Evidence of meeting #15 for Agriculture and Agri-Food in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was buyer.
A recording is available from Parliament.
Liberal
The Chair Liberal Pat Finnigan
We'll get right to it.
We want to welcome via video conference Mr. Ronald Cuming, professor, College of Law, University of Saskatchewan.
We're still doing the the PACA subject today, the Perishable Agricultural Commodities Act.
Welcome, Mr. Cuming. We'll give you up 10 minutes for your opening statement.
Thank you.
Ronald Cuming Professor, College of Law, University of Saskatchewan, As an Individual
Thank you.
Mr. Chairperson and members of Parliament, you will be aware that I appear before the committee, as requested by the chairperson, as a result of my role as the originator and drafter of the proposed fresh fruit and vegetable products protection act. You'll also be aware that I was retained to develop the proposed act by Mr. Webber on behalf of the Fruit and Vegetable Dispute Resolution Corporation and the produce industry.
I have listened to the proceedings of the committee relating to this matter. I have taken particular note of the questions raised by members of the committee. These questions relate principally, then, insofar as my interest is concerned, to the legal structure that would be implemented should the proposed act become law. Answers to these questions will no doubt be the most important feature of my appearance before the committee. For this reason I'll keep my comments as short as possible, so there is more time for the questions.
Mr. Webber informed me that he presented to the committee a short curriculum vitae describing my professional background. Accordingly, I will only take a few minutes to refer to some features of this.
I have taught and conducted research in Canadian and international commercial law for 50 years. I drafted the secured transactions law of three provinces, and the laws of these provinces were copied in eight other Canadian jurisdictions. I drafted a new debt recovery law for Saskatchewan. The Saskatchewan model is being closely examined as a possible precedent for a few other jurisdictions in Canada.
I proposed and participated in the development of an international private law treaty dealing with secured financing law, which has been ratified by at least 70 countries, including Canada. I have acted as a consultant to Industry Canada in connection with matters relating to the Bankruptcy and Insolvency Act.
I have also acted as a consultant to a range of international organizations, including the World Bank, the United Nations Commission on International Trade Law, the Asian Development Bank, and the Organization of American States.
For a range of reasons, described by Mr. Webber, solutions to the problem that the committee is considering have been difficult to find. From a technical perspective, one reason for this difficulty is the constitutional structure of Canada. Without going into great detail, what I'm referring to is the divided jurisdiction over debt. The problem being addressed by the committee essentially involves debt.
Matters of contract and debt fall primarily within the constitutional jurisdiction of the provinces under section 92.13 of the 1867 Constitution Act. The federal Parliament does not have power, or general power at least, to legislate in relation to these matters. However, when debt results in insolvency on the part of the debtor, the matter falls within federal constitutional jurisdiction under section 91.2 of the Constitution Act.
When Mr. Webber asked me to seek a legal solution to the problem, I was cognizant of the difficulty in getting a federal-provincial solution. It was clear to me that if a solution is to be found, it must be based on federal constitutional jurisdiction and that, of course, necessarily means insolvency.
It follows that the proposed legislation cannot apply to a simple breach of contract resulting from non-payment of debt. It expressly applies only where the buyer is insolvent as that concept is defined in the Bankruptcy and Insolvency Act. If the buyer is not insolvent, but has just failed or refused to pay the seller, this is a matter for provincial law of contract and debt. However, it's relevant to note in this context that a person can technically be insolvent, even though he or she has sufficient assets to discharge his or her debt.
The general rule of bankruptcy law is that upon a declaration of bankruptcy, all of the bankrupt's property, other than property subject to security interests, vests in the trustee in bankruptcy. This property is liquidated and the proceeds are distributed among the unsecured creditors of the bankrupt in accordance with the priority regime of the Bankruptcy and Insolvency Act. However, property held in trust by a bankrupt as a trustee for the benefit of someone else is not treated as property of the bankrupt. It does not vest in the bankrupt's trustee and it is not available for distribution to the general creditors of the bankrupt. This property must be allocated to the persons for whom it is held, and these persons are generally referred to as beneficiaries.
Now, a trust that provides for beneficial interests can be created voluntarily by ordinary citizens, but it also can be created by a statute, and this, of course, is the role of the proposed act. It deems that any product supplied by a supplier to a buyer, and any property derived directly or indirectly by the buyer from a dealing with that product, is deemed to be held in trust by the buyer for the benefit of the sellers who have dealt with that buyer. The result is that the property does not become property of the buyer. It does not vest in the faulty buyer's trustee in bankruptcy. Should the trustee take control of this property, he or she must do so in full recognition of the interests of the beneficiary sellers.
