Bill C-203 (Historical)

An Act to amend the Bankruptcy and Insolvency Act (unpaid wages to rank first in priority in distribution)

Bankruptcy And Insolvency Act

[Scott Brison, Progressive Conservative, Kings—Hants, NS]

Mr. Speaker, it is with pleasure that I rise to speak to Bill C-203. I commend the hon. member from the New Democratic Party who presented it today.

Like so many private members' motions and bills, the bill should be votable. We should have an opportunity as private members to raise issues of importance and then to have the level of importance and focus put on them that are deserved as initiatives led by individual members of parliament. Many pieces of thoughtful legislation are not provided with that opportunity because the Liberals are not interested in significant parliamentary reform. Reform could begin by enabling private members to present legislation which is votable.

At first glance, when one looks at amending the Bankruptcy Act to protect employees, it seems very positive to ensure that in cases of bankruptcy employees end up ultimately receiving the pay owed to them. I have some concerns relative to the unintended consequences that may follow.

Banks are not always the only creditors. It is very easy to point to large financial institutions and say that they do not necessarily need the money. If it is a question between the interests of large chartered banks and that of employees, the onus should be on paying employees in such circumstances.

In most bankruptcies the banks are prominent creditors, as are a lot of other businesses. Many are small businesses in an accounts receivable or trade credit situation. I know this as someone who started my first business when I was 19 and continued to participate in small and medium size business during that period until I actually ran for parliament at the age of 29.

During that period I saw many companies with which I was doing business end up in circumstances where they were not able to pay their bills. I saw and experienced firsthand what that did to other companies. It can create a chain reaction which can result in not just one company going bankrupt. It is important to realize that it can potentially lead to threatening the existence of several companies.

There is a different dynamic between larger and smaller corporate entities. I believe the hon. member also recognizes the difference. In many cases, for instance, the owners are people who have not taken pay for extended periods of time. They have made significant sacrifices. In terms of establishing a sense of unity between goals and objectives, there is probably a greater amount of commonality of interest between employer and employees in the small business environment than in most other businesses.

I also have some concerns about how it might impact in a perverse way. I am certain the hon. member would not intend this to be the case, but it could unintentionally result in a reduction in lending money to small businesses. If this were implemented we could expect it not just in terms of banks but also in terms of trade.

If I were a small business person and I had an opportunity to sell products to another small business and part of the consideration in terms of extending credit was associated risks, it would reduce the likelihood of repayment. In a bigger corporate setting that is not as likely the case.

Perversely smaller companies would be judged in some cases more negatively from a credit risk perspective if the legislation were introduced than larger companies for which the wages would not form as large a percentage of their actual accounts payable.

For example, if we look at a restaurant, a store or a small business, the degree to which wages form the lion's share of expenses on a week to week basis is less capital intensive and more labour intensive. It might have a very negative impact on the service industry, small retailers or small restaurants.

Under the provisions of the legislation any business with a higher focus in terms of cost structure on pay or labour costs as opposed to capital expenditures would be disproportionately discriminated against in the eyes of lending institutions or other businesses extending trade credit.

Most of us in the House would agree with what the hon. member is trying to achieve: greater protection for workers in the event of bankruptcy. Clearly people employed with a firm, a store or whatever do not have the upside potential of great profits if the business succeeds and in some cases have a significant loss when a company goes broke. It would be unfair if workers did not receive pay that was owed to them for the labour they provided. It is the contract between an employer and an employee which indicates that an employee is to be paid by the hour or by project.

One model I am sure the hon. member is familiar with is the Australian model whereby various levels of government work together in a sort of employment insurance type guaranteed scheme which costs Australian taxpayers $100 million per year. Given the multibillion dollar size of the government EI surplus, that might be a rational approach to take a look at.

We would be far better off if we achieved what the hon. member is trying to achieve, better protection for employees in the case of bankruptcy. If we can avoid the negatives of potentially increasing the risks associated with lending to small business and business in general, which is certainly not something we want to see, we would be far better off. An appropriate way to proceed is by investigating some of these other alternatives.

