Finance Committee on July 7th, 2020

[Elisabeth Lang]

I will try. It's a hard habit to break, apparently.

The OSB is part of Innovation, Science and Economic Development Canada, and the Minister of Industry is responsible for insolvency policy via legislation and regulations. As superintendent, I work closely with my ISED colleagues and also have directive-making power that enables me to provide additional guidance on the legal requirements of the BIA.

As mentioned in the materials, the OSB is predominantly a vote-net organization. OSB revenues cover all direct costs of the operation, as well as indirect costs for various centrally managed expenditures.

In addition to the OSB, the key players in the insolvency system include licensed insolvency trustees, debtors, creditors and the courts. Licensed insolvency trustees, which I call LITs, are private sector individuals and corporations that are the only professionals authorized to administer insolvency proceedings that allow debtors to be discharged from their debt. LITs go through a thorough training and certification process before being licensed by my office. They must adhere to standards of practice set out in the BIA, in the CCAA and in regulations, including the code of ethics for trustees and the superintendent's directives.

Debtors have rights and responsibilities in the insolvency system, including complete and honest disclosure of their assets and liabilities and co-operation throughout the process. In the case of consumer debtors, they must participate in two insolvency counselling sessions. Debtors can be subject to consequences if they fail to fulfill their duties, such as a refused discharge, an order to pay additional amounts to creditors, and even, in the most serious cases, criminal charges. Most debtors, however, are honest and co-operate fully, and upon their discharge can benefit from a fresh financial start.

Creditors also have rights and responsibilities in the insolvency system. They are entitled to receive a portion of the amounts collected from the debtor. They have a role to play in the insolvency proceeding. They must respect a stay of proceedings and cannot attempt to collect debts that have been discharged.

Courts play an important role, which varies depending on the type of insolvency proceeding. Legislative changes in 2009 provided additional automatic discharges for certain bankruptcy types, which reduced the need for court involvement in the majority of bankruptcy proceedings.

I'll turn now to some of the OSB's programs and the steps we've taken to address the COVID-19 pandemic.

Since my appointment as superintendent in October 2018, I have established three strategic objectives for the OSB: engagement with stakeholders, compliance and organizational excellence.

In large part thanks to the OSB's increased engagement with stakeholders, including the Canadian Association of Insolvency and Restructuring Professionals, also known as CAIRP, and LITs across Canada, the OSB was able to act quickly in response to the COVID-19 pandemic by issuing our first guidance note on March 13, 2020. We immediately enabled LITs to carry out certain duties remotely that they would typically have had to carry out in person, including the initial debtor assessment and insolvency counselling. We have since extended this flexibility to March 31, 2021, to support social distancing, help debtors receive services in their preferred way, leverage technology and provide important efficiencies to the system.

Since March 13, 2020, the OSB has issued at least 10 guidance notes, as well as several on behalf of the CRA and Revenu Québec, all of which help to ensure that the system can operate effectively and efficiently. We have sought to lighten compliance requirements where appropriate and have embraced technology and other efficiencies.

Perhaps most significantly, using my authority pursuant to the BIA, I applied for an order on behalf of the more than 451,000 open insolvency estates and those filed by June 30 in all 13 provinces and territories, effective April 27, 2020. This allowed consumer proposal debtors to miss an additional three payments between March 13, 2020 and December 31, 2020 without having their proposal deemed annulled, in recognition of the fact that many consumer proposal debtors found themselves out of work and unable to maintain the promised levels of payments. Note that missed payments would need to be made up at some point prior to the completion of the consumer proposal. The order also allowed for the extension of timelines where necessary for things such as meetings of creditors, applying to court and mediation.

OSB officers across the country reached out to LITs in the early weeks of the pandemic to check in and ensure that they could operate effectively. The OSB also created a dedicated email box and COVID response team to reply accurately, consistently and in a timely manner to all COVID-related questions from LITs and Canadian stakeholders.

We're continuing to explore ways to leverage technology to effectively carry out our compliance duties at a distance, including inspections of LIT practices, debtor examinations, chairing meetings of creditors, opposing discharges and conducting criminal investigations, as well as using electronic signatures and enabling electronic fund transfers.

We've also put an emphasis on ensuring that debtors have accurate and reliable information on the options available to them to address their financial difficulties. Last year, we launched a debt solutions portal on our website, which we promoted with the help of partners, including the FCAC. We issued a guidance note directed at debtors in the context of COVID-19, and developed a series of COVID-19-related social media posts to be published throughout the summer. This year, the OSB launched a map-enabled feature to help debtors find a LIT in their area. In the coming year, we hope to develop new and interactive tools to help Canadians find the best debt solutions for their debt challenges.

In terms of readiness for a possible increase in insolvency filings, we start by looking back at prior years and the past weeks. We are keeping a very close eye on insolvency rates, compared with the last significant Canadian recession, in 2008-09, which impacted insolvency rates with a record high of over 158,000 filings, or 5.83 filings per 1,000 adults, in 2009.

In 2019, the raw numbers of insolvency filings reached more than 140,000, but note that Canada's population has also grown over time. This was the equivalent of 4.64 filings per 1,000 adults, a rate that has been relatively stable since 2011, where it has remained under five following the effects of the recession.

In the weeks following the onset of COVID-19 in Canada, BIA insolvency rates dropped below both 2009 and 2019 rates. For business insolvencies, this drop appeared in the week of March 8, and on the consumer side, it appeared in the week of March 15. The rates have remained well below 2009 and 2019 levels on the BIA side since then. We can surmise, with a fair amount of confidence, the reason insolvency rates have remained low. I think we attribute it to financial and liquidity supports from government, reduced levels of enforcement by creditors, and uncertainty regarding the future for businesses and employees.

On the CCAA side, I would note that we have received 27 CCAA filings, the largest insolvency filings in Canada, in Q2. This is more than double the 10-year quarterly average. The next-highest quarterly filing rate was 17 in Q1 of 2012. l would note, however, that in some years we see a spike in one quarter followed by a significant drop in others, so it's too soon to tell whether this is a sign of a record year. I would also note that the numbers are very small across the board.

It is important to emphasize that insolvency is a lagging indicator. In the materials I provided, slide 8 shows the correlation between insolvency rates and drops in the gross domestic product, with an increase in insolvency filings occurring when the GDP goes down or in the quarter following a drop in the GDP. Decisions to make a formal insolvency filing are complex. We know that individuals and businesses that may technically be insolvent will not always file a formal proceeding.

Future insolvency rates will be impacted by a multitude of factors. The OSB has not historically been in the business of forecasting insolvency rates. We have a model to forecast revenues, which is very reliable. The majority of fees are paid at the end of an insolvency proceeding, so we base our forecast on current filing data rather than forecasted filing data. We've been in discussions with colleagues, both in Canada and internationally, to determine whether there is a reliable forecasting model and how well it could be applied in the context of the current uncertainties. Work is continuing on that.

In the meantime, the OSB is preparing to ensure that the insolvency system can handle a significant increase in insolvency filings. Based on experience from 2009 and additional efficiencies that have been adopted in the insolvency system, I am confident that the system can handle it.

Specifically, I would point to the fact that insolvencies are filed electronically with the OSB, and we verified that the system could handle significant spikes in 2009. We're also testing it to ensure that it can handle even more. We have extended remote service delivery options by LITs, and the OSB will provide additional efficiencies. LITs have also found efficiencies over the years in how they deliver services. We can make some strategic adjustments to compliance requirements. As well, as I mentioned, we have reduced court time, given the increase in the number of files that can obtain an automatic discharge and due to the increased number of consumer proposals that are filed. We continue to explore other system efficiencies, such as the use of artificial intelligence for detection of potential debtor non-compliance, which we will be piloting this fall.

That concludes my remarks. I'd be happy to answer any questions you may have.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Lang.

We'll start our first round of questions with Mr. Poilievre. Then we'll go to Ms. Dzerowicz, Mr. Ste-Marie and Mr. Julian. We'll go to a six-minute round.

Mr. Poilievre, you're up.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much, Ms. Lang. I appreciate your hard work in this difficult time.

Obviously, bankruptcies have basically been frozen throughout the COVID period because of the deferral of taxes, mortgage payments and the sudden but temporary inflow of government assistance that will temporarily get people through this rough patch.

However, in the period leading up to the COVID shutdown, there was a very large increase in insolvencies, particularly from 2018 to 2019, and then January 2019 to January 2020. We saw large increases in insolvencies through those times. A lot of people were clearly suffering.

When the temporary measures of deferred mortgages and taxes and the Canada emergency response benefit lapse, when all of this lapses, do you have a sense of whether or not there could be a large number of Canadians facing the very real likelihood of bankruptcy, an inordinate spike, or maybe even a bankruptcy crisis in Canada?

[Elisabeth Lang]

As I mentioned, the 2019 rates were actually fairly stable, up slightly but still under five per 1,000 Canadians, because our population has grown. On the other hand, of course, we know that the household debt ratio has grown significantly over the past number of years, and that's a very real concern for us. However, you don't see every single person file for an insolvency who might, on paper, need to file for an insolvency. It's a multifactorial decision. One question that will remain is whether Canadians will be able to get their jobs back, whether creditors will continue to be reasonable, given the extreme circumstances that everybody is facing.

If, as many are suggesting, we face a recession and our GDP goes down, our historical data shows that we will see an increase, but I don't think it will be sudden. I'm not sure it will be a crisis, but it's very difficult to predict.

[Pierre Poilievre, Conservative, Carleton, ON]

Currently, Canadian households have about $1.76 in debt for every dollar of disposable income, which is a record high for Canada. It's actually higher than was the case in the United States in the lead-up to the great financial crisis there. In that context, though, the household debt was concentrated among people who had subprