mechanisms. Under the present regime, group pension plans are protected. RRSPs held with insurance companies are protected. But other RRSPs and similar retirement savings plans are not protected. Unanimously, BIAC said they should be.

Because exemptions are a matter of provincial jurisdiction, that change cannot be made just through Bill C-5. However, because of the need for change, self-employed people and other entrepreneurs who rely on RRSPs for their retirement income become significantly more exposed than are members, for example, of a company pension plan. That's inequitable. It can be destructive.

We strongly recommend that along with the improvements being made through Bill C-5, Industry Canada move aggressively to negotiate solutions to this problem with the provinces. We recommend, Mr. Chair, that your committee both monitor and encourage those efforts.

There is one last area of policy we would like to draw to this committee's attention. It relates to the qualifications required for monitors appointed under the Companies' Creditors Arrangement Act and receivers as contemplated by part XI of the Bankruptcy and Insolvency Act.

The current wording in Bill C-5 would require the courts to appoint ``a person'' to fill the role of monitor. The bill is silent on what qualifications that person should hold. BIAC, on the other hand, unanimously recommended that the bill should specify that a trustee in bankruptcy be appointed as the monitor.

Now, obviously the courts will provide some discretion and some protection in their choices. But unless the current wording is changed, there is a potential here for the appointment of inappropriate persons. There have been cases where that is exactly what has happened.

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In my home province of British Columbia there is already a solution in force. Under that province's legislation a receiver manager of a corporation must be a trustee in bankruptcy. This ensures that those appointed to that position are both qualified and impartial.

We are recommending, therefore, that the proposed section 11.7 of the Companies' Creditors Arrangement Act be amended to include a requirement that the monitor must be a chartered insolvency practitioner or, failing that, must be a trustee in bankruptcy.

To conclude our formal presentation I shall turn the mike back to Mr. Peterson.

Mr. Peterson: Our detailed brief contains 33 specific recommendations affecting the matters we have discussed here and a wide range of other matters. We are proposing a number of changes that will better protect both consumers and creditors and that will assist CIPA members to meet their responsibilities as effectively as possible. We look forward to discussing these matters and others with you.

We have chosen to focus on these few key items in our opening remarks because they are fundamentally important. Unless sections 114 and 126 are amended, these 1996 amendments will probably be in force without significant change for seven years. It is important to get it right, although, given rapid changes in our economy, we recommend that the mandatory review period be shortened and this legislation be amended more often to provide the opportunity to address emerging issues.

We believe the bill should work to streamline the system, but some of the amendments actually introduce additional complications. Barriers to proposals should be addressed and proposals should be encouraged where they make sense. We believe the system should be flexible enough to accommodate reality; it should involve a minimum of uncertainty.

It is important to state that on balance Canada's bankruptcy and insolvency system is working well and is meeting the needs of the Canadian economy. In particular, the 820 members of the Canadian Insolvency Practitioners Association, who work daily in this field, want to make it very clear that there is a minimum of abuse in our system, although we'd be the first to say that it can always get better and we include some recommendations to that end in our brief.

We believe that the amendments your committee will recommend to Bill C-5 can improve the system so it can better play its role of providing debtors and creditors with ground rules that make it possible to operate in an economy in which risk is a reality and to balance the need to rehabilitate and protect the debtor's integrity with the need to protect the interest of the creditors involved.

We would be happy to answer any questions you may have on anything we have said today or on the contents of our technical brief. Again, thank you for allowing us to have the opportunity to be here today.

The Chairman: Thank you, Mr. Peterson.

We'll begin the questions with Mr. Lebel.

[Translation]

Mr. Lebel: I would like to thank you and congratulate you on the attention to detail shown in your brief and on your frank approach to the issue of your legal status as insolvency and bankruptcy professionals.

My question will come as no surprise, because I asked it earlier of the representatives of the Canadian Bar Association. However, in light of your brief, it has become much more important. Do you think that because you are appointed to act in a particular case you are necessarily neutral or are you rather likely to come under pressure or find yourself in a conflict of interest situation quite often?

In other words, do the provisions of the current legislation, which was proclaimed in 1992, clearly establish the neutrality of your association as regards the choice of the trustee in a particular case? Do you represent the creditors, the debtors or both?

[English]

Mr. Peterson: If I can follow up on the comments made by the representatives of the Canadian Bar Association, I think we are squarely in the middle. We really are officers of the court. Our duty is to be impartial. We're not on the creditor's side and we're not on the debtor's side.

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Quite frankly, creditors often think we work for the debtor and debtors quite often think we work for the people they owe money to. It would be nice to have everybody like us, but maybe having no one like us is good evidence that we're doing the job we should and we're impartial.

It's a difficult situation. It's part of our professional ethics.

[Translation]

Mr. Lebel: As professionals in bankruptcy and in solvency, how and at whose request do you usually get involved in a case? Are you approached by the bankrupt or the creditors, who turn over their documents to you and say that they want to file a petition in bankruptcy against an individual or a corporation? I know both options are available. What percentage of bankrupts approach you and ask you for professional assistance?

[English]

Mr. Spergel: As you mentioned, both options are available. An individual can be petitioned into bankruptcy and an individual can make an assignment into bankruptcy. In my practice I would say the vast majority of individuals are making assignments into bankruptcy. Clearly, the pressure becomes so great that they have to seek the advice of a professional to try to deal with the pressures of family life and the creditors calling at the home. They don't know how to deal with it. It's at those times that they seek the advice of a professional such as myself.

[Translation]

Mr. Lebel: That's fine, thank you. Don't you occasionally find yourself in a conflict of interest situation when someone who is insolvent approaches you and asks you to manage his or her bankruptcy, because that person becomes in fact your clients?

[English]

Mr. Spergel: As was mentioned before, we are appointed as an officer of the court and are duty-bound to the court. We administer the Bankruptcy Act. Our first allegiance is to the administration of the act. We can carry out the proper administration of the act and at the same time take care of the concerns of both the debtors and the creditors, but we have to be aware of the concerns and needs of both. There is a balancing act, but of paramount importance is maintaining the integrity of the act.

Mr. Drake: I will follow up on that. From time to time there are undoubtedly situations where there is a clear conflict of interest. In those situations our members normally would recognize that conflict and just back away from the situation, to clear the conflict and to go on to something else.

There is a fail-safe within the process as well. Through our professional association, through the various provincial institutes of chartered accountants, through the Office of the Superintendent of Bankruptcy, there is a system whereby any abuses of the process, i.e. a failure to recognize a distinct conflict of interest, are brought out and dealt with. So there's always going to be an opportunity. The professional will recognize the opportunity and manage it appropriately.

The Chairman: Thank you.

Mr. Schmidt: Mr. Chairman, I too want to thank the representatives. I think they made a masterful presentation. I appreciate the detail and also the frankness. It's very refreshing to have it come out like that.

As a result of that I really don't have very many questions. But I do have one or two.

One has to do with this mediation business. If I understand it correctly, you're opposing it because it adds another layer of bureaucracy and somehow extends the period. I assume that's based on the assumption that the courts ultimately have to make a decision if some kind of an arbitrary decision is going to be made. Is that correct?

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Mr. Drake: One of the concerns about the mediation process is that to invoke the process and to manage the particular file through the process adds additional time. Some of the issues are tending to be addressed by the mediation process; for example, on what conditions a bankrupt should be discharged from bankruptcy.

By and large, now the system is working through negotiation between the trustee and the bankrupt, sometimes involving the creditors, and through a presentation being made, very simply, very quickly, very inexpensively, to the court, which grants an order based on a consensus recommendation, if you will, that is brought to it.

The intention of the legislation, as we understand it, is basically to move the process from the court, where in many jurisdictions it is operating very efficiently and very cost effectively, into a process where it would be more involved with the official receiver's office. We believe that the official receivers are already carrying a heavy workload requiring them to do many different things within the process. Our concern is that the cost of equipping them to do the mediation, perhaps the cost of increasing the staff complement of those district bankruptcy offices to handle that additional workload, and the opportunities for them to be seen to be in a conflict of interest are things that should be looked at very carefully. Like the Canadian Bar Association, in our view, on balance, it looks cost ineffective to introduce that concept as it has been designed.

Mr. Schmidt: That suggests that some courts would be inefficient. Others are very efficient. I can see where the court is working very effectively and there's a consensus of opinion. It's just a matter of five minutes and it's done. But in other cases, where it's prolonged, that is not the case.

Is the remedy in changing the court procedures, or is it in introducing something that guarantees that this process won't go on forever? I ask this because courts are very expensive.

Mr. Drake: I acknowledge that the cost of the process.... I think there's an opportunity to find some middle ground. For example, as I understand the court system in Ontario, the courts now direct a mediation process in the right circumstances. So maybe the middle ground is to look for the opportunities to direct the right cases into the right kind of mediation process and take advantage of that as it's developing and maintain the status quo for the 80% of the cases where no change is required.

Mr. Schmidt: If I understand the provisions of that correctly, Mr. Chairman, that's precisely what's intended here, but I'm not sure. I think that's it. To me it made a lot of sense. I'm very interested in this and I'd like to discuss it further.

The other point I'd like to raise has to do with the qualifications of the people who might act in the monitoring process. I think you're suggesting that there should be such qualification. You used a sort of blanket suggestion that it be trustees or persons such as yourselves. I think that's fair.

Would it be acceptable to you to put in there those kinds of qualifications or their equivalent? I'm not sure that we have to designate ahead of time that it has to be this kind of group. Surely other people who have equivalent qualifications could do it.

Mr. Drake: One concern there would be what is the measuring stick for the equivalent.

Mr. Schmidt: Precisely, but your code should specify that so you could determine that.

Mr. Drake: Our suggestions are that it be a chartered insolvency practitioner or a trustee in bankruptcy. The reason for choosing that, in part, is that to earn both of those designations or responsibilities we have to comply with an educational requirement. We have to pass examinations. We have to maintain a level of competence and professionalism. In those there is an objective measuring stick that runs with us throughout our professional career. So it's difficult to see how one could define the equivalent.

Mr. Bodnar (Saskatoon - Dundurn): Over the years I've realized that people who are insolvency practitioners or are registered by the Superintendent of Bankruptcy tend to be chartered accountants. It seems as if very few others get into it. I've found out that practising lawyers are not licensed and cannot be licensed because of the policy of the superintendents of bankruptcy. Do you believe such a policy should continue; that practising lawyers, even though they may meet all the other qualifications, should not be licensed?

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Some hon. members: Oh, oh!

The Chairman: What's your background, Mr. Bodnar?

Mr. Drake: My president has pushed that potato into these hands.

Our association actually does have some lawyers, not practising law, who are very competent insolvency practitioners.

I don't know precisely the reasons why the Office of the Superintendent has inculcated those rules. I believe there is some concern that practising lawyers can be put in a conflict-of-interest position where they are acting both as legal advisers and as principals, and that could create some awkwardness. From our perspective, people who qualify and demonstrate the skills and the capabilities and the professionalism necessary to do a good job are welcome to come and do a good job.

Mr. Bodnar: Is there any greater chance of conflict than with accounting firms doing accounting work and having insolvency branches associated with the accounting firms? These are national firms, primarily.

Mr. Drake: That is very definitely a potential source of conflict. That's why our association, the various CA institutes, and a lot of corporate law will automatically disqualify the incumbent accountant or auditor and anybody who has been the accountant or auditor for the past two years from accepting a formal insolvency appointment.

Mr. Bodnar: All right. That makes sense. But why would members of the practising legal profession be automatically disqualified rather than simply being disqualified on an individual case-by-case basis where conflicts may potentially exist?

Mr. Drake: I don't have an answer for that. We're not part of the establishment of that policy.

Mr. Bodnar: Okay. If there are no conflicts and there are practising lawyers out there who wish to be trustees in bankruptcies, do you see any opposition from your organization to licensing of such practising lawyers? I want to know where the opposition to such a licensing program would be.

Mr. Peterson: To be quite fair, I think we would have to discuss that with our members and in particular our management committee. I don't think we could really respond to you today, but we'd be pleased to do so and get back to you.

Mr. Bodnar: Okay. Then my question would be how soon do you think you could have a response to that? In a month?

Mr. Peterson: I think we could open the topic and put it on the agenda for our next management committee meeting.

Mr. Bodnar: Fine, I appreciate that. Thank you very much.

The Chairman: Ms Skoke.

Ms Skoke: Just a couple of brief questions. I have to continue where Mr. Bodnar left off. That's very interesting.

I trust most professions certainly want to protect their own profession, so about your objection to mediation in bankruptcy, to what extent, if any, does our proposal, this proposed amendment, cut into the role of the trustee and take away from the fees you would earn, and would that have anything to do with your objection to mediation?

My second question arises from the child and spousal support and the recommendations you've made here. One is that you recommend these provable claims not be given a preferred status. Secondly, your recommendation is that the claim be limited to no more than six months in arrears. I'd like to know why you're making those two recommendations.

Mr. Spergel: Can you repeat the first question, please?

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Ms Skoke: Okay. An example is that under the Divorce Act we allow for mediation, but when a client comes to a lawyer, quite frankly we're reluctant to refer them to a mediator, because there goes our business and our revenue. Let's be honest about it. What I'm asking is what threat, if any, is this mediation clause to you when it comes to the conditional discharge process through a trustee? Are you going to lose revenue because you have to refer them to a mediator? Is it going to diminish your role and authority in the management of the bankruptcy process? If so, I'd like to know.

Mr. Spergel: I don't perceive any threat to the mediation role. Currently the role of the trustee is to prepare a report upon the application for the discharge. The activities that are being contemplated in the amendments are really new duties that are being introduced. So when you speak of a threat to the present role of the trustee, I think we're really neutral on the matter.

What we have identified is that we're somewhat critical of what's being proposed right now and we're recommending an alternative procedure.

Is that sufficient?

Ms Skoke: What about the fees or the costs? Does it reduce your fees in any event if a mediator then goes on to prepare a report or a recommendation? Does that cut into your fees as a trustee in any way?

Mr. Spergel: If you're speaking about a summary administration, it would have absolutely no impact on our fees. Our fees are not determined in that manner; they are really based upon a tariff that is set under the act. At the moment that would have absolutely no impact upon our fees.

Ms Skoke: The second question has to do with the family law issue, which has to do with child and spousal support. As I read your brief, you indicate that the trustee in bankruptcy usually is not recognized as having status to become involved in family law matters when a spouse is bankrupt.

You go on to make recommendations. One is that these provable claims not be given a preferred status. In other words, you don't want the child and spousal support to have a preferred status. I'd like to know why. Second, you recommend that the claim be limited to no more than six months of arrears with respect to the child and spousal support. I want to know why you'd make that kind of a recommendation. Considering your impartiality as officers of the court, why would you take this position with respect to a preferred creditor?

Mr. Spergel: We're not trying to be indifferent to the needs of family support, and our recommendation shouldn't be interpreted in that way.

What we have to recognize is that while the individual is an undischarged bankrupt, clearly there is an obligation for him to continue with the monthly support payments. I think what's coming under question are the arrears, the amounts that have not been paid. What should be appreciated here is that the bankruptcy process is really paving a way to allow the individual to catch up with the arrears, because this is one of the very few debts that is not discharged from bankruptcy.

