[Recorded by Electronic Apparatus]
Tuesday, October 1, 1996
.1545 
[English]
The Chairman: Order.
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.
[Translation]
Good afternoon and welcome. Our witnesses are Mr. Lessard and Mr. Gauthier from the Confederation of National Trade Unions.
Mr. Lessard, you have the floor. Generally, witnesses have ten minutes for their presentation, followed by a question and answer period. Please proceed.
Mr. Michel Lessard (Treasurer, Confederation of National Trade Unions): Mr. Chairman, I am accompanied today by Mr. Pierre Gauthier, legal counsel for the Confederation. He will give you the substance of our comments, while I will explain to you what the Confederation of National Trade Unions is.
First, the Confederation of National Trade Unions wishes to thank you for giving it the opportunity to submit its observations regarding Bill C-5 to the Standing Committee.
The CNTU has 240,000 members in all sectors of the economy throughout Quebec as well as in Ontario and New Brunswick.
The CNTU is a well recognized Quebec institution, which this year is celebrating the 75th anniversary of its creation.
We find this bill to be of great importance. In the present economic situation, a number of our affiliated unions are facing situations of insolvency and reorganization in the companies in which they are present.
Two examples are the hotel and manufacturing sectors, and we could mention many others. Increasingly, our members are intervening in the context of a bankruptcy or reorganization of the company in which they work. The comments that follow are based on their interventions. With your permission, Mr. Chairman, I would ask Mr. Gauthier to submit to you the viewpoints and comments of the CNTU regarding this bill.
Mr. Pierre Gauthier (Legal Services, Confederation of National Trade Unions): Thank you, Mr. Chairman and members of the Committee.
Rather than giving an overview of the legislation as a whole, we have confined our comments to the principal amendments we would like to see made to Bill C-5.
The first amendment which seems to us important and on which we would like to comment concerns clause 15 and the personal liability of the trustee. Through this provision, we understand that the legislator wants to make it easier for the trustee to take over the business's activities. It seems to us that such a provision practically eliminates all liability of the trustee.
There are two points here that strike us. The first concerns the personal liability of the trustee for salaries. The Supreme Court did in fact rule very clearly on the issue of the trustee's responsibility in the case of St. Mary's Paper Inc.
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We represent people working in unionized companies, but we can also certainly talk about people who are not unionized.
When the trustee continues to operate a bankrupt company, so as to resell it as a going concern, the trustee is considered as an employer. We do not see why the trustee would not have the same obligations as any other backer, any company which purchases a business. We do not think therefore that the liability of the trustee should be limited when he is acting as an employer. On the contrary, it is necessary to ensure that the trustee's obligations are the same as those which the employer had. In our view, the trustee is an employer.
The second point concerning the trustee's liability is related to subsection 15(2) and environmental damage. The wording ``failure to exercise due diligence'' seems to us adequate as a standard, since we believe that the notion of ``gross negligence'' or ``wilful misconduct'' could be established only in the case of very serious fault on the part of the trustee, who then would really never be responsible for environmental damage. Consequently, given the objective sought here, that is to protect the environment, does not seem to us to be at all advisable to reduce the responsibility of the trustee with respect to environmental issues.
The other subject of concern to us is the responsibility of directors. When directors are sued, it must not be forgotten that they were the people controlling the destiny of the business, and able to see how the business was going, whether wages were being paid and what went into those wages. Therefore, it does not seem to us to be at all appropriate to stay proceedings against directors with respect to wage claims. On the contrary, we believe it would be preferable to strengthen the obligation regarding payment of wages.
In our view, directors should be made accountable. In fact, an obligation to make directors behave responsibly will not cost them anything at all since they will simply have to continue to implement the provisions contained in collective agreements.
It also seems to us that the preferred wage claim of $2,000 is far too low. It should have simply been indexed in 1992. It was decided arbitrarily that the amount would be $2,000, but if the amount of $500 awarded in 1949 had been indexed to the CPI, it would have come to $3,500. Consequently, we believe that the indexed preferred wage claim should at the present time be about $3,600.
We are opposed to the fact that a director may make a compromise when he submits a proposal to start a business, we agree that the business should be able to continue to operate and employees continue to work, but we do not think that there should be compromises allowed with respect to claims against the directors.
We also have questions about clause 69.31, which indicates that there will not be any stay of proceedings with respect to secured creditors wishing to exercise their guarantee, whereas there will be one in the case of employees. This seems to us to be an example of double standard. Why would secured creditors have the right to continue their action against directors, and why would employees not have the same right as secured creditors?
