[Recorded by Electronic Apparatus]

EVIDENCE - Monday, December 2, 1996

The Chairman: ... Our second witnesses are from the Canadian Bar Association. Mr. Robert Klotz is the chairperson of the National Section on Bankruptcy and Insolvency, and Ms. Tamra Thomson is the director of the Legislative and Law Reform Section. Thank you very much for attending. I understand Ms Thomson will begin with some opening comments.

Mme Tamra Thomson, directrice, législation et réforme du droit: L'Association du Barreau canadien est une association nationale qui représente plus de 34,000 juristes au Canada. Parmi les principaux objectifs de l'association, est l'amélioration du droit et l'administration de la justice et la promotion de l'égalité dans le système judiciaire. C'est dans cette optique que nous présentons nos commentaires ce soir. L'Association du Barreau canadien approuve l'orientation des modifications contenues dans le projet de loi C-5. Les membres de l'Association du Barreau canadien ont participé activement au processus de consultation mené par le comité consultatif sur les faillites et l'insolvabilité. Nous croyons que les modifications énoncées dans le projet de loi doivent se faire le plus rapidement possible.

Senators have been provided with a copy of our detailed submission on Bill C-5, as well as a letter voicing our concerns with amendments made in the other place with respect to treatment of support arrears. It is on that matter that we wish to focus our comments this evening. Mr. Klotz, who will speak to the substance of our concerns, brings unique expertise and interest to this subject. He has written extensively on family law matters in bankruptcy generally and on this subject in particular. His leading article on this subject has also been distributed to you. On behalf of the CBA, he raised the problem of support arrears treatment in the BIAC consultation process and was instrumental both in ensuring consideration of the matter and in developing a balanced solution. I should also note that the CBA policy on this matter was sponsored by both the Bankruptcy Section and the Family Law Section and was adopted by CBA Council, which is the highest and most widely representative governing body of the CBA. I will now ask Mr. Klotz to elaborate on our position.

Mr. Robert A. Klotz, Chair, National Bankruptcy and Insolvency Law Section, Canadian Bar Association: Good evening, Mr. Chairman and honourable senators. The Canadian Bar Association has been actively involved in the consultation process of the bankruptcy and insolvency advisory committee, and in general we support both the thrust and the detail of the new bill. We made our submissions on the bill to the House committee which considered Bill C-5, and a number of our comments were addressed in the version of the bill that was adopted in the other place.

However, in the area of spousal support, our primary concerns were not met. Indeed, the bill before you exacerbates the problem we identified in our submission, that is, the problem of collusion. There is no doubt that reform is needed in this area. The Bankruptcy and Insolvency Act is anachronistic in its treatment of support. That is why we proposed this amendment and fought hard for it. What we proposed was a balanced amendment based on equal sharing. What appears in Bill C-5 is not balanced and contains deep flaws.

The problem lies in recognizing that, in many cases, financial failure and marital dissolution occur together. Each contributes to the other. In many cases, the issue of support between the spouses is negotiated when creditors are looming. This creates the risk of collusion. Collusion goes by many names: fraudulent conveyance, fraudulent preference, reviewable transactions. The concept is well known in bankruptcy law and is the subject of numerous cases. Our concern here is that the new remedy is an invitation for collusion and has no controls.

Let me explain, by way of the example I noted in the letter, of a heavily indebted husband earning good income who jointly owns a home with his wife. Let us say he makes $100,000 in income and the home is worth $200,000, owned jointly. If they separate, under current law he will lose half his home and will have to pay his wife or ex-wife support. His creditors will obtain some dividend. Under Bill C-5, he will say to himself, or his lawyer will say to him, "Why not agree to pay her $100,000 in lump sum support? She will keep the home. The creditors will get nothing. You, husband, will not have to pay support over the next five years." This remedy, as currently drafted, allows this to be done by way of a separation agreement done the day before bankruptcy. There is no limit on the amount. This is not a settlement under Section 91 of the act because no property changes hands. It is not a fraudulent conveyance under provincial legislation. It is not a fraudulent preference under section 94 because it is the Act itself which creates the preference, not the parties.

This new preference is unlike any other in the existing act because it can be created by agreement, whereas every other preference currently in the act is created by status: An employment relationship, a worker's compensation claim, a tax liability. The problem is that future support will be paid on the backs of creditors instead of out of the husband's future income or out of his exempt assets such as RRSPs or other exempt assets.

What is the effect of not having anti-collusion control? This is something that might not be intuitive unless you look at the Act and think about it a bit. The new remedy has an anti-family impact. When the financial going gets rough, it creates terrific stress on the family. It is crucial to encourage the family to stay together against this adversity, but Bill C-5 as currently drafted does the opposite. Since the spouses can save the family assets through a support agreement done the day before bankruptcy, the family will be under pressure to split up to take advantage of it. If the wife is in a troubled marriage and the husband is going bankrupt, if she leaves, she can get priority for thousands of dollars. If she stays past the date of bankruptcy, she gets no priority whatever. Why do we want to create such a terrific incentive to split up the family?

There is a problem of creditor confidence in the bankruptcy system. We must be concerned about the moral and ethical tone of the bankruptcy laws, as you, Mr. Chair, said yourself in the Senate, and about the disgust that some creditors will feel when they lose their dividend in these circumstances. As a result of our submissions to the House committee, no anti-collusion provision was added; instead, the remedy was strengthened by making provability, that is, sharability, unlimited instead of limited, as it had been in the earlier version. Thus, a spouse gets priority and, as well, can get equal sharing for any balance, which may be a 15-year-old arrears claim that no one can challenge and that may not correspond to the reality over that 15-year stretch.

There are several solutions to the problem, none of which are perfect. I would be pleased to describe these in greater detail if you wish to explore this matter through your questions. Mr. Chair, honourable senators, this is an important amendment. It can help needy spouses and children. However, if left unfettered, it can damage creditor confidence, lead to dismay with the system, and drive apart struggling families. For all these reasons, a more balanced solution ought to be seriously considered by this committee. Thank you.

The Chairman: Thank you. In your comments, you focused on the issue that was the subject of the covering letter that came with your brief. As you know, your brief contains a number of other amendments, approximately a dozen. Are there any of those upon which you wish to comment? The recommendation that the mediation process be deleted, for example, was also recommended by the group that was here before you. We have already talked about the RRSP inequity or anomaly, whatever you call it, and shortening the review period. At least three of your twelve points have been covered by other witnesses, and I think the committee's questions would indicate where their heads are at on those. Are any of your other amendments ones to which you specifically want to draw our attention as being critical?

Mr. Klotz: Yes, there are three which we still feel strongly about. They are numbers one, two and eleven in our summary of recommendation on page 18.

The Chairman: Do you wish to make a few comments on those?

Mr. Klotz: Yes. You have heard much about the desirability of strengthening the consumer proposal remedy. One of the suggestions that we make to encourage that remedy is to raise the threshold from $75,000 to a higher figure. We have not proposed a specific figure but we suggest that one way to make it more popular is to increase that number. We do not see any significant downside to raising the threshold from $75,000 to some reasonable number above it.

The Chairman: From a layman's point of view, would you recommend that that number be in statute or in regulation? I ask that because of the difficulty in changing a statute; it is so much easier to change a regulation. Do you have any view on that?

Mr. Klotz: Regulation makes sense as long as it is visible to the group who will be utilizing it. The trustee community can convey that limit, if it is in regulations, to the general population. I do not see a problem with that.

The Chairman: Therefore, your statement that it should be increased to an amount greater than $75,000 without specifying an amount, can be accommodated by having a statute setting out the amount as X, and then X is determined by regulation.

Mr. Klotz: We have not recommended a specific amount, but presumably an amount would be set through regulation.

Senator Angus: Would it vary?

Mr. Klotz: Again, we do not have a fixed view on that but it seems appropriate to raise that amount given the numbers with respect to consumer proposals and that $75,000 is not the hefty amount it once was.

Senator Angus: It is a substantial increase that you have in mind?