We think that, in fairness, not all the burden should be shouldered by the unsecured creditors. Placing the amounts owing for arrears on family support payments as a preferred claim could easily wipe out any dividends in the estate and thereby leave nothing for the creditors. Recognizing that the debt is carried forward and survives bankruptcy, we thought 12 months was too severe.

So it's not as though the debt is being ignored; it's just an alternative method of handling it. We felt that, in fairness to all creditors and stakeholders in the process, a little bit of balance had to be imposed here.

Mr. Shepherd: Just to comment on some of Mr. Bodnar's comments, I've always been mystified by why lawyers regard the incorporation of companies to be an exclusive legal jurisdiction.

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But to carry on, I would like to ask some general questions. Six or seven months ago I happened to be travelling around my constituency and listening to the radio. A large CA firm, both domestically and internationally, came out with a jingle, and the jingle was more or less ``If you have some financial problems, come down and see us, we'll solve your problems''. I think of that and I think of the spiralling consumer bankruptcies in this country. What's wrong with this act, with bankruptcy legislation in this country, with a general attitude within your profession that promotes the sale of your business in that way?

Mr. Spergel: You're suggesting the profession is promoting insolvency?

Mr. Shepherd: That commercial was specifically directed at people who currently had financial problems. I don't think they were going down there to get creditor information. I think they were going down there to follow along the course of insolvency. What is wrong with what we're doing here that promotes that? Maybe I'm asking you from a professional point of view within your profession, is that acceptable advertising, to promote your services in that way?

Mr. Spergel: Well, not to take it out of context, when one has financial difficulties they don't always necessarily lead to bankruptcy. As practitioners, we've all been involved in situations where somebody has gone through some difficult financial times and we've been involved in a restructuring or an informal proposal, or perhaps credit counselling for the individual, putting them on a budget. So your inference is correct but perhaps the conclusion is not, that we're really advertising for bankruptcy. I think the vast number of insolvency practitioners pride themselves on the number of situations in which bankruptcy has been avoided. We don't always arrive at the conclusion that bankruptcy is the best route.

Mr. Shepherd: How do we account for the fact that consumer bankruptcies in Canada are on the increase and the amount of debt they're going bankrupt for, if you will, has been significantly declining? In other words, people are seemingly going bankrupt for less and less debt than ever before. I don't know what the number is, $10,000 or $20,000, but at one time it was $50,000. Why is it people would appear to be going bankrupt more readily than they ever did before?

Mr. Spergel: Again, I have to refer to my own experience and observations. Quite often, after I have conducted an interview with an individual, the initial outcry is ``I'll do anything but go bankrupt''. There really is a resistance to bankruptcy. This is why I think our recommendation about opening up access to consumer proposals would be a tremendous step forward. If I could express the anguish these people feel in finally facing up to the fact that they have no choice but to declare bankruptcy.... It's not an experience they relish. I think the misconception is that people are readily running out and declaring bankruptcy as an easy out.

Mr. Shepherd: There's more acceptance today than ever before, to my mind. I've met people who have been bankrupt more than once.

Mr. Spergel: Yes.

Mr. Shepherd: That's a rarity to me, but it seems to be more prevalent today.

Mr. Spergel: But the administration of the act has kept up with that. The clearing house concept has been diminished. When one has gone bankrupt once already and is a repeat bankrupt, the second time through a much closer look is taken at the circumstances surrounding the bankruptcy and the conditions that are imposed upon discharge. So there is a balance there.

Mr. Shepherd: Let me ask you one other thing, and that is about the concept of a proposal, as opposed to bankruptcy. You were talking about the fact that so few proposals ever go through and everybody goes bankrupt. To what extent is your ability to collect fees a factor in that? In other words, it's a lot easier to get the fee out of a bankruptcy. There are only so many assets to go around.

Mr. Spergel: Right.

