November 26, 1996
The Honourable Michael Kirby
Chair - Senate Committee on Banking, Trade and Commerce
SENATE OF CANADA
140 Wellington, Room 204
On behalf of the National Bankruptcy and Insolvency Section of the Canadian Bar Association, I am pleased to enclose our submission on Bill C-5, Bankruptcy and Insolvency Act amendments. This was presented to the House of Commons Industry Committee on September 17, 1996.
The purpose of this letter is to reiterate some of our earlier concerns, in light of amendments made by the House of Commons. Our concerns lie principally with the amended provisions in the Bill, which would now provide for unlimited provability and limited priority for pre-bankruptcy support arrears.
Firstly, we must stress our support for legislative reform in this area. Indeed, the Canadian Bar Association, was instrumental in bringing the anachronistic treatment of support arrears in bankruptcy to the government's attention. However, we have grave concerns that the proposed amendments go too far and will ultimately result in serious problems.
We believe our initial proposal of limited provability for support arrears (i.e. equal sharing) is well balanced. Bill C-5, as first introduced, included limited provability plus limited priority. It has now been amended further to provide for unlimited provability plus limited priority.
As originally drafted, the Bill C-5 provision would not adequately address the problem of collusion. A provability amendment similar to the C-5 provision was introduced in Australia in 1980. As a result of numerous instances of fraud and collusion, it required further amendment seven years later. Despite the Australian example, and our strongly held concerns, Bill C-5 was amended in a form which exacerbates the anticipated collusion problem by strengthening the new remedy (namely by making provability unlimited) and still providing no anti-collusion protection.
Why are we so concerned about this particular provision? In many cases, bankruptcy occurs in tandem with marital dissolution. In such cases the new amendment would allow virtually unfettered family financial planning at the expense of other creditors. It would permit separating spouses to deprive their creditors of all of their assets, and to use those assets to provide for the non- bankrupt spouse's future support.
Consider a heavily indebted husband whose income is $100,000 annually, and whose family home is jointly owned with equity of $200,000. While his income is arguably sufficient to support his wife if they separate, it is in both of their interests if he agrees to pay her $100,000 in lump sum support, so that she can keep the house. The priority established in section 136(d.1) of Bill C-5 would allow this to occur without any effective controls. As a result, other creditors will receive nothing, and the husband could substantially reduce his future support obligations. While banks and institutional creditors could protect themselves by demanding security, many other creditors could be dismayed by this outcome. The new section 136(d.1) would be the only statutory preference which could be created the day before bankruptcy by the stroke of a pen, and no effective anti-fraud provision exists in the Bankruptcy and Insolvency Act to address such injustice.
This new remedy would another important repercussion. Because the legislation would allow a separating family to retain all the bankrupt spouse's assets (or their value) through a separation agreement or court order, it could discourage spouses in the face of bankruptcy and financial stress from keeping their family together. By staying together, spouse's would lose all of the bankrupt's assets at the time of bankruptcy. By separating before the bankruptcy, and signing a separation agreement providing for lump sum or retroactive support, the other spouse could retain most or all of the bankrupt's assets. Counsel for that spouse would have to advise that by waiting, he or she may lose out on thousands of dollars of priority over other creditors.
We conclude that the support remedy proposed in Bill C-5 could lead to a loss of confidence in the system by creditors, because it would allow spouses to use the assets of the bankruptcy to pay for future support. Because this remedy is unlimited in amount and unfettered by controls, there will be a strong incentive for families under financial and marital stress to take advantage of it by separating.
While we recognize the good intentions behind the amendment giving family support a priority in a bankruptcy, we do not believe that the government has adequately addressed either of these two aspects of the problem. In our view, the government would be best advised to adopt the proposal originally advocated by the Canadian Bar Association. In the alternative, anti-collusion protection would preserve the integrity of the system and reduce the inadvertent "anti-family" impact of the new remedy.
Robert A. Klotz
Chair, National Bankruptcy and Insolvency Section
Canadian Bar Association