Mr. Klotz: These are my personal views now. The number should start somewhere over $100,000. It is, after all, a consumer proposal, not a business one, so the number cannot be astronomical. The second submission which we support and emphasize is number two, that the mediation process be deleted. The Canadian Bar Association, particularly the insolvency section, has confidence in the mediation skills of trustees. All of us in the insolvency business constantly balance interests. Trustees, particularly, are trained to deal with the conflicts of interest that arise. They have recourse to the courts when they cannot manage those conflicts. We have strong concerns, after looking at the proposals, that the cost will outweigh the benefit; that the added bureaucracy, the added training and facilities, will not be sufficient to improve what can be done directly by trustees. Our third submission is number 11. The CCAA threshold should be lowered to make the act available in certain sections of the country where the dollars are not necessarily as high as they are in Toronto or perhaps Vancouver. A number of our members were concerned that, without some kind of judicial discretion, that CCAA arrangements would not be available where they are appropriate and suitable and that we would have a focus in the two cities that I mentioned rather than across the country.

The Chairman: I understand the intent of your proposal. From a practical standpoint, how would you see that being done? There are two ways of doing it. You could make the numbers so low that everyone is automatically included. The other option is choosing a number which, subject to judicial discretion, could be raised or lowered. Which of those two do you prefer?

Mr. Klotz: There has to be a number; we do not have a problem with that. There should be a judicial discretion to lower the number in an appropriate case. That discretion can be defined in terms of certain factors, one of which could be geographical factors, economic factors, and so on. I would personally approve of that type of solution.

The Chairman: It would be helpful to us if you could, in the next couple of days, give us some wording to meet that need. We understand the intent. The question is what it would look like in an amendment to the act.

Mr. Klotz: Yes.

The Chairman: Thank you.

Senator Angus: You have narrowed it down, Mr. Chairman, to highlighting these three areas plus others that are duplicated?

The Chairman: You do stand behind all of them?

Mr. Klotz: Of course.

Senator Angus: You opened your presentation this evening by saying that you support the thrust and the detail of the bill. Then you highlight certain flaws which are different by degree. You have highlighted the spousal one, but these other ones are there. Do you consider that, without these amendments, this legislation would be a so seriously flawed as to cause you to withdraw your support for the thrust and detail of the bill?

Mr. Klotz: Do you mean apart from the particular items which I have just discussed?

Senator Angus: Yes, I refer to the 10 or 12 items.

Mr. Klotz: We would support the bill.

Senator Angus: You feel it is basically a good bill?

Mr. Klotz: Yes. Members of our association sat on the various working groups of the bankruptcy insolvency advisory committee, as well as at the steering committee level. We have had tremendous input and cooperation in general. Much of what is here has been put forward, considered, and vetted in conjunction with our comments. We are very pleased with that.

Senator Angus: There is a good consensus on these issues?

Mr. Klotz: I would say so.

Senator Angus: You are saying that it is basically the bankruptcy and insolvency subsection of the bar across the country that has had input and has led you to be here?

Mr. Klotz: Yes, through individual members and, as well, our association has had some contact.

Senator Angus: I would like to accept your invitation to ask you for more detail on how the highlighted items might be addressed. I read the summary of your brief on my way up here tonight from Montreal. I was amazed at what I understood to be the statement that it is so widely prevalent for marital break-ups and bankruptcies to go together hand and glove in a substantial number of cases.

Mr. Klotz: There are a lot of similarities between the two areas. There was a stigma in both divorce and in bankruptcy which has eroded over the years. That is why, to some extent, they do come together. The cost of matrimonial litigation is unbelievable. That alone can put anyone into bankruptcy. Finally, it is no surprise that, when financial pressures start to rise, disputes come up. It is not unusual to see the two happen together.

Senator Angus: Has there been some cross-referencing between your subsection of the bar and the family law section on this issue?

Mr. Klotz: I would say considerably. The position of the bar association has been approved by both the family law section and the bankruptcy and insolvency section.

Ms Thomson: Yes, the matters relating to support arrears have been the subject of council resolution within the CBA. That resolution was sponsored by both the bankruptcy and insolvency and the family law sections.