One other far more technical point concerns Bill C-36, the Companies' Creditors Arrangement Act, which we believe duplicates the Bankruptcy and Insolvency Act. It seems to us that there are two pieces of legislation here on the same subject. Consequently, we consider that Bill C-36 should be repealed.
The fourth point in our presentation concerns the role of the trustee. We greatly regret that the trustee is not acting for the creditors as a whole, as he should do in our view. Unfortunately, when the trustee assumes the management of a company, he is acting either only in the interest of the bankrupt party, or specifically as if he were a proxy for the secured creditor, which very often is the bank. We think it is important that the trustee should not assume such a role because he is an officer of the court and should play a far more neutral role in this context. Even the fact of obtaining an opinion before assessing guarantees or undertaking any action seems to us inadequate, and the trustee should be formerly forbidden from acting on behalf of secured creditors.
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All of this is very important because we see that the trustee is too often a proxy for the bank and works solely to realize the security rather that in the interest of all creditors, who, obviously, include the employees but also a large number of small businesses which provided services to the company. They will not be represented, and often the trustee will not act for them.
After making these four negative comments, I would like to make a fifth one which will be positive. Clause 126(2) would enable the union to present a proof of claim on behalf of all its members. As everyone in society agrees with reducing bureaucracy, it is far simpler to present one single claim rather than a host of claims when there are 200 or 300 people working in a company. It therefore seems to us logical to allow the union to present one claim on behalf of all its members.
One other important point is that we believe that section 113 of the Act should be improved. At an initial meeting of creditors, employees, as well as the family of the bankrupt party, cannot vote on the appointment of the trustee or inspectors. This provision seems to us completely outdated and should be changed. We understand that it is a little late to do so now, because section 113 is not amended under Bill C-5, but steps should be taken to ensure that employees have the right to vote on the appointment of inspectors and the trustee.
I would like to conclude on the question of preferred wage claims. The preferred wage claim represented three months of wages. In 1949, it was $500. We believe that a good opportunity was missed in 1992 by setting an arbitrary amount of $2,000. In fact, by just applying the CPI to the amount of $500 set in 1949, the amount allowed in 1992 would have had to be $3,400. In July 1996, the amount would have been set at $3,653.
When there is a bankruptcy, too often agreement is reached on an amount based on the gross wages, the paycheck that people receive every week. When a company is insolvent, it is obvious that if the employer wishes to continue operating he will have to ensure that his employees are paid, otherwise they will simply stop working, since they won't go three, four, five or six weeks without getting a paycheck.
Consequently, the employer will very often continue to pay the wages but will not be able to pay other indirect wage costs such as vacation pay, union dues, group insurance contributions or pension contributions, because he will use that money for other purposes. We therefore believe it is essential to stop that practice and ensure that the amount of the preferred wage claim is increased, since $2,000 is inadequate.
That concludes the main points of our presentation. We have focused on what seemed to us to be the most important items. On coming here, we have learned that we are the only union organization to appear before you.
As my colleague indicated earlier, we are well established in Quebec, established to some degree in Ontario and in New Brunswick, but it is important to hear our position, we speak on behalf of the workforce as a whole, and our representations to you this afternoon apply to the Canadian labour force as a whole, whether unionized or not. We believe that the position of those workers is too often disregarded in the case of bankruptcy or insolvency.
I don't know if you would like us to further clarify some of the points raised. We will be pleased to answer any questions you may have.
The Chairman: Thank you very much for your comments. I hope there will be many questions.
Mr. Leblanc (Longueuil): I would like you to elaborate somewhat on clause 15, as you indicated that the trustee does not necessarily comply with the same rules as the former employee during negotiations. You mentioned that earlier. I would like you to elaborate on that a little.
For example, do you mean that the trustee is not required to comply with the collective agreements signed by the former employer?
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Could you provide us with some examples of this?
Mr. Gauthier: We did not say that the trustee did not have to do so. We said that the trustee is an employer and consequently continues to manage the business of the company in place of the bankrupt party. The trustee is therefore like the employer.
It is therefore probable that he will continue this work in order to wind up the company. A few days later, he will publicly announce in the newspapers that he wishes to sell the equipment, the premises or the stock. In most cases, he will want to sell the business as a going concern so that the purchaser may continue to operate. For example, if a plant goes bankrupt, the trustee will try to sell it first as a going concern, with all production equipment, the building, materials, etc.
