Agriculture Committee on May 9th, 2016

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

There's a great report that was done by the Conference Board of Canada called “Exports at Risk - Assessing the Impact on Canada's Produce Industry by the PACA Rule Changes”. I encourage all members to read it and I could share a copy maybe. It really highlights the issue of PACA and some of the losses. It talks also about DRC and how it does not have authority in case of bankruptcy or insolvency, and producers in the U.S. and Canada have expressed frustration. There's a lack of reciprocity for payment for U.S. firms operating in Canada. There are some recommendations, and towards the end of the conclusion, it talks about the loss of exports and that it has serious implications for Canada's economy. The changes to PACA could result in GDP losses of up to $38.4 million annually, along with the permanent loss of 464 jobs and $17.7 million in labour income.

I've met with a lot of stakeholders and groups, and moving forward with a PACA-like system in Canada I don't think would require any government funding. Like you said, there are some obstacles working with the provinces. I know that there was a legislative framework that was presented by industry. Was that taken into account? Was that looked at?

[Mark Schaan]

I think I know the paper you're referring to, and we have certainly reviewed that paper and continue to consider it as part of the overall considerations as we look for evidence-based innovations to the insolvency regime in Canada. I wouldn't speak for my colleague from Agriculture, but I'd say evidence-based innovations in the agricultural sector are also something that they continue to review.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Has that been looked at also, Mr. Gorrell?

[Fred Gorrell]

It has been, and I've been told by the industry they've actually updated it and they will be presenting a new copy to both our colleagues and us. We'll be looking forward to that.

With reference to your questions about some of the farmers' losses, it is understood that the fruit and vegetable industry is a perishable industry. Obviously, it's unique in the sense that the produce is often eaten or disposed of before they get payment. It is very clear that it is unique.

In that context, there are people, and you made reference to them. Did they file formal complaints with PACA? These are things that would be useful for us to know. Were they between Canadians? Were they between Americans? We need the details.

In working with the industry, we're really trying to quantify the impact. We have lots of notional ideas, and the Conference Board of Canada projects it, but since 2014 when we did not have access to the formal dispute settlement mechanism, we've been tracking to see what the damages are. When you have information like that and other information, we're very much trying to look at that and work with the industry to actually determine whether there is an impact because of the changes in the PACA or are there other factors that have contributed to it as well.

Again, we really are trying to get to the essence of the challenge and determine what we might be able to do going forward.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Gorrell.

Thank you, Ms. Brosseau.

Mr. Breton, you have the floor.

[Pierre Breton, Liberal, Shefford, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses for being here today. Their input is very valuable for our study.

It was noted earlier that Canadian companies seeking to recover unpaid bills must post a bond equal to twice the value of the claim in order to access the protection provisions under the PACA. What is the reason for this? That is a lot of money for fruit and vegetable exporters.

Can you please give us an explanation for this?

[Fred Gorrell]

Thank you for your question.

This amount is set under the U.S. PACA.

If this amount is double, it is because of the United States.

[Pierre Breton, Liberal, Shefford, QC]

I see.

Have any Canadian companies stopped exporting to the United States after the United States revoked access? What proportion of companies have done that? Can you tell us about this?

[Fred Gorrell]

I don't know, actually. That is a good question.

As I said, our exports to the United States continue growing.

We can verify that, but I don't know. Maybe the industry will identify it, but the United States continues to be our most important market, and our exports of both fruits and vegetables continue to increase.

[Pierre Breton, Liberal, Shefford, QC]

In previous testimony before the House of Commons Standing Committee on Finance, the Fresh Produce Alliance advocated amendments to the Bankruptcy and Insolvency Act to establish a statutory trust modelled on the act.

Are there other options for Canada such as bonding and insurance? Can you talk to us about that please?

[Mark Schaan]

As you said, there could be other options that could be beneficial to the common products industry.

I think previous papers have looked at a number of these potential options, such as self-insurance models or whether there's a mechanism to potentially create some sort of industry fund that people could call upon in the case of some of these claims. I think not all of these have been well received by the industry association, but I do know that some consideration has been given as to whether or not they, too, may be able to fill some of these gaps.

From our perspective I think they are policy alternatives that are certainly worthy of consideration.

[Pierre Breton, Liberal, Shefford, QC]

Okay.

I have one last question for you.

There are of course other import-export operating systems for fruit and vegetables around the world. Have you looked at the operating systems in other countries, such as in America, Europe or Asia? If so, can you tell us about them please?

[Fred Gorrell]

Thank you for the question.

The majority of Canadian exports go to the United States. We are looking at systems in the United States because it is our most important market.

We have not done a comparison with other countries. For example, if we look at NAFTA for Mexico, they do not have a PACA-type system, and they are a major exporter to the United States as well. They face the same issue of double the bond. The United States has a unique and special system, but we could look at other countries. Given our trading patterns, we have focused on the countries to which the majority of our produce goes.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Breton.

We will now go to the second round of questions.

Mr. Drouin, you have six minutes.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Thank you, Mr. Chair.

I would like to thank the witnesses for being here today.

