[Recorded by Electronic Apparatus]

EVIDENCE - Tuesday, September 17, 1996


The Chairman: ... 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.


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.


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.

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.

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.


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?


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.


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?


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.


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


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.


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


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


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?


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.


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.


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.


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


Mr. Klotz: Yes.


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?


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. 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.

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.

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.


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.


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.

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.


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?


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 -


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


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


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


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.

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--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?

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?

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 -


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.


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.

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