Mr. Leblanc: I understand the role of the trustee, but you said that the trustee should have the same responsibilities or follow the same rules as the former employer, I am trying to understand.
Mr. Gauthier: That's it exactly. In our view, when the trustee wants to sell the business as a going concern, he is bound by the collective agreement and by the same obligations as the employer. That rule is clear. The trustee who manages a company is in exactly the same situation as the employer.
Let us move away for the moment from the context of insolvency. If a company is sold to another employer, there are provisions in the Canada Labour Code and other provincial labour codes under which the rights and obligations of the employer will be transmitted to another employer. The trustee is in the same position.
There is also an important demand here being made by the trustees. They tell us that, in order to manage the company, they should not have the same obligations as the employer, therefore, they are ready to continue to hire staff, to pay the salary provided for under the collective agreement, but they don't want to be obliged to apply the collective agreement as a whole.
Very often, the trustee will contact the union and explain that he is ready to continue to operate the company, for example a hotel a plant or a service company, that he is ready to pay the employees at the same wage rate, but that he does not want to apply the pension plan or the percentage for vacation pay. This was discussed in a court case in Ontario concerning the St. Mary's paper mill, where the trustee continued to operate the business but without applying the provisions of the pension plan.
That is why we reiterate that in labour law, a trustee who continues to operate a business so as to sell it later as a going concern should b e considered as the owner of the business. We also say that he has the same responsibility as the employer and must apply all the provisions stipulated in the collective agreement.
Clause 15 therefore must be reviewed since the liability of the employer must not be reduced. We should not say that the employer will not be liable if he is not personally at fault.
In our view, the trustee benefits from the presence of the labour force and will benefit from it when he sells his asset as a going concern. For example, in the case of a hotel, if you sell separately the beds or kitchen equipment, the resale value will not be very high. If the hotel does not stop operating, the resale value will be considerably higher. In fact, the customers and very often the general public will not even know that there was a situation of insolvency because the service remained the same. It is important for the business not to stop operating.
Recently, in an area next to your riding, Mr. Leblanc, in Saint-Hyacinthe to be more specific, Volcano went bankrupt and the trustee continued to operate the business so as not to lose the customers dealing with it. Volcano benefits from this. On the other hand, the collective agreement must still be enforced in order to ensure that the same working conditions continue to apply.
Therefore, should we remove the concept of fault, not ask any questions about the conduct of the trustee, not try to determine whether he behaved fraudulently or was guilty of any fault? I would like to point out to you that the trustees want us to remove them of any personal liability.
We are saying that the trustee is an employer, that the economy in general will benefit from the sale of the company as a going concern and therefore the same working conditions should apply to employees.
Have I answered your question?
Mr. Leblanc: Yes.
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I would like to ask you another question. You said that the trustee acted as an officer of the court and that he represented primarily or almost exclusively secured creditors. To the best of my knowledge, trustees generally represent all creditors. As a result of the bill currently under consideration, do you think that trustees will act essentially for secured creditors?
Mr. Gauthier: We are presenting to you the kind of situation that occurs in our experience when members affiliated with the CSN find themselves facing an insolvency situation. According to the legislation, the trustee is expected to act as an officer of the court and to show some neutrality but this is not at all how it happens in practice. In practice, the trustee sees his mandate as coming from the secured creditor who wants to have the business sold at the best possible price in order to realize his security.
We consider it unfortunate that far too often the trustee will act mainly for the secured creditor and we think there's is some danger in taking the position that the trustee need only obtain a valid legal opinion before acting on behalf of the secured creditor. We think there should be a requirement for transparency, equity and independence to ensure that the trustee is acting on everyone's behalf and that all creditors, large and small, workers and providers of services, can take part in the realization of the sale of the assets.
We maintain that one must avoid facilitating the confusion in roles where the trustee acts as if he were merely an agent of the bank. On the contrary, standards must be upheld so that there is total independence between the trustee and the secured creditor. So if the secured creditor wants to take action, he is entitled to do so, he does have remedies and can take part in the bankruptcy mechanism like any other creditor. But by no means must he have a special relationship with the trustee.
Mr. Leblanc: Do you think that there is a special relationship? The bill does not provide any more protection to one or the other.