Typically, if a business is creating something, they can enforce a lien through a lawyer. My brother has a construction business. If it doesn't pay, he puts a lien on the house. In the produce business it's a bit harder because the goods are perishable. Essentially, you can't put a lien on something that's perishable unless the lien doesn't last very long.

What other tools could the industry use—and it is a bit unique—with regard to recovering payment?

[Mark Schaan]

There are two issues we can speak to. There's recovering payment from an insolvent entity, and there's recovering payment from a solvent entity. Those are two different situations. Part of it would depend on whether the solvent entity that you're trying to reclaim the funds from is in your own province, in another province, or in another country. Each of those would have its own distinct aspect.

Within Canada, there is a deemed trust provision for aquaculturists, farmers, and fishers for the 15 days leading up to bankruptcy or the appointment of a trustee. We do have a deemed trust provision for that essential period leading up to bankruptcy. There is some mechanism by which that is a deemed trust, and essentially, you will get that money back in the case of an insolvency.

With respect to a solvent entity, my colleague may be better able to address that. There is currently an ability to oversee some of those disputes.

[Fred Gorrell]

You're very much correct. The produce industry is unique because you can't put a lien on something that's been eaten or thrown out. It's very clear.

On that subject—this is just a statement, not a criticism—it really is incumbent on all the sellers of fruits and vegetables to do their due diligence to make sure they know who they're selling to, what their history of payment is, and so forth. There are many avenues within the produce industry that help them with that.

One of the challenges is when some business is solvent and they're not paying. The government itself doesn't guarantee that they get payed, but there are mechanisms. For example, right now, under the licensing and arbitration regulations or the Fruit and Vegetable Dispute Resolution Corporation, there are mechanisms that allow informal arbitration in complaint solving to determine what the problem was, whether it was a quality problem, whether the product arrived, all of those types of things that you might look at.

Often, you'll have an arbitration that will end up with a reduced sum. If it was x, you're going to get x minus two for the payment. Often though, that starts a record against the person you sold the product to. If I'm the person who has been buying product and hasn't been paying the people who have been selling to me, I will get a record and a reputation slowly. That is reported on and it is very useful because it should help you make your business decisions about how you want to sell to them and how you want to get paid.

Often in the produce industry, you're helping the person behind you, not yourself. You'll be helping the person who is going to find out that Mr. Gorrell didn't pay on time and that they have to be careful with him. There are not a lot of mechanisms, except through the complaints process. Informal arbitration, arbitration through the DRC, and the licensing and arbitration regulations are the mechanisms that we use in Canada right now, but we can never guarantee payment.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Do U.S. producers have access to this? The issue is that the U.S. was obviously not satisfied with our system if they removed the special conditions on our producers. Are we speaking with the U.S. on this to ensure that whatever it is we're going to be proposing in the future is acceptable to them, so that we can get back to a preferred status? We did have a competitive advantage. Now we're just like every other country in the world.

[Fred Gorrell]

You've touched on a very important point, sir.

What we've been talking about often with PACA is Canadian produce exporting into the United States in terms of how we are going to make sure we're going to get payment from the United States.

The question you just asked, which I think is really important, relates to how the system we have in Canada assists the United States in making sure they get payment from Canadians, as well. The United States are members of the dispute resolution corporation, and they have the services under the licensing and arbitration regulations, as well.

They are pleased with what we're doing on the regulations and the Safe Food for Canadians Act. They're very pleased with that.

To be fair, and to the questions of some of your colleagues earlier, the real issue is on the insolvency aspect in the bankruptcy. That is the area where there seems to be an ongoing gap.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

But the insolvency is very low in the industry. Right?

[Fred Gorrell]

Correct. Yes.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Who's pushing back on this, if it's very low in the industry?

[Mark Schaan]

That's a good question.

I have the enviable, or unenviable, job of looking after our bankruptcy and insolvency regime both under the BIA and under the CCAA.

If anyone ever tells you they have a simple fix to insolvency, I've now been in my job long enough to know that anyone who comes with a simple fix for my legislation, it's usually.... I'm opening up a bigger box than that.

Insolvency is about balancing competing interests amongst creditors. It's a big issue. It's important for achieving business certainty for lenders, investors, and creditors, which supports a healthy and innovative economy.

The super-priorities in deemed trusts, even if small, that favour some creditors over others in insolvency can have a significant negative economic impact, both on the monitoring and compliance costs, and the shifting of losses among creditors. It can increase credit costs. They're exceptional remedies.

When we look at these issues, while small, the compliance costs and the potential impacts on the cost of creditors are significant. There's also the issue of deemed trusts and super-priorities. The list of people who are interested in super-priorities and deemed trusts is a very long one. It's a regular crew of folks who come and ask for them. The problem is that we're constantly balancing against all of those competing interests to find an equitable solution.

In the case of fresh produce sellers, we have a deemed trust for those farmers, fishers, and aquaculturists who provide goods in the 15 days leading up to it. Then they move into the unsecured creditor zone.

It's worth noting that not every bankruptcy is a full and complete haircut for unsecured creditors, as well. The unsecured creditors—

[The Chair, Liberal, Pat Finnigan]

Mr. Schaan, thank you.

We're going to have to move to the next questioner.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Thank you.