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Mr. Shepherd: As one of your proposals said, it's more costly to implement. To what extent is it purely an economic decision?

As your adviser, I can't afford to go through a proposal. It's going to cost me too much money. I'm not going to make my fees out of it.

That doesn't happen?

Mr. Spergel: With respect to the potential conflict that you see there, as we mentioned in our brief, we are holding steadfastly that the ultimate decision rests with the individual. It is his or her decision. It's not our decision.

Unfortunately, right now there are too many disincentives to the individual's following the proposal route. I don't want to repeat what we've already said, but credit rating has a lot to do with it, as do the length of time involved and other factors, wherefore, when they are given the option, bankruptcy seems to be the easier route to follow and there's a lot more certainty involved with following the bankruptcy route.

Our association is very supportive of reaching forward and trying to research how we can start to have more consumer proposals as opposed to bankruptcy. In my opinion, it's the responsible thing to do.

Hopefully, all of the recommendations we've made today will be acted upon and we'll see those numbers start to increase.

[Translation]

Mr. Lebel: In the preamble to your brief, you say that you went beyond the proposed amendments to the legislation. You also refer to that several times in your conclusions.

I still find it surprising that some employers go so far as to dismiss an employee who declares consumer bankruptcy. Some professional corporations will not allow bankrupt professionals to continue to practice. I understand that the Ordre des comptables agréés du Québec imposes this requirement.

I'm surprised that you are not concerned about this attitude on the part of some professional corporations or employers which penalize individuals for doing something they are legally entitled to do. In the area of bankruptcy, there is still a sort of shame about using this legal provision.

I would have liked you to make a recommendation about this, but you did not. As professional bankruptcy administrators and defenders of the interest of the unfortunate bankrupt, you do not seem very concerned about this problem.

[English]

Mr. Peterson: I don't think we view it as being a problem. I think most of the professional associations will look at the circumstances of the individual member's situation before they'll lose their accreditation.

My home province is Alberta. We certainly saw it in Alberta when we had a number of chartered accountants who got caught in real estate transactions.

As long as the associations look at it...and it's our obligation to talk to the individuals and warn them ahead of time that they had better talk to their associations.

I'm not quite sure of what you mean by ``the employers''.

[Translation]

Mr. Lebel: It is not difficult to imagine that some employers would warn their employees that if they declare bankruptcy, they will be dismissed. That is true of the Quebec Chambre des notaires. Notaries who go bankrupt are no longer entitled to be notaries; they are debarred from their profession. And yet all they did was to use a legal provision that is available to everyone.

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[English]

Mr. Spergel: I think what you're contemplating is two issues. One is where there might be some professional rules that don't allow one to practise a profession if one is an undischarged bankrupt. There are a number of professions that have these rules of conduct. Those we have no control over, nor should we.

However, your comment about the wage earner who is being threatened by his employer that should he become bankrupt he is no longer employable.... Frankly, from a practical consideration there is no duty of the trustee to advise the employer of the bankrupt status. Quite frankly, usually it's a matter between the wage earner and his conscience.

[Translation]

Mr. Lebel: You came here to make recommendations to the committee, to the Department of Industry, and to the government. Would this not be a good opportunity for you to make a recommendation on this matter?

[English]

The Chairman: A very brief response, please.

Mr. Drake: On the point about the individual employer, I would suggest one looks at whether that isn't a discriminatory hiring practice that may not necessarily fall under the purview of the Bankruptcy and Insolvency Act but may fall under the purview of employment and human rights legislation.

On the second aspect, about the professional bodies, my experience in participating in reviews of bankrupt chartered accountants has been that the concern there is protection of the public interest. If the individual has gone bankrupt and he's in a position to be handling the funds of others, then one has to be concerned about whether the mismanagement of one's personal resources is also a reflection of an ability to mismanage the resources of others, who should have some protection.

The Chairman: Mr. Murray.