Mr. Klotz: Are you interested in the possible solutions which might be available here?

Senator Angus: Absolutely. You said there are three or four, but perhaps there is one that you might prefer.

Mr. Klotz: I should preface this by indicating that the Ministry of Industry, Science and Technology has had a dialogue with us where some of these have been explored. We had hoped that one of these choices would be selected in the bill. Let me briefly run through some of the possibilities. The first is a cap on priority. That is a dollar limit to be imposed on the section 136 priority that the act provides. The number that was mooted at one point was $30,000 but there is no magic in it. This would stop the high dollar cases but the committee should recognize that most consumer bankruptcies are under $30,000 of assets.

Senator Angus: You gave an example earlier where a lump sum settlement is made on the eve of the assignment. The asset, the house or whatever, may be up to $300,000, but in this proposition you could not go beyond $30,000.

Mr. Klotz: That is right. The priority would be capped at $30,000. The same problems will occur but only in the smaller- dollar cases. Unfortunately, it is in those cases where there is not enough money at stake for the problem to be challenged. We will restrict the collusion problems to the cases where there is no practical remedy because the dollars simply are not large enough. That is one of the problems with that solution. Another possible solution is to provide for a delay period or a look-back period. We see this with other kinds of anti-collusion devices. For example, with respect to fraudulent preferences, the look-back period is either three months or, if it is a related party, 12 months. With respect to settlements which are fraudulent conveyance transactions, the look-back period is one year or five years. We could have a look-back period of three months or a year. This will solve some problems. It will solve the "day before problem", but I think we will find that spouses will enter in an agreement and simply wait. Since most bankruptcies are done by voluntary assignment and not by creditor petition, that waiting is certainly something that can be done. It will stop some kinds of collusion. The third possibility is a general anti-avoidance provision, that is, a provision which says a court may, in its discretion, reduce or extinguish the priority for support depending on various factors, such as the existence of collusion, artificiality, an intention to defeat creditors or if the support is not really support.

Senator Angus: There would be a big burden of proof there, would there not?

Mr. Klotz: The problems are that it is uncertain remedy and it is an expensive remedy. We want certainty in this process for many reasons of which I am sure you are aware. The final possible solution, apart from those three or some combination of them, is to go back to the provability amendment alone -- that is, to provide for equal sharing, which is new. Equal sharing has a built-in anti-collusion protection.

Senator Angus: How does that work?

The Chairman: We wind up talking about amendments meaning amendments to the existing Bankruptcy Act, and then there were the amendments that the government -- I almost said jammed through, which is an incorrect statement -- dumped on the table with one day left before the House of Commons committee. When you say "go back to", can you give us some sense of what you mean by that?

Mr. Klotz: I was referring to the initial proposal advanced by the Canadian Bar Association, which was that support arrears ought to be provable to a limited extent -- that is, they should share with other creditors. At the risk of telling you what you already know, at the moment, support arrears are not considered a debt. They survive bankruptcy. They can be enforced despite the bankruptcy, but when everyone gets 10 per cent or 20 per cent or 2 per cent or 90 per cent, the support arrears creditor gets zero. That is an historical anachronism, but that is the problem. The amendment proposed by the Canadian Bar Association follows a similar Australian amendment from 1980, which said, to a limited extent of one year's arrears plus any lump sum, support arrears should be provable in bankruptcy like every other creditor. They still continue to be enforceable, despite the bankruptcy, unlike every other creditor, but they should get the 9 per cent or the 90 cent or the 2 per cent as do all other creditors. We put that forward as a moderate amendment that would not swamp all the other creditors. It would not take priority over other creditors. The advantage is that it has a built-in anti-collusion device. If you look back at the example I began with, the husband has $100,000 in assets. He agrees to give the wife $100,000 in an agreement. He is free of it. There is no reason for him not to do this. It is absolutely in his benefit to do this. It does not require trust between the spouses. In fact, spouses who loath one another with a holy passion will still do this because it is in the husband's self-interest.

Senator Angus: I am not sure of the current state of divorce laws. He may think he has a "forever deal" on that lump sum of $100,000, but cannot the other spouse come back later for further maintenance?