Mr. Gauthier: It seems to us that when the trustee is told that it is enough for him to request an opinion on the value of the securities before acting, this means that there is an obvious special relationship between the trustee and the secured creditors. In our view, it would be preferable to reinforce the trustee's independence and confirm his role rather than let it evolve in the direction preferred by the secured creditor. We think that there is an important distinction.
The rules must be clear, the trustee is acting on behalf of everyone without any distinction. Often his remuneration will be guaranteed by the secured creditor. We think that such a close relationship should not be allowed and that the trustee should be prevented from acting on behalf of the secured creditor.
The Chairman: Thank you.
[English]
Mr. Lastewka.
Mr. Lastewka (St. Catharines): Thank you, Mr. Chairman.
When I was listening to your presentation I was trying to follow your report also. There are a couple of things I want to get clarified.
You made it sound as though the trustee was not one who would be acting on behalf of the employees, as though the trustee was only acting on behalf of management. I find that difficult, since the intention of the trustee is to work on behalf of everybody to try, I suppose, to save the business or company, as a result saving employees work and creditors dollars and so forth. But you take the attitude that the trustee is not there whatsoever for employees. Was that your intent?
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[Translation]
Mr. Gauthier: Exactly. Our position is that the trustee is not there only to protect the employees. In practice, the trustee is the person who is acting on behalf of everyone and who has the responsibility to manage the bankruptcy and to save the company.
We agree that the first concern is to save the company and the jobs. We are merely pointing out that very often in the cases in which we are involved, the trustee is actually against us. For example, we may have difficulty obtaining access to documents that we would like to consult in the trustee's office.
You will say that these are public documents. Anyone can have access to them but in actual practice, unionized workers have little to do with the trustee who tends, unfortunately, and far too often, to work on behalf of the objectives of the bank and the secured creditor, that is realizing the maximum on the assets.
We would like to see a reinforcement of the trustee's independence and neutrality in relation to current practice because the fact is that generally speaking the trustee does not represent everyone involved. The trustee gives far less attention to employees and to small creditors than to the bankrupt's, the bankrupt company or the secured creditors.
That is why we emphasize the definition of the trustee's role in a bankruptcy. We want the trustee to have the responsibility of the employer because he is in fact the employer.
[English]
Mr. Lastewka: It seems, Mr. Chairman, nobody likes the trustee, no matter where they come from.
The Chairman: Especially when they're bankrupt.
Mr. Lastewka: I'm glad I'm not a trustee.
When you were describing something on the environment, I understood that you didn't like the changes but I wasn't sure what you were recommending. I might have missed it in the translation, or while I was looking at it in the report. Could you just explain what you didn't agree with, or what you recommend?
[Translation]
Mr. Gauthier: Oddly enough, the CSN is in agreement with the status quo as far as the trustee's environmental responsibility is concerned. The current standard, that is failure to act with due diligence, is already a compromise in relation to our position.
We do not want the standard to be raised for the trustee by making reference to ``gross negligence or wilful misconduct''. A positive action on the part of the trustee should be required for him to be held responsible. For example, if the trustee set fire to the building, it would be a case of wilful misconduct.
It seems to me that this is an attempt to lighten the trustee's environmental liability. In our view there is no need to change the present provisions of the act on this matter and the trustee should be required to act with due diligence.
We realize that this is a change the trustee would like to see enacted. They wanted to decrease their liability or increase the level of proof required to show their gross negligence which is serious, deliberate and blatant behaviour.
Wilful misconduct is a serious matter. The trustee may claim that he is not responsible if fault cannot be proved. So I don't see any point in changing that.
We think that the status quo is perfectly adequate since the purpose is to protect the environment rather than protect the trustee.
[English]
Mr. Lastewka: Thank you, Mr. Chair.
The Chairman: Mr. Milliken.
[Translation]
Mr. Milliken (Kingston and the Islands): You've indicated your opposition to clause 13.4 of the bill giving the trustee the right to obtain a legal opinion relating to the security and the secured creditors.
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I can't understand why you're against this proposal since as a result of obtaining this legal opinion that would be made known to all those involved in the bankruptcy, money would certainly be saved for the benefit of workers, employees and everyone else.
Mr. Gauthier: It is indeed a problem because we consider that a legal opinion should automatically be obtained to find out whether the securities are valid and enforceable.
A bank lending money to a company will of course determine whether these securities are valid before committing any money. The bank will insist on having a security in case the company should ever be unable to pay back its loan.
