THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Wednesday, June 4, 2003
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:00 p.m. to examine on the administration and operation of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: Good afternoon, ladies and gentlemen. The banking trade and commerce committee is meeting today to continue its examination of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. Our first witnesses are from the Canadian Bar Association.
Welcome. It is a pleasure to have you. I understand that two of your members will be making opening statements. Please proceed.
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Ms. Tamra L. Thomson, Director, Legislation and Law Reform, Canadian Bar Association: Honourable senators, the Canadian Bar Association is very pleased to have the opportunity to appear before the Banking Committee today to make its comments on the five-year review of the Bankruptcy and Insolvency Act and the CCAA.
The Canadian Bar Association is a national association, which represents over 38,000 jurists across Canada. Among our primary objectives are improvements in the law and improvement in the administration of justice. With that point of view, we have made the written submission, which you have received and with which we make our oral statements today. The introductory comments will be relatively brief. I will ask Mr. Cohen to address the corporate insolvency and reorganization issues with the assistance of Mr. Shea. Mr. Klotz will address the personal bankruptcy and insolvency issues, and then we will be pleased to take questions.
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Mr. Robert A. Klotz, Executive Member and Past Chair, National Bankruptcy and Insolvency Law Section, Canadian Bar Association:
Honourable senators, for your information I served as a member of the personal insolvency task force under Mr. Goldstein's chairmanship and I congratulate you on choosing him as your advisor.
By and large, we see the task force report as a good one. In our submission, we adopted many of their proposals. I will highlight some we see as important.
First, on student loans, we agree with the trustees' organization and Mr. Stehelin, whom you have heard, that the current provisions are too harsh. I spoke before you in 1998 and said this. We recognize the financial concerns that led to the initial reform in this area. We believe that these harsh reforms have led to a new attitude in the courts and amongst students. It will effectively control the abuse problem if those measures are now made more reasonable and fairer. We believe the current law is badly designed, because it forces students who might be eligible for the court's mercy hearing to wait for ten years before having that hearing. To use an analogy, it is like being sent to jail for ten years with the right, after serving your time, to have a hearing to see if you should have served the time.. That hearing should be available before, not after. It is a bad design. We said that in 1998, and we say it again. That is why we agree with the task force report to reduce the ten years down to five and to allow a one-year period after ending studies before the hardship hearing.
We agree with the task force approach to RRSP exemption. The policy goal of retirement saving is a very important goal, as is the policy favouring repayment to creditors. We believe that if money is to be preserved from creditors claims for the purpose of retirement saving, then that money should be locked in. The creditors will have the comfort of knowing that it will indeed be utilized for that socially valuable purpose and the legislation will ensure that the purpose is fulfilled. We ought not to exempt money that could be treated as a savings account and spent shortly following bankruptcy. That does not serve any goal.
Anti-collusion control is essential. Without a mandatory clawback, there is no effective remedy to control the abuse of debtors who choose to put money towards retirement that should go to unpaid creditors, be that unpaid taxes, family law property claims, or general dents shortly before bankruptcy. In our view, it is too easy to make a blanket RRSP exemption, as has been done in Saskatchewan. What is more difficult, as the task force has attempted to do, is to design an R.R.S.P. savings protection system, without bring the system into disrepute because of insufficient or inadequate anti-collusion controls. We believe the task force recommendations reflects a proper balance, subject to the minor variations indicated in our submissions.
We agree with the task force proposal to overrule implied reaffirmations, which are agreements that a debt will survive despite bankruptcy through unconscious or unknowing behaviour. However, we strongly oppose the remaining recommendation for the reasons set out in the dissent on page 32 of the English version of the task force report. For your information, that is my dissent. We see no need for the drastic change, which is ill-designed to control the problem and which significantly departs from the ethical underpinnings of our laws.
On international personal insolvency, we see the need and usefulness of an appropriately crafted remedy where there is no remedy available to help Canadians who filed for bankruptcy while living in the United States or another country. This is a labour mobility issue. We should not force them to go bankrupt again when they return to Canada. The task force recommendation does this effectively, with appropriate safeguards, in our view.
I shall comment briefly on a proposal which is not in our submissions or the task force report, but which has been raised before you; namely, voidable transactions. We are strongly opposed to any limitation being placed upon the trustee's right to initiate proceedings under provincial fraudulent conveyance laws. We are also concerned that fraudulent preference legislation is amended to set up an effects-based standard. We require significant consultation and dialogue to ensure that the exceptions to such a test are properly designed to avoid injustice. Our submissions in this respect mirror those of Mr. Telfer, who made many of the same points in that respect.
Our final comments relate to the task force streamlining proposal, which we support. However, we emphasize the philosophical importance of maintaining the central role played by the trustee in maintaining public confidence in the system. If we reduce that role too much or eliminate too many of the formal proceedings in bankruptcy, we will allow an unacceptable degree of abusive conduct and strategic behaviour to slip through the system. Some of this conduct does slip through the system in any event. It is essential for the integrity of the system, and the confidence of the creditor community, not to mention the Canadian public, that the trustee plays an active and substantive role in personal insolvencies.
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Senator Moore: I wanted to ask, with respect to personal bankruptcies, we note that, while you support the PITF recommendation with respect to giving some protection to RRSPs, you do not support the three-year clawback, preferring two years rather than three, and that you do not support the proposed cap. Can you give us some indication of how you arrived at two years, rather than three? Could you provide us with your opinion as to the possibility of having a one-year clawback?
Mr. Klotz: I will give some background to that question, but, because I was a member of the task force, I will leave it to Mr. Cohen to give the more specific views. In our view, we agreed with the structure of the proposal. We agreed with the clawback. We agreed that it should be for a number of years. We agreed that it is essential to have a cheap, effective remedy because there is not an appropriate remedy that is available now.
We do not want a fraud test. The word "fraud" does not have a value in this context. We are not trying to say that anyone who contributes to an RRSP is a fraud artist. We think that is the wrong language. It is a question of policy. When someone is going bankrupt in the near future, how many years of their RRSP contributions should be paid to creditors as a matter of policy and justice? We do not think that the word "fraud" has anything to do with this issue. It is a policy question. That is why we need to have a specific number of years.
Within our group, we had divisions. There was division on the task force; the consensus was three. Within the CBA, the consensus was that two years is probably enough. That is where it stands.
By virtue of our recommendation, we do not believe that one year is sufficient. You have to remember that the bankrupt has control of the timing. In almost all cases, 99 per cent, personal bankruptcies are voluntary filings. Petitions in bankruptcy are very rare. The bankrupt has almost total control of when that bankruptcy is to be filed.
If we have a one-year period, we are allowing a degree of abuse and strategy; it is too short. Some would say that two years is two short. The CBA felt two years, on balance, was enough. The task force felt three years was enough. No matter what time period you choose, there will be some people who contribute at the end of that time period who were in fact not insolvent. We suggest that is few. With two years, it is fewer. With one year, it is not enough.
In terms of the cap, the task force noted some problems. If you do not have a cap, RRSPs, unlike pensions, can be self-administered. You raise the spectre of someone who invested their RRSP quite wisely, perhaps at MicroSoft in the 1980s, and is able to exempt a multi-million-dollar RRSP. One might say, "Good for him" or "Good for her." However, there are creditors who will be hurt. It is important for this committee to understand, as a philosophical matter, that the public will weigh this provision when we have a case where someone who may be a very bad person has injured or borrowed money from vulnerable senior citizens. The seniors have had their retirement savings destroyed but the bad person with the very large RRSP is protected. That will be something very uncomfortable to live with.
If there is no limit, then there is a possibility of this exemption putting the system into disrepute. On the whole, however, the bar association felt that the artificialities that are created with a cap are of concern. In balance, we were not convinced that the cap was appropriate. On the other hand, we felt the cap devised by the task force worked; the numbers it generated worked effectively.
You might note that the Colter commission -- I think in 1986 -- recommended a cap of $50,000. The task force cap is substantially more than that but it has the benefit of being easy to calculate and easy to apply. It generates fairly substantial numbers and we have the examples.
We are not convinced that a cap is necessary, but if a cap is chosen, this is the way to go. Whether the cap is necessary or not is really a political judgment on what sort of contempt might be brought upon the system when we have people with multi-million dollar RRSPs facing creditors who have nothing because of the conduct of those bankrupts. That will be very hard to stomach.