I would argue that we are not seeing enough lending to small businesses. We have seen some improvement but not enough. Lending to small businesses is a real challenge in Atlantic Canada. It is much easier to get the money if it is not needed. It is a real catch-22 for small businesses. I would not want to do anything that would further reduce the chances of small businesses getting that money. That being the case, we can achieve the same result through different means which would spread out the risk a little further and provide greater protection for employees.

There is another point to realize. I am sure the hon. member would agree that incidents where employers have tried to create or manipulate circumstances in such a way as not to meet payments to employees are not widespread. However when it does occur it is unacceptable. If employers go out of their way to create circumstances in which employees do not get paid, it is egregious, offensive and immoral to all involved. However I believe it is a fairly rare circumstance when it occurs.

When we are developing public policy that can be very broad and sweeping in its impact we have to consider how pervasive the actual situation is that we are addressing. We have to be very cautious in this regard. I would be interested in further debating the Australian model and other best practices in other countries.

[Pierre Paquette, Bloc, Joliette, QC]

Mr. Speaker, first, I must say that I feel the previous speaker from the Canadian Alliance has really skewed the question.

The question is not whether we are for or against job protection and creation; we are all in favour of job creation prior to bankruptcy. Once bankruptcy has been declared, however, there is no more discussion of job creation. The question instead is how the liquidated assets are going to be divided between the banks and the workers, between those who are making record profits that are even an embarrassment, even to shareholders, and those in need of money quite simply to support their families.

The question has been skewed, and the response the hon. member for Winnipeg Centre was seeking has not been obtained. I congratulate him for introducing this bill and share his regret that it is not a votable item.

Will pay owing to workers have precedence over the financial institutions, or will it not? The Bloc Quebecois' answer to this is yes. We agree with Bill C-203 that the order of creditor priority must be changed when a business goes bankrupt, so that pay to salaried and other employees takes top priority when assets are being divided.

In my eight years as secretary general of the Confédération des syndicats nationaux I heard of many sad cases. I will name three only: the bankruptcy of the Coopérants, the bankruptcy of Crowne Plaza, on the west side of Sherbrooke Street; there are two Crowne Plazas in Montreal, the other one is on the east side of Sherbrooke; and the bankruptcy of Papiers Saint-Raymond.

In each case, workers who had devoted much of their life to developing the business ended up penalized because, with the liquidation of its assets, the company was unable to meet its salary and pension obligations, in particular. These were unionized workers. The CSN spent time and energy pursuing the company directors under Quebec and federal laws in order to recover some money. It took time. At times we were unable to obtain everything due them.

Unfortunately, these unionized workers are still a minority in the labour force. In the case of Quebec, only 40% of the labour force is unionized and in Canada, the figure is a little less than 35%. Legislation is needed to re-establish a balance, if I can put it that way, so that workers, the employees of the company, are the first to be paid when assets are liquidated.

Why should they be paid first? Because they are often the victims of the errors made by employer and directors. Unfortunately in Canada and Quebec we are still not entitled to economic information that will help employees. They are, in the end, at the mercy of a decision that may have been made in all good faith. I do not doubt that. I do not think many employers, I have known some who did it for anti-union motives, but they are the exception, made a conscious decision to lead their business to bankruptcy, but it can happen.

Workers are adversely affected by these errors in judgment in that they lose their jobs. If they also lose the salaries owed to them, it is a double whammy.

There is also the ability to shoulder the loss of income. As I said earlier and I will say it again, banks make profits which, in my opinion, are obscene. These profits are made at the expense of both businesses and consumers. The Canadian Federation of Independent Business complains about the treatment that its members are getting from major Canadian banks and others.

Given their record profits and the instruments they have at their disposal, banks are able to put up with losses that workers cannot shoulder, because it is the future of their families and their own retirement which are at stake.

In theory, I underline in theory, when financial institutions lend money, they take a risk. Their payoff for that risk is the rate of interest they charge. Interest rates are very real and they are still too high. Banks have the means to assess the risk. These financial institutions take risks and it would only be normal that they come after the workers.

Under Bill C-203, it is not guaranteed, as the hon. member rightly pointed out, that all the debts owed to workers would be paid back.

In this respect, Canada should follow up on convention 173 of the International Labour Organization and sign this convention adopted in 1992, precisely to protect, just as Bill C-203 seeks to do, the debts owed to workers, to ensure that they are compensated for their salaries, pensions and other types of benefits, following a bankruptcy.

Convention 173 also proposes the creation of an independent fund to which all employers would contribute so as to ensure that not only would workers head the list of creditors, but should an insolvent employer be unable to pay their wages and pensions by liquidating its assets, the fund could be used to ensure that workers were not penalized.

All Quebec's labour unions, the CSN, the FTQ, the CSD and the CSQ, are in agreement with the principle of Bill C-203. As a representative of the Quebec people and of their interests, I have an obligation to support this bill.

It is very hard for me to understand why the government members keep telling us about the extremely generous values to which Canada subscribes when the country is refusing to sign ILO convention 173.

It always seems to be the same old story with the present federal government, the Liberal government. It always has its left turn signal on, but it always turns right. At least with the Alliance, things are clear: always a right turn signal and always headed to the right.

I have had enough of this hypocrisy, and I want to assure this parliament that, in the interest of the Quebec people, in the interest of the workers of Quebec and Canada, we are always going to support measures of the sort found in Bill C-203. Once again, I congratulate the member for Winnipeg Centre on his initiative.

[John Cannis, Liberal, Parliamentary Secretary to Minister of Industry]

Mr. Speaker, as I begin my remarks let me acknowledge the concern of the member for Winnipeg Centre for employees in bankruptcy company situations. When he speaks to this issue he is very sincere about it, but the issue of unpaid wages and pension contributions when a firm goes bankrupt is one considered by the House several times in the past. The member also alluded to that. I am confident members on all sides would like to see the most equitable solution possible.

Over the years different governments, as was stated earlier, considered many different options for wage earner protection that would be good for the economy and for workers. This is not a partisan issue. It is not an easy issue at all. Each option has its trade-offs and several times parliament has been unable to agree on the fairest course of action.

Industry Canada, which is responsible for the Bankruptcy and Insolvency Act, is aware of the need to protect wage earners whose employers face bankruptcy. As recently as 1992 parliament amended the act to extend the protection of unpaid wages. In particular, parliament found it appropriate to increase the protection for wages earned up to six months prior to bankruptcy. This represents a doubling of the previous length of time.

In 1992 parliament also quadrupled the maximum amount that could be claimed from $500 to $2,000. Further review of this important issue is currently under way. I am pleased to bring members up to date on the plans of Industry Canada to strengthen the Bankruptcy and Insolvency Act.

First, the department expects to release in the next couple of months a discussion paper which addresses wage earner protection. Second, Industry Canada officials will be undertaking cross-Canada consultations with stakeholders to help identify a fair solution. Third, the act will be referred to the parliamentary committee for review in the next year. The results of the consultations and the whole question of wage earner protection will likely be examined during the parliamentary review.

Notwithstanding, I certainly realize that wage earners sometimes face special difficulties when their employers go bankrupt, leaving their wages and pension contributions unpaid. They are vulnerable creditors that often cannot afford such losses and usually lack the information to assess the risk that their employers may not pay them.

To protect employees the current act gives preferred status of up to $2,000 in wage claims for services provided in the six months immediately before the employer's bankruptcy. It also protects up to $1,000 in disbursements for sales people, as mentioned earlier.

In the preferred ranking, wage claims are given priority over claims of ordinary creditors but wage claims rank behind those of secured creditors. Protection for pension contributions is provided in federal and provincial pension legislation, much of which gives secured creditors status to claim unpaid pension contributions.