We think it's a mistake to claim that the trustee can act on behalf of the secured creditor simply because he has obtained a legal opinion stating that the securities are valid.
I think we also have to be careful when we say that employees could also save money. It doesn't come free of charge. The fact that the trustee is acting on behalf of the secured creditors reinforces his belief that he is not an employer. He will hire people as if he was taking them off the street, as if they were not unionized and had no rights and very often will make decisions solely on behalf of the secured creditor.
We want to reinforce the trustee's transparency. We want to make sure that he acts for everyone.
We agree with the idea that the business has to be restructured. If bankruptcy can be avoided, all the better! And if we can keep jobs, all the better! But not at any cost! It's not only the secured creditors interests which are to be taken into account in a bankruptcy, the system must work for everyone.
Mr. Milliken: Yes.
Mr. Gauthier: Secured creditors have a priority position and lose the least amount of money in a bankruptcy but this cannot give them the right to act at the cost of everyone else and to control almost all the trustee's activities.
We see the trustee as a officer of the court. The banks are not allowed to pay a part of judges salary and that,s too bad because it would cost the government less. So the trustee must act on everyone's behalf. The secured creditor has the choice of engaging the services of an agent, as is often done. He will often have a receiver appointed before the bankruptcy. So he can hire an agent after the bankruptcy and in such a case we no longer need the trustee.
Mr. Milliken: Thank you, Mr. Chairman.
[English]
The Chairman: Thank you.
If no other member has a question, I'd like to ask a question
[Translation]
concerning your point 6.
[English]
Could you elaborate on that a little bit for me?
[Translation]
Mr. Gauthier: Before the first creditors' meeting after the bankruptcy, a notice will be published in the newspapers inviting creditors to submit a proof of their claim or else the trustee will write to a number of creditors asking them to respond and send proof of their claim.
At the first creditors' meeting, the balance sheet of the bankruptcy is presented, with explanations about how the bankruptcy occurred and the bankruptcy mechanism will be put into place. The appointment of the trustee will be confirmed and inspectors elected to watch over the actions of the trustee.
Section 13 of the act states that there are some people who cannot vote on the appointment of the trustee. In the case of the Crown Plaza Hotel in Montreal, the creditors wanted to have the trustee changed and the employees were not allowed to vote for the appointment of the trustee.
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It strikes us as an aberration that the employees who are involved in the management of the business are not allowed to vote. After all, wage earners nowadays do not have any particular knowledge about the finances of the business.
It's the same for the appointment of the inspectors. Very often it's to the advantage of employees to keep watch over the conduct of the trustee. If the trustee wants to keep the business going or to sell it off, people are very much interested in knowing who will be working or how the business will continue. This is particularly true in small communities where there are mining companies or regional or strictly local businesses. It's very important for these businesses to keep operating so that local people could have jobs.
In these circumstances employees can be inspectors but they are not entitled to take part in the vote for the election of the inspectors. This strikes us as quite abnormal. If someone belongs to the immediate family of the bankrupt, for example, we can understand that this person cannot be appointed as an inspector because of the obvious possibility of collusion but as far as the employees are concerned, there will never be any collusion and they are people who are keenly interested in the entire bankruptcy proceedings, the sale of the business, the resumption of activities etc. So we think that employees should have the same voting rights for the appointment of inspectors.
The Chairman: When there is a union, does the union have only one vote or are all the employees entitled to vote?
Mr. Gauthier: In the case of bankruptcy proceedings there is always a relationship with the value of the proofs of claim. For example, if we represent 200 people in a business, we will vote in relation to our claims and that means there won't be just a single vote for the union. If there are 200 people who would each claim $3,000 or $4,000... It will be in proportion to the claims against the bankruptcy.
We are merely saying that employees should have the same voting rights as any other creditor who has submitted a proof of claim.
The Chairman: Mr. Leblanc.
Mr. Leblanc: I'd also like to make a comment. I think it is quite laudable to allow employees to chose the trustee because they are also creditors, sometimes just as important as the preferred creditor, and they must be represented just like the other creditors.
I therefore support your recommendation and I think it is quite interesting. But, as does the Chair, I too have a short question about class claims.
This is something that will be allowed under the legislation now. In other words, it will be a claim made under the section of the Act allowing employees to chose the trustee as well. The section could be amended so that it can be used as a basis for a class claim as well as for the appointment of the trustee.
