Finance Committee on May 2nd, 2019

[Mark Schaan]

It's for up to $2,000 of lost wages.

As well, there's a super priority on any outstanding payroll deductions, EI and CPP essentially, so if your employer had failed to pay the CPP and EI on your last paycheque, those payments go forward. That's super priority, essentially. There is a limited number.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Is that the only example of super priorities: just wages, and EI and CPP deductions?

[Mark Schaan]

Yes, and then you move to a preferred claim. There are not many preferred claims, but one of the preferred claims is to the trustee, the actual monitor. One of the views is that you need someone to be able to take on the work of managing through an insolvency and getting parties to work out the arrangements so the monitor is paid as a preferred creditor.

The third is then secured creditors, those who have lent on the basis of a security against the estate and assets, and they then get paid.

Then there are unsecured creditors, who are a whole range of people. They could essentially be anybody who has an account on pay, which would include unfunded pension liabilities. There would also be any unpaid benefits, as well as any of the suppliers and contractors who may have been party to the process. These often include a significant number of small and medium-sized enterprises.

Finally, if there's any money left after those have been paid out, it's for shareholders, but the shareholders are almost never paid because, by definition, if you had money left to pay all of your debts, all of your secured claims and your unsecured claims, and still had money to return to your shareholders, you wouldn't be insolvent.

[Pierre Poilievre, Conservative, Carleton, ON]

Can you give me the name of the last category again?

[Mark Schaan]

It's the shareholders.

[Pierre Poilievre, Conservative, Carleton, ON]

Oh, you said shareholders.

So we have super priority, secured....

[Mark Schaan]

It's super priority, preferred, secured, unsecured and then shareholders.

[Pierre Poilievre, Conservative, Carleton, ON]

I have one last question.

If the unsecured pensions were given super priority, would that potentially put pensions in competition with unpaid wages in the event of an insolvency?

[Mark Schaan]

The way the insolvency system works is that it has a number of objectives. One of them is to prevent what we call a race to the courthouse. It tries to have an orderly mechanism to ensure that nobody can essentially call their loan or use other mechanisms to get paid at the expense of others.

The other element of that is that like gets treated like. Essentially, there's usually a prorated distribution across the entirety of a category, so all unsecured creditors, for instance, normally get a pro rata proportion of what's left at that point. Super priority would largely be the same. If you had a very significant call on the initial estate—and we should be clear that there are lots of examples where that's been the case, particularly when there's been provincially regulated pensions that have had significant unfunded pension liabilities—there may not be enough money to actually get through stage one. To our mind, that also has a significant knock-on effect, in terms of preventing restructuring.

[Pierre Poilievre, Conservative, Carleton, ON]

Finally, do you see that there is a moral hazard in the present system, where management commits the company somewhere far down the road to pension obligations that the present management is not going to have to fulfill and leaves that problem for some other president or CEO to encounter? He might say, “Things are going great around here. I'm making a huge profit. My workers are really happy with me,” without revealing the fact that he has made these commitments to the company that some other CEO is going to have to inherit down the road.

Do you not think that if you gave more priority to pensions in the event of insolvency, present-day lenders, those bond holders who are considering lending money to the company, might force the company to have a better funded pension?

[Mark Schaan]

I'd answer that question in two ways. First, I think it's important to look at the relationship between pension solvency rules and insolvencies. I won't trump my finance department colleagues, but just to state what our approach is federally, we have extremely stringent pension fund insolvency rules to prevent exactly that moral hazard.

We require federally regulated pensions to be funded 100% on a wind-up basis, which means there is enough money in the kitty, should the entity go insolvent, to be able to pay out their requirements. That's not the case in all provincially regulated pensions, so that's one way we deal with that.

[Pierre Poilievre, Conservative, Carleton, ON]

We can say that's provincial jurisdiction, but when we fall into bankruptcy and insolvency, then it becomes federal.

[Mark Schaan]

That's right. We prevent that moral hazard.

On the second part of your question, though, if you were to start that on a brand new basis—if I were starting a brand new pension tomorrow—I think you're potentially right that the economic incentive to a lender would be to ensure that this pension was extremely well-funded, but we're not starting it at tabula rasa. We're starting with funds that already have unfunded pension liabilities, and they're in sectors and in parts of the country that are particularly hard hit.

The fear we have is that what ends up happening, instead of creating great behaviour around pension funding—even beyond what provincial regulators do— is that it calls a cavalcade of calls on loan, and that we push these firms into insolvency and liquidation more quickly. People would jimmy around with their loans to ensure they get paid, which is exactly what the insolvency system aims to prevent.

[The Chair, Liberal, Wayne Easter]

Okay, we'd better move on to Mr. Dusseault. We're moving a little off the bill, I would suggest, but it is great information for us to have. Anybody who might want to do a private member's bill—

[Pierre Poilievre, Conservative, Carleton, ON]

You should never have let me have the chair. That was your first mistake.

[The Chair, Liberal, Wayne Easter]

I knew that before I left.

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

For your information, a colleague of mine introduced a private member's bill to change the order of creditor priority, but it was defeated.

I have a question on that subject. It has to do with the consultations you mentioned, Mr. Schaan. What were the results of the consultations? I'm especially interested in the number of people consulted who recommended changing the order of creditor priority. Was that one of the main recommendations you received, or did people not really raise the issue?

[Mark Schaan]

The government received many submissions as part of the consultations, more than 4,000. Most of them were online submissions, many being form letters from organizations that had encouraged all their members to participate.

A lot of people said it was important to change the order of creditor priority, but others said they didn't think the change would make a difference if the company became insolvent. There wasn't a consensus on the issue. The purpose of the consultations, however, wasn't to determine how many people were for or against the change. Rather, it was to examine the issue as a whole and ascertain people's views.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I see. The fact remains that most people who participated in the consultations probably wanted something to be done about the problem, but here we are, today, with a bill that fails to meet their expectations. I want to say how disappointed I am that the bill does not include one of the main recommendations called for by stakeholders. We are talking about a change that was clear, explicit and entirely feasible.

That's the first thing I wanted to say.

Since I still have some time, I'd like to ask a few technical questions about the bill.

Subclause 143(3) seeks to amend the Canada Business Corporations Act by adding section 172.2, which deals with the “well-being of employees, retirees and pensioners”. Could you clarify what “information respecting well-being” means?

[Mark Schaan]

As with the other requirements applicable to organizations under the act, the usual process in this case is to specify the regulatory information that must be provided to shareholders annually.

Last year, Bill C-25 added to the act the requirement that corporations disclose to shareholders regulatory information on gender and diversity among directors.

That's what's being done here. Most of the information disclosed will be set out in regulation.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Very well.

I have another question about the approach on remuneration. A prescribed corporation is required to develop such an approach, which shareholders will vote on. The word “approach” can mean many things.

Could you please explain what the various possible approaches are and which mechanism will be used to submit the chosen approach to shareholders?

[Mark Schaan]

Further to the bill, the approach involves all aspects of remuneration, including salary, benefits and so on.

The bill makes it mandatory for directors to set out that approach.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Which directors are you referring to?

[Mark Schaan]

By directors, I mean those on the board of directors.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I see. They are responsible for laying out the approach.