Mr. Klotz: It is true that there is a limited ability to do that, and nothing can ever be done to prevent that or limit that, although family lawyers will to their best to do so. The fact of the matter is that he can successfully give that $100,000 to the wife under the wording as drafted. If it is a simple provability amendment, which is what we proposed in the first place, there is a risk for the husband to do this. The risk will lead him to avoid collusion. This risk is this: If he agrees to $100,000 of lump- sum support, she will only receive "X" per cent, the same as the other creditors. That advantages him. However, let us say she receives 50 per cent, as all other creditors do. He must think to himself, "If I do this, she will have a $50,000 support order against me that I have agreed to after my bankruptcy. It will survive my bankruptcy, so I will have to trust her." As people who separate often do not trust one another, that lack of trust is the disincentive on him to give her a sweetheart deal at the expense of the creditors. That is the internal logic of a provability amendment. Once you have priority attached the way this bill did in first reading and does before you, you have a collusion problem which is very difficult to control. That is one of the beauties of the proposal put forward in the first place. It had its own anti- collusion logic to prevent this kind of collusion between the spouses.

Senator Angus: You say this was brought in in Australia in 1980.

Mr. Klotz: This is the curious thing. They did not have an anti-collusion provision, and they had to come back seven years later to fix it. What we are proposing before you and what we proposed in the other place is simply to do it right now so we will not have to come back in five years. That is why we are appearing before you today. We see what happened in Australia. What happened in Australia was that spouses did precisely what we are talking about here. You can see it in the case law and in the paper which was provided to you. We have the examples. In their case, they allowed happily married spouses to do this. A company with three directors was about to be sued for millions of dollars. The directors made a separation agreement. Actually they were still living happily together. They made a domestic agreement with their spouses, gave them all the assets, and the court said there was no anti-collusion protection, and this was permissible under this amendment. We will see that. Not only will we see it, but bankruptcy lawyers will be advising family lawyers and family lawyers will be advising their clients on how to do it. Family court judges will go along with this because their job is to protect the family. The Divorce Act requires them to have regard for child support. This is a great way of doing it. Nothing in our legislation, as currently before you, tells them not to.

Senator Angus: This is another form of collusion where they are not actually trying to break down the marriage. They are trying to fraudulently beat the creditors.

Mr. Klotz: Collusion is the nasty name for it. In fact, there are far nicer words for it -- an attempt by the courts or the parties to provide for the welfare of their families. The family courts will do this.

Senator Hervieux-Payette: That is good. The husband will be at the mercy of the wife for the next seven years. Why are you opposing that? That is the best thing I have heard. A woman probably did that.

Senator Angus: Are you finished?

Mr. Klotz: Senator, I am never finished on this subject. My concern is that future support is something that ought to be paid out of future income and that this is being done on the backs of creditors. It is the submission of the Canadian Bar Association that we have not looked at all the ramifications of this. When it happens, it will not be very nice.

Senator Hervieux-Payette: I think some of your recommendations are similar. The mediation seems not to be the most popular. Senator Stewart: I was a little surprised by your endorsement of the bill in general as it is now. Recognizing that you have these specific amendments, we had witnesses here last week who were quite critical. For example, we heard from a lawyer by the name of Ramsay. Did you happen to read his testimony?

Mr. Klotz: I did and I have spoken with Professor Ziegel.

Senator Stewart: They seem to be knowledgeable persons, and I am a bit miffed that you, as a knowledgeable person, seem to disagree almost diametrically on the general value of the bill as it now stands.

Senator Angus: No collusion amongst lawyers.

Senator Stewart: No, but it casts great doubt as to the competence of lawyers.

Senator Meighen: I thought that was a given.

Mr. Klotz: I have spoken with Professor Ziegel about this and I have given some thought to that discrepancy. I think part of it is orientation. We in the Canadian Bar Association are practitioners. We work in the world of the real. We work with what we have got. The professors have a broader scope than we do. They want to look at the system as a whole and structure it and have particularly the house committee, and, perhaps, this committee, look at the factual underpinnings of the system. Our perspective is much more minute. We take the system to some extent as we have it. And we say: How can we incrementally improve it? This bill definitely incrementally improves the system. Does it solve the underlying flaws that Professors Ziegel and Ramsay have pointed out? Probably not. Are those important flaws? Probably. But our scope is much more restricted and we are dealing perhaps in the edges of the problem to try to cooper them up and solve them in a practical way rather than create a better structure which, perhaps, they are focusing on.

Senator Stewart: But you seem to be saying, by stating your choice, that you feel that their approach is -- and, I do not want to be unkind -- academic?

Mr. Klotz: Our terms of reference are different. I have the highest of respect for Professor Ziegel and his comments. I have read his submissions and many of them strike a chord in me and should be taken seriously. My role and scope is not so broad, nor that of my association. We have worked too hard with the Ministry of Industry, Science and Technology and with the Bankruptcy and Insolvency Advisory Committee. We have put too many unpaid hours into this to say that because we have not gone back to first principles and have not solved all the flaws in the system that this is a bad bill. We do not feel that way. We feel that there are certain advances here that are good. Does it solve all the problems? No. Does it make some problems better? Yes, with some exceptions that you have heard about.

The Chairman: I understand all your recommendations, with one exception. It is your recommendation nine, in which you say that the bar recommends that section 14.06 be amended so it that it safeguards trustees and receivers from direct liability arising out of successor employer legislation. Can you explain that to us?

Mr. Klotz: It is my understanding -- and perhaps the experts behind me might assist on that -- that that has been addressed and that amendment was made.

The Chairman: I am looking at Mr. Mendelson or Mr. Marantz. Are you nodding "yes" or "no"? It has been made? One nodded "yes"; one nodded "no"

Mr. R. Gordon Marantz, Osler Hoskin & Harcourt: It is been dealt with, but one keeps pushing for more.

The Chairman: There was then an environmental one.

Senator Angus: There have been some submissions about the environment. Could you elaborate on that?

Mr. Klotz: Yes. In respect of the environmental issues, the Canadian Bar Association fractured. Our environmental section, to simplify matters horribly, felt that the provision should be stronger. The insolvency section felt that they were too strong. We agreed to disagree and our submission before you, as a result, does not make a recommendation one way or the other. It simply demonstrates that there is a division of opinion here.

Senator Angus: Perhaps the solution in the act is the middle course and it might have some merit?

Mr. Klotz: Certainly by some perspectives - that is, if both opposing poles are dissatisfied -- there is a truism that might apply.

The Chairman: It is part of the Canadian principle of equalized unhappiness.

Senator Meighen: Do I infer from recommendation 11 that you feel that both the CCAA and the Bankruptcy and Insolvency Act should continue in existence and that the two acts have some merit, separate but different? Second, did you consider the amendment by the house to proposed section 124? By not commenting on it, can I conclude that you did not deem it to be of significance?

Mr. Klotz: We did not examine it. So I do not think you can draw the conclusion that we felt it was of no significance. We limited our scope to the matters that you have heard tonight. However, I have some sympathy.

Senator Meighen: You did not consider it because it came after the fact - that is, after your study?

Mr. Klotz: That is right. We did not prepare a fresh submission on that point. In terms of the two tracks or the one track, my personal view is that we need the two tracks. To some extent, it is a matter of drafting and convenience, whether it is in two pieces of legislation or one. We do not have a firm view on whether it should be in one or the other. We sort of like it to be all in one, but it does not give us any difficulty at all having it in two.

Senator Meighen: Since you are good enough to give us your personal view, what is your personal view of the amendment to proposed section 124?

Mr. Klotz: My personal view is outside the main stream of the opinion of the insolvency section. I would speak instead of the main stream opinion in my section, which would be that that section is a problem.

Senator Angus: As amended?

Mr. Klotz: As it is before you. My personal view differs from that. I would be delighted to share it, but I believe I am not speaking for my constituency.

The Chairman: Thank you Ms Thomson and Mr. Klotz. This is the second presentation we have had from the bar association within the last month and both have been absolutely outstanding. Thank you very much for coming.

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