Mr. Murray (Lanark - Carleton): I'd like to return to this question of barriers to proposals. Mr. Spergel was talking about it.

I think we're all agreed that it's probably better to have proposals rather than to have people going bankrupt, but I understand there was quite a bit of consensus on the BIA Committee on a large number of topics. I'm wondering what the arguments were against bringing in some of the incentives that would favour more proposals - the sort of thing you would recommend. There must have been others arguing against making those changes to the act. Am I wrong in assuming that?

Mr. Spergel: I'm not quite sure I understand.

Mr. Murray: If you are recommending that there should be more incentives for people to conform with proposals rather than to go bankrupt, I'm assuming others were arguing against doing what you are suggesting we should do in the act. I'm wondering what the arguments are against doing that.

Mr. Spergel: Unfortunately we don't always control the environment we live in. We don't have absolute control. We cannot legislate how credit rating agencies rate people's credit. It's largely an educational process, that it's far more desirable for a person to go through the exercise of a consumer proposal and perhaps not take the easier road out than to declare bankruptcy. That's been one of the most difficult hurdles we've encountered. It's difficult when you're counselling an individual who says ``My credit is already terrible, and if I go bankrupt you're telling me it will remain terrible''. It's not such an incentive. However, if you're advising the individual of what the consequences are of the differences between pursuing a proposal as opposed to a bankruptcy and you're able to advise them that their credit rating will actually improve to, say, an R-5 as opposed to an R-9, then that's an incentive.

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Mr. Murray: I'm sorry to interrupt, but, in terms of looking at the legislation for it, I wonder if something should be changed in order to make those incentives part of the law. I understand the arguments. Mr. Peterson explained the example to us. Should we be doing something when we're amending this law to bring in those incentives?

Mr. Spergel: I'm not certain if the act is empowered to govern these credit rating agencies. I believe they fall under provincial legislation.

As well, as an aside, the very users of the credit rating agencies, through the BIAC process, have already been educated as to what the differences are between a consumer proposal and a bankruptcy. They're very supportive of pursuing the consumer proposals, and hopefully sufficient pressure will be brought to bear on these credit rating agencies that they'll comply and recognize the difference. But I don't think it's possible to legislate those differences.

Mr. Valeri (Lincoln): I want to go back to the point in your brief where you refer to RRSPs and similar retirement plans and you recommend that Bill C-5 be amended to exempt RRSPs. Right now they're just under insurance products. When you talk about similar retirement plans, you are talking about money purchase plans, defined benefit plans. You also refer to other property meeting certain characteristics and quantitative maximums adjusted for regional economic indicators.

Do you see any difficulty in going by that route with that type of amendment to the act when we talk about streamlining the process, streamlining the act? If now we have to deal with different regions and different regulations in various regions, might what in fact may qualify in one region not qualify in another region of Canada?

Mr. Drake: The general theme is to find something that is fair, transparent, and consistent across Canada.

Recognizing some regionality is necessary and desirable.

On the basis of that theme, if it is a plan that is designed in order to assist us in our earning years to prepare ourselves for our retirement years, regardless of what name is attached to it, if it's a plan that fits that general parameter it should be treated in the same way, regardless of the name and regardless of the specific structure that's attached to it.

It's hard to get down to specifics, but that's the basic theme we see on that. If it walks like a duck and quacks like a duck, then let's call it a duck.

The Chairman: I'd like to thank you, Mr. Peterson, and through you your colleagues here and the association, for coming out. You can tell by the questions from both the government and opposition sides that there is a great deal of interest. A lot of people have brought their professional experience to bear in their questions, and your responses are very much appreciated for their professionalism, as is, as I said to the Canadian Bar Association, your willingness to participate in a very long and difficult process of getting some consensus on these points. The committee members appreciate the time you've taken with us.

This committee stands adjourned until tomorrow at 3:30 p.m. We'll deal with the business of the committee at the beginning of the meeting.

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