Mr. Gauthier: Let me clarify one thing. At the first creditors' meeting, the trustee is usually already appointed and has already begun working to prepare the balance sheet of the bankruptcy. Very often, the vote will be solely to confirm the trustee's appointment. Let me give you the example of the Crowne Plaza Holiday Inn on Sherbrooke Street in Montreal where the employees we represent were laid off on December 24th, Christmas Eve. It was obvious to the creditors that the behaviour of the bankrupt party and the trustee was rather high handed since the employees were suddenly laid off on Christmas Eve at a time when the hotel was continuing to operate.
For a certain period of time workers replaced these employees who were laid off and at the creditors' meeting, the latter attempted to have the trustee replaced, they felt that they could no longer trust him and that he was too close to the bankrupt party. This kind of thing happens quite often and in exceptional circumstances people are all able to vote for the change of trustee. But in the case of the appointment of inspectors, they are regularly elected among the creditors present at the first meeting. We would like to have our word to say on this matter.
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The Chairman: We shall continue our clause by clause work tomorrow.
Do you have an amendment to move to the committee?
Mr. Gauthier: On this question of voting?
Mr. Leblanc: Do you have any precise amendment to suggest?
Mr. Gauthier: No. We are referring to our general presentation.
The Chairman: So if you were able to...
[English]
If you can help us in any way now or before the Senate with any ideas in that way, we would appreciate further correspondence from you.
[Translation]
Are there any other questions?
I'd like to thank the witnesses for their good work.
[English]
We appreciate your coming to Ottawa and spending time with us. Thank you very much.
[Translation]
Mr. Gauthier: Thank you for your attention.
[English]
The Chairman: I'd like to call our next witness, from the Winnipeg Commodity Exchange. It is located, unfortunately, half a block out of Winnipeg North Centre, so I'm not as attentive as usual.
Michel Gagné, are you the lead?
I'll ask Mr. Drabin to introduce himself and the other witnesses.
As you probably saw from the last witness, we'd like to have a presentation for ten minutes or so and then open it up for questions from the members, as this is a bill in which we've all taken a great deal of interest and we'd like to hear people's different perspectives.
Mr. Wayne Leslie (Lawyer, Winnipeg Commodity Exchange): Thank you, Mr. Chairman and members of the standing committee. My name is Wayne Leslie. I am legal counsel to the Winnipeg Commodity Exchange. With me are Mr. Michel Gagné, director of finance for the Winnipeg Commodity Exchange, and Mr. Scott Drabin, who is the vice-president, risk management, Canadian Derivatives Clearing Corporation.
We thank you for the opportunity of appearing today. We provided a written submission on August 2, 1996. Hopefully each member of the committee has that. Having reviewed it, you will see that we are here to support the proposed amendment to section 95 in respect to payments made to clearing houses by clearing members.
By way of brief background, the Winnipeg Commodity Exchange is the oldest and largest futures exchange in Canada. It is a voluntary, not-for-profit, self-regulatory association with approximately 250 members. Its memberships include private elevator companies, cooperatively owned elevator companies, terminal elevators, domestic shippers, exporters, processors, commission firms, brokers, banks, lake carriers, foreign buyers, and other individuals and organizations. Its predominant standing in futures trading has been based primarily on agricultural products.
There are approximately 53 registered clearing members with the exchange, with their head offices in Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal, and Chicago. These members have as their customers parties from all over the world. It is well recognized that many such clearing members have as their customers futures commission merchants from other jurisdictions, including the United States, who in turn have customers throughout the world.
The exchange has been involved since 1988 in encouraging the proposed amendment to section 95, the purpose being to protect the integrity of the derivatives market in Canada and thereby bring such markets in line with markets in the United States of America and the United Kingdom such that no competitive disadvantage exists on this issue.
It's our view that the integrity of the derivative market is directly dependent upon the ability of each clearing house to operate without fear of repercussion. Currently, given the way the legislation is presently framed, there is a very real threat to such integrity. This arises from the reverse onus presently in existence in section 95, which onus is not present as against clearing houses in the United States of America or in the United Kingdom.
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As our submission indicates, the clearing house is a facilitator of transactions, neither gaining nor losing in the transaction, and should not be subject to the jeopardy currently in existence. With the amendment the onus will be on the trustee of the bankrupt, a broker or a futures commission merchant, to prove that payments made to the clearing house within three months of the bankruptcy had as their predominant motive an intention by the payer to prefer the clearing house over the creditors. Payments are made to the clearing house pursuant to the rules and regulations of the clearing house and the exchange.
It is our firm belief that governments have long recognized the importance of derivative markets in improving the efficiency and credibility of the capital markets. Confidence in the capital and derivative markets is paramount, and any diminishment of that confidence can lead to complete deterioration of the markets.
The amendment is strongly supported by the Toronto Stock Exchange, the Toronto Futures Exchange, the Montreal Exchange, the Vancouver Stock Exchange, the Canadian Depository for Securities Ltd., the Canadian Investor Protection Fund, and the Ontario Securities Commission. To the best of our knowledge, there is no opposition to the proposed amendment nor any convincing arguments that would dictate against the same. Our appearance here today is to emphasize our commitment and desire to see the amendment through to its conclusion.
Mr. Drabin is with the Canadian Derivatives Clearing Corporation. It is the clearing house for futures and options trading on the Toronto, Montreal and Vancouver exchanges. Mr. Drabin and Mr. Gagné are here to endorse the amendment and answer any questions you may have.
You will note that we propose some very cosmetic amendments at the close of our written submission. They are simply, we believe, to tidy up the language somewhat to make sure there is no ambiguity in the final product.
That is our submission and we thank you for giving us this opportunity.
The Chairman: Thank you very much for such a concise presentation and some support for the work done by the department in preparing this legislation for this committee.
[Translation]
Mr. Leblanc, do you have any questions?
[English]
Are you going to try to understand the western economy? Mr. Lastewka.
Mr. Lastewka: I wanted to get a better understanding of the risks the clearing houses have now. Could you explain that in just a minute?
Mr. Leslie: The difficulty of the risk as we see it is that there is very little for the trustee to establish in order to commence an action against a clearing house. He need only establish three issues. He must establish that there was a payment made within three months, that it was made by the broker at a time when the broker was insolvent, and that the effect was to create a preference.
Given the very short time-span and the rules and regulations governing the clearing house, there will always be payments made during that period. The moneys received by way of margin with the clearing house are paid to the other side within 24 hours. You can think of it as a wicket, with a buyer and a seller on each side and the clearing house sitting in the middle. As moneys are brought forward by the buyer, they are processed through to the seller. They don't stay per se with the clearing house. So you have a huge volume of funds going through daily and paid out on the other side. A trustee, in looking at that, arguably could say that he would take issue with these hundreds of thousands and perhaps even millions of dollars going through, and by the very action the onus would flip to the clearing house to defend itself.
The courts are clear in saying that the only relevant intent is the intent of the party that paid in. The clearing house is not involved in the transaction; it facilities it. So it has no part to play in the commercial transaction. It simply brings the parties together and ensures by this margin the performance of that transaction on the other side.
If you leave it as it is, then you essentially can promote litigation against a party that is not part of the commercial transaction. This was recognized in the United Kingdom and in the United States, that there should not be this sword of Damocles hanging over this facilitator because it is not a party that has a risk. Yet by leaving them out there, you are giving them a risk. That's the underlying risk we are referring to.
Mr. Lastewka: Thank you.
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The Chairman: Have you had a chance to talk to the department or counsel about these specific amendments you've suggested in definitional terms?
Mr. Leslie: No, we have not had any discussion with them. We have simply made the submission, in the hope that the minor amendments we are suggesting fall right in line and it's a matter of cosmetics only. We haven't had any response to indicate a concern that our proposal would be offside in the final intent.
The Chairman: Counsel is sitting behind you, so perhaps afterwards you can just make sure they understand what you're trying to do and vice versa, because this goes through two stages, both the House of Commons and the Senate. We want to make sure the people who have professional experience in these fields are properly heard - that's our job here - and then we can get the advice of the department as well as from the witnesses on what we should do. There are a number of changes of a technical nature as we've clarified the intent of the bill. I think it's fair to say the committee is probably reluctant to nod one way or the other without other advice when such suggestions are put on the table. So just make sure counsel behind you understand what you're trying to do and can respond a bit from their context.
Does anybody else have any questions?
[Translation]
Mr. Leblanc, you have a minute.
Mr. Leblanc: The people who spoke before you representing mainly employees said that employees were very vulnerable at the time of a bankruptcy since the trustee was involved mainly in defending the interests of the preferred creditors.
We know that wage earners are often very vulnerable in bankruptcies and it would appear that once again the law does not provide sufficient protection to workers.
I don't know whether you are aware of what they said in their presentation but it seems to me that they are right in believing that once again the preferred creditors will be favoured. Employees are very vulnerable because they do not have the same right to chose the inspectors or the trustee or even to change him if they do not consider him to be reliable.
I'd like your opinion on this matter.
[English]
Mr. Leslie: That is certainly not an area the Winnipeg Commodity Exchange has looked at. It's our understanding that the secured creditors are obliged to submit their security and that security is reviewed by independent counsel to ensure there's no conflict of interest, to ensure if they are to have the paramount rights they allege they have there is an independent body that checks to make sure that right is proper at law. It's certainly recognized that creditors are vulnerable in an insolvency situation and it is expected, from the viewpoint of the exchange, that the amendments that are being made serve the creditors' interests better.
My client has not looked at the situation of whether employees should have a vote. That's certainly something that would be before the committee for consideration. From my client's perspective, the concern from their end, being a quasi-regulatory body, is simply that as regards the flow of funds, these arise out of the ordinary course of business and employees of the broker would well recognize that these payments were made not to favour a father or an aunt, an uncle, a mother, or some preferred company, but in fact these were payments that were made to allow the company to stay in business.
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If you have a broker fearful of paying because there is some jeopardy of preference and he's reluctant to pay, that will put the broker out of business. The employees will have their jobs for less.... There will be a loss of jobs. Allowing them to carry forward without jeopardy what they're doing - as they believe - in the ordinary course of business could be unwound.... If one were to try to relate the two, from our perspective one would say that this will better serve the employees' interests by allowing the broker to continue without fear, that by making payments somehow there'll be a problem down the road....
I hope that answers your question.
The Chairman: Mr. Shepherd.
Mr. Shepherd (Durham): This reminds me of Confederation Life. Is that basically the model we've taken to try to address the confusion created in the derivatives market by Confederation Life and its concept of preference in a derivative being an instrument of matching two financial instruments? Has that been properly addressed in this legislation?
Mr. Leslie: I do not believe the issues that arose in Confederation Life touched on this particular area. It was more in the area of set-offs of eligible financial contracts. This particular area is an enhancement of what was seen in 1992 to be a need to ensure that eligible financial contracts could go forward because of their peculiarities and not have the system in conflict with that particular system. We see that as an enhancement.
To the best of my knowledge, Section 95 and the clearing house for derivatives was not an issue within Confederation Life.
Mr. Shepherd: I want to just clarify it for myself. I know the bankruptcy of Confederation Life threw the derivatives business pretty much into a tailspin. The concept was that somehow the trustee could hold back on half of that contract, on the good half, the one that was in its hands.
The growth of the derivatives business was pretty phenomenal and other jurisdictions seem to have a better way to treat it. Do you think that's been addressed in this legislation?
Mr. Leslie: From the exchange's perspective, there are other developments in other jurisdictions that protect better. There's a more refined piece of legislation in the United States that involves ensuring the integrity of the marketplace. Whether that is the appropriate system, with all its various protective devices, is uncertain, because their legislation has marked differences compared to ours.
We certainly see this aspect of this amendment as a positive step. It may very well be that through what I understand to be a continuing review, further enhancements are necessary in the nature of levels beyond the clearing house as it relates to Canadian derivatives clearing or the Winnipeg Commodity Exchange. That's something we explored at the bankruptcy and insolvency advisory committee level. Certainly from my clients' perspective, we would welcome more review.
We see this as the cornerstone of ensuring - at least at the clearing house level, which is the regulatory end of things - that there is not a problem. Whether there is a domino effect that moves us backwards and that needs addressing is an issue we're looking at. Perhaps more changes are necessary down the road.
The Chairman: I have one question. What do you think of the Wheat Board?
Some hon. members: Oh, oh!
The Chairman: I was just joking.
I'd like to thank you very much. The questions reflected the very specialized point you're making. As I said, it's one we'll get advice on. I encourage departmental people to take these considerations seriously. The Winnipeg Commodities Exchange has a unique position - and we've talked on other issues - and it requires a fine eye by federal regulators to see your niche and to see how you fit into wider regulatory and legal frameworks. With that message, I'm sure they'll give it every due consideration.
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Thank you very much to the witnesses. We very much appreciate your comments and we'll take them into account.
Mr. Leslie: Thank you.
The Chairman: The committee is adjourned until tomorrow at 3:30 p.m. The room will be Room 237-C in Centre Block, and we will begin clause-by-clause consideration.