Very few people would argue against the principle of protecting the claims of wage earners. Fairness weighs in favour of protecting them. In practical terms wage earners are more likely to have their unpaid wages claims satisfied than ordinary creditors because of their preferred status. In some circumstances as well, secured creditors may allow trustees to pay accrued wages to which the employees are not entitled, strictly speaking.

The issue raised by the member for Winnipeg Centre in Bill C-203 is apparently straightforward. The bill provides for a kind of super priority for wage claims and payments in respect of pensions. As we know from extensive past discussions on bankruptcy law, super priority, as with other options, raises various issues.

A difficult issue and one in which earlier proposals have foundered is that super priority could affect the availability of credit to companies. It could become an important factor in the risk assessment of commercial lenders, leading to a reduced amount of credit being available. The consequences could adversely affect the employment and interest of workers generally. Commercial bankruptcy law has an important role in the allocation of these credit market risks.

I ask hon. members not to misunderstand what I am saying. I am not saying that super priority should be rejected as a way of handling wage and pension contribution claims in bankruptcies, but I am stressing it is a complex issue that has a long history and involves certain trade-offs.

The basic principle of wage earner protection was established 50 years ago in the Bankruptcy Act, 1949. Since that time five committees have reported the possible changes: the Tassé study committee in 1970, the Landry committee in 1981, the Colter advisory committee in 1986, the advisory committee on adjustments in 1989, and the bankruptcy and insolvency advisory committee in 1994. None of their recommendations for wage earner protection were implemented.

Over the past quarter century no fewer than eight bills have been introduced in the House and in the other place to amend the act. Only one of these bills subsequently altered the provisions for wage earner protection, the bill involving the 1992 amendments to the act.

These committees and bills proposed or analyzed a wide range of approaches including wage earner protection funds financed by contributions from employers, from employers and employees, or by the government through general revenues. Some bills proposed super priority protection for wage claims. Some bills proposed raising the ranking of wage and pension contribution claims among preferred creditors.

There is a great deal of divergence on who should pay for the cost of wage and pension contribution claims. It was nearly impossible to obtain a consensus on better ways to proceed than what is currently in the Bankruptcy and Insolvency Act. That is why the protection of wage earners requires further examination and consultation.

I have sketched out these details to suggest various available points to my colleagues on all sides, and specifically the hon. member for Winnipeg Centre. There is great interest in the whole question of wage earner protection following bankruptcies, but finding a fairer solution than what is now available would require a good deal of hard and thoughtful work during the forthcoming parliamentary review.

As I said in my opening remarks, this is not a partisan issue. Several different governments have already grappled with the question. Each option for wage earner protection has its advantages and disadvantages. Industry Canada currently is working to identify a fair solution.

[Pat Martin, NDP, Winnipeg Centre, MB]

moved that Bill C-203, an act to amend the Bankruptcy and Insolvency Act (unpaid wages to rank first in priority in distribution) be read the second time and referred to a committee.

Mr. Speaker, I would like to say at the outset what a rare and wonderful thing it is for an opposition backbencher to be given the opportunity to bring forward one of his or her own private member's bills for debate in the House. I think most members would agree that one of the most satisfying aspects of our job is when we can actually shape the course of the debate for at least one hour.

Most private members' bills that are brought forward are very thoughtful and very well researched and seek to address a very important subject brought to the member's attention, usually by people in his riding or across the country.

However, I am very disappointed and I begin the debate with a certain element of sadness. My private member's bill seeks to right an historic wrong but was not deemed to be votable by the ad hoc committee that meets regularly to deal with private members' business. This is a criticism we in the House should observe and it is something that should be rectified. When a private member, no matter what party he or she belongs to, opposition or government, brings forward an important issue on behalf of their constituents we should be giving it a bit more consideration and allow the issue to get to committee stage.

In speaking to Bill C-203, a bill to amend the bankruptcy act, I want to dedicate the effort we made to bring this issue to debate to the workers at the Giant mine in Yellowknife. As members may know, the history of the Giant mine has been a tragic one. It has involved a great deal of labour unrest. Many workers have suffered at the hands of an absentee landlord, namely foreign ownership. Nine people died in an explosion at the mine.

As if the employees and the citizens of Yellowknife have not gone through enough inconvenience, Royal Oak-Giant mine has declared bankruptcy. The workers, after years of working in the mine, have been left with back wages owing to them as well as pension contributions and severance pay. The bill seeks to address those problems. In the event that any enterprise goes insolvent or bankrupt, the current law has workers' wages ranked down on the list of priorities as to who will divide up the assets of the enterprise.

Before I go into the details of the bill, let me say that the employers do not really resist this type of amendment to the act because by the time an enterprise declares bankruptcy the few assets that are left over are of little consequence to the owners of the company. They would not oppose this sort of activity. In the interest of basic fairness we would want to believe they would want the interests of their employees addressed and prioritized in terms of dividing the few assets that are left.

I also want to explain some of the rationale behind putting the interests of the employees ahead of the interests of the other creditors or bankers.

A very special relationship exists between an employer and an employee. It is a contract of sorts or a tacit agreement between the employer and the employee. It is not enshrined in a written document, such as a collective agreement, but it is recognized in law. The relationship is very simple. The employee provides a basic service or a service the employer wants and the employer pays a set wage or a remuneration for the service. That exists and is recognized in common law.

Both parties have certain obligations. The obligation of the employee is to do their duties in a diligent fashion and to be loyal to the employer. There are many cases in common law that the duty of loyalty of the employee to the employer goes beyond the workplace. The employee is not even allowed to trash the employer in his private life. Certainly that relationship is recognized.

The employer has an historic obligation to recognize the debt to the employee for services rendered. One of the reasons common law is usually sympathetic to the employee in situations like this is that there is an historic out of balance in the relationship. The employer holds all the cards while the employee holds very few. The employee is really at the mercy of the whims of the employer, which is where it becomes very much a trust relationship. It actually goes further than that. The trust of the employee for the employer to pay him or her is usually far more serious. If the employer reneges on the obligation to pay the wages, the impact on the employee is much more serious than if the employer had chosen not to pay back the debt to one of the banks or lending institutions.

I would argue that when the lending institutions loan money to a company they know full well the risks that might be involved in that enterprise. They even get compensated for that risk by charging interest on the loan. Usually by the time a company goes bankrupt the loan has been repaid, at least in part. The bank or lending institution will be compensated for at least some of the risk it puts into the venture, either through interest payments or payments to the principle.

The impact on the employee, however, is far more serious. We are talking about a person's day to day income. It may mean the loss of their home. It may mean a huge impact on their family or huge impact on an employee's spending power which influences small businesses in given areas.

In terms of the relative weight of a debt to an employee versus a debt not paid to one of the banks or secured creditors, the impact, I would argue, is far greater, which is why common law has been a little more sympathetic to the employee in that case. However, that sympathy has not been translated into legislation.

Since 1975 my research shows that this issue has been before the House of Commons to be remedied to varying degrees of success four times. There was always a basic recognition that the employees, because of the imbalance in the power relationship, needed the authority of legislation to look after their interests more than the banks needed the legislative authority of parliament to look after theirs.

What should be our primary concern in the House? Whose interests should we be here advocating? What should be primacy in terms of the relative priority of who is more at risk and who deserves our support more? I would argue that it is the people of Canada, the working people of Canada, who sent us here to advocate on their behalf. They are the ones who need representation. I would argue further that chartered banks or lending institutions are far more able to absorb the impact of a debt gone bad than working people. They do not frankly need our help. The people who voted for us need our help.

Bill C-203 results from extensive research on various mechanisms and the instruments we could put in place that would give some relief to employees in a situation like this one. We looked at various models from around the world because Canada is not alone in realizing that employees need more protection through legislation. We looked at a few options.

For instance, Australia put in place a wage guarantee scheme which is a little different from what I would put in place with my bill. It contemplates putting together a pool of funding through the government. Through either general revenue or some payroll tax the government would actually be responsible for the back wages owed to employees.

I am critical of this model, even though it is working quite well in Australia. It is better than nothing, in that at least there is some avenue of recourse and some satisfaction that employees can achieve. However it also raises problems.

During the debate in Australia to put in place its wage scheme the spectre of a moral hazard was raised. If employers knew that there was a fallback position for employees they might be more likely to leave the employees dangling or to fail to clean up whatever mess has been made in terms of back wages prior to the bankruptcy situation. I caution it is probably not the right route to go.

I will speak later to how various boards and task forces in Canada arrived at recommending a wage scheme rather than at what I am recommending in my bill.

Another alternative which comes up now and then is giving a special status to employees, the preferred creditor status. This as well has its shortcomings and shortfalls. I advise it is not the best way to go.

We are recommending giving a super priority to the back wages owed to employees. In the event of a bankruptcy employees would be first in line for any back wages, back contributions to pensions and severance pay. In the event of self-employed people, travelling salesmen for instance, they would be in line for any costs they might have incurred. In other words, any wages or compensation owed to employees should be cleared up first out of the assets remaining in bankrupt companies and the others can get in line to divide whatever is left over.

It is an issue of basic fairness. It is an issue that recognizes the historic imbalance between employers and employees and the imbalance between the ability of employees to recoup any back wages versus the authority of the banks or any other lenders or creditors.

Looking at the history of what the House of Commons has tried to do to deal with this issue over the years, I note the Canada Business Corporations Act looks at the issue of unpaid wages and the liability on corporate directors. At least it was contemplated in that act.

Liability for wages can be assigned to the directors in certain situations. Directors can be sued personally. If an individual employee wants to go after the board of directors, the directors can be liable. There is a section in the act which covers the liability of directors and makes it very rare for employees to be able to sue directors.

Subsection 123(4) exonerates directors from any liability if they were acting in good faith on the information given to them through the financial information of the company. In other words the onus would be on employees to prove that directors were acting in bad faith and were not dealing properly with the information given to them. It is a huge burden to put on employees. If average employees went after a few thousand dollars worth of back wages they would never be successful in this challenge.

We could trace the efforts to amend the bankruptcy law back to Bill C-60 in 1975 when an effort was made to introduce the idea of a super priority status for employees. The Landry committee in 1981 gave it an effort. The Colter advisory committee in 1985 made a series of recommendations to change the Bankruptcy Act for just this reason, to give employees a super status.

The committee recommended that a fund should be established, which is not exactly what I recommend, and believed that it should be paid for by contributions from employers and employees. My argument would be why should employees have to pay some sort of a premium to buy insurance to guarantee that their wages would be paid. That is patently unfair and goes in the wrong direction.

I believe this is an act whose time has come. I am very disappointed that it was not given the votability it deserves. I point to the incidence of bankruptcy in Canada. If I had more time I would go through the details. Last year alone there were 10,500 bankruptcies, leaving a total liability of $2.5 billion. In 1999 there were 10,800 bankruptcies, leaving a liability of $2 billion. The same was true in 1998.

Every year approximately 10,000 companies go out of business and every year employees are left dangling on the hook for back wages, back pension contributions, severance pay and other compensation to which they were entitled. I appeal to members of the House of Commons today to recognize that the wages of workers should stand first in line in terms of priority whenever a company goes bankrupt.

[Pat Martin, NDP, Winnipeg Centre, MB]

moved for leave to introduce Bill C-203, an act to amend the Bankruptcy and Insolvency Act (unpaid wages to rank first in priority in distribution).

Mr. Speaker, I am very pleased to present this bill today. The purpose of the bill is that in the event of a bankruptcy the interests of the employees will be put before the interests of any other creditors. In other words, if there are unpaid wages or severance pay owing, the company will have to deal with those debts first before the debts to the banks or other creditors.

We believe it is overdue. It stems from the drastic situation of Giant Mine in Yellowknife, Northwest Territories.

(Motions deemed adopted, bill read the first time and printed)