The trust that would be created is for the general benefit of all sellers who have not been paid by that particular buyer and who have complied with the newest requirements of the act. In other words, a seller who has not been paid is not required to demonstrate that trust property was received by the seller from the sale of his or her product. So long as there are unpaid sellers and their product, then the trust prevails.
As Mr. Webber pointed out to you, the most valuable property that is subject to the trust is likely to be the accounts receivable of the buyer, while other property, such as cash, falls within the trust. The practical reality is that a buyer is likely to have dissipated all cash before he or she enters into bankruptcy.
I don't want to mislead you: when property that is held in trust is sold to a good-faith buyer or is used to pay the debts of the bankrupt trustee, the trust is non-effective. In other words, in order for the trust to be effective, the property must be held by the bankrupt or the trustee under the trust created in the act. Consequently, if by the date of bankruptcy the buyer has collected all his or her accounts receivable and has dissipated the money, the trust gives no protection. There's a theoretical possibility of bringing an action against the buyer for breach of trust, but a judgment against an insolvent person is essentially worth nothing.
The proposed act specifies a condition that must be met by an unpaid seller, and this is a statutory notice delivered to the buyer within 30 days from the payment date set out in the sales contract. The trust gives priority to sellers over any security interests taken by secured parties in the property of the buyer that falls within the trust. However, customers of the buyer who buy the product from the buyer in the ordinary course of business are protected. They're not subject to the trust.
The trust is effective if, instead of becoming a bankrupt, the buyer invokes insolvency proceedings under the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act. It is also effective if a receiver is appointed as provided in section 243 of the Bankruptcy and Insolvency Act.
The proposed act provides a mechanism involving the courts under which the trust is administered. When bankruptcy is involved, the trustee in bankruptcy may be prepared to administer the trust but is not required by law to do so.
This is a very brief overview.
Liberal
The Chair Liberal Pat Finnigan
Thank you, Mr. Cuming. You are right on time, at 10 minutes exactly, so thank you.
We shall now move to questions, and we will start with Mr. Shipley, for six minutes.
Mr. Shipley.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Thank you, Mr. Chair.
Thank you, Mr. Cuming. It's been with some anticipation, quite honestly, that we have looked forward to having you here on video conference. It is a long way, particularly if votes sometimes interrupt our schedule. It's great to have you here to help us walk through and clarify how we can move forward with Canada's PACA solution. In your briefing, you're calling it the fresh fruit and vegetable products protection act.
What I'm wondering is this. If you have multiple sellers who get caught in the trap.... And just to be really clear, this is not about a buyer who doesn't pay or delays his pay; basically we're talking about bankruptcy and insolvency. Is that correct?
Professor, College of Law, University of Saskatchewan, As an Individual
Yes: insolvency necessarily, not always bankruptcy, because there could be insolvency proceedings, but yes, essentially the buyer has ceased operation.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Help me a little bit. If we have four or five sellers and at the same time their goods are received by that buyer, how do we make sure that our seller in our area would be protected similarly, in a fair way, against the other sellers who may have also gotten product to that person?
Professor, College of Law, University of Saskatchewan, As an Individual
That's a very good question. The way the act is structured is simply this. It says that any product received by that buyer, and it could be, in this context, from several sellers, or any of what we call the proceeds of that product...and this is more likely to be the case, the accounts receivable. Product has been received from several sellers and it has been resold on credit, so the real value here is the accounts receivable.
Let's assume then that this seller becomes bankrupt or invokes insolvency proceedings. The outcome is simply this. The law says that those accounts receivable are held in trust for all of the unpaid sellers who gave the appropriate statutory notice. Now, the chances are, of course, that there may well be more unpaid sellers than value in the accounts receivable, so that there has to be some method of “ divvying up”, if I can use that term, the value of those accounts receivable.
The promoters—
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
How is that divvying up determined? I didn't want to cut you off, but I didn't see it in your report.
Professor, College of Law, University of Saskatchewan, As an Individual
It's done on a prorated basis. The act would say that essentially the court would take over those assets or appoint somebody to take over the assets and the money would be distributed on a prorated basis, so that they would get a portion relative to the amount of debt owing to each of them.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
I'll come back to a further question to that one, but what I want to know is this. You have a seller who goes to a buyer. That buyer is not the end result; he hasn't gone broke. Then someone, and it may be a bit of a processor or a packager, sends it to a retailer or a wholesaler who actually does go broke. Now I'm down the line, because the first buyer isn't going to pay me, because he hasn't been paid by the third one, and if he is paid , he's only going to get a small portion.
How does that work in terms of the protection of me, as the original seller?
Professor, College of Law, University of Saskatchewan, As an Individual
Maybe we can boil it down to a very simple situation. We have our buyer, who has resold to someone else who, for one reason or another, hasn't paid that buyer. That is an account receivable owing to the buyer.
Of course, if that account receivable is worth nothing because of the insolvency or bankruptcy of the person who dealt with our buyer, then, of course, there's no asset. It's an asset on the books, but it is of no value. Remember, this is a trust of assets actually received by or that the buyer is entitled to and can enforce the entitlement to. If the buyer has resold to somebody else on credit and hasn't received payment, that buyer has an accounts receivable, but if it's an accounts receivable that's worth nothing, then of course there's nothing for the trust to attach to.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Okay.
The last one I'll touch on goes back to the same idea, the case when you have the buyer with multiple.... You rather answered it, in terms of its going on a pro-rated amount that the seller would get.
Can you help me understand, from some of your analysis, across the board what sort of benefit it would be to the fruit and vegetable growers as compared with what is there now? I mean, nothing comes without risk.
Professor, College of Law, University of Saskatchewan, As an Individual
Yes. That's a very good point.
Let's take two scenarios, one scenario in which this act doesn't apply, in which the act isn't passed. What happens when that buyer goes bankrupt?
Well, the suppliers, the sellers, will all have a claim in the bankruptcy, but the problem, of course, is that they are just one group of creditors. All the other unsecured creditors of that buyer also have claims. When the assets of the bankruptcy are divvied up, they're distributed on a pro-rated basis, with certain priorities set out in the Bankruptcy and Insolvency Act. The point is—
Liberal
The Chair Liberal Pat Finnigan
Mr. Cuming, we're going to have to stop it here. Maybe you can pursue it in the next question.
Thank you, Mr. Shipley.
Now Mr. Longfield will start with questions....
I'm sorry; it's Mr. Peschisolido.
Liberal
Joe Peschisolido Liberal Steveston—Richmond East, BC
Mr. Chair, thank you.
Welcome, Mr. Cuming—or I should say “Professor” Cuming. Unlike my colleague Bev Shipley, who waited for your appearance with some anticipation, I waited with a bit of trepidation.
Professor, College of Law, University of Saskatchewan, As an Individual
Oh, oh!
Liberal
Joe Peschisolido Liberal Steveston—Richmond East, BC
I have to say, Professor Cuming, that it brought me back a few years, during commercial law class, or insolvency class and secured creditors, when I was trying to wrap my head around concepts that you were trying, through your textbooks and your materials, to teach law students.
Welcome.
Professor, College of Law, University of Saskatchewan, As an Individual
Thank you.
Liberal
Joe Peschisolido Liberal Steveston—Richmond East, BC
You're very welcome.
The whole purpose of this exercise is for Canada to try to create a system here that is comparable to the American system, so that our producers of fresh fruits and vegetables can get back and have a preferential system in the American market.
Now, we've had an entity that has been trying for three years to create that entity. The Americans have said, no, that's not comparable. Why would your proposed law be different from what has been done in the past? Based on that, why would the Americans say, “Yes, your law, Professor Cuming, is fair to our producers, so we'll allow Canadian producers to go into our market”?
Professor, College of Law, University of Saskatchewan, As an Individual
Of course, I can't speak for the U.S. Department of Agriculture, but I think the answer to that is we would have, if this act were passed, a system very much like theirs. In other words, their system is based on the trust concept, and so would our system be, so that their people would get as much protection as our people would get under their system.
Liberal
Joe Peschisolido Liberal Steveston—Richmond East, BC
The folks came in from Innovation Canada and talked on the same points that you made about the constitutionality and the difference between provincial and federal jurisdiction. There is an existing act right now, under the Bankruptcy and Insolvency Act—I forget the section—but we were led to believe that it would be quite difficult to implement a similar system because of the differences inherent in our system compared with the Americans'.
Professor, College of Law, University of Saskatchewan, As an Individual
Well, I didn't hear their testimony on that point, but forgive me, I don't understand what they would be talking about. No doubt it would be a problem to put this into the Bankruptcy and Insolvency Act, but as a stand-alone act it's no different from what the Americans have. They have their regular bankruptcy act and this special trust system protecting certain types of suppliers. In that respect, there's a direct parallel between the two systems.
Liberal
Joe Peschisolido Liberal Steveston—Richmond East, BC
Yet have you had conversations with the folks over at Innovation, Science and Economic Development Canada?
Professor, College of Law, University of Saskatchewan, As an Individual
I'm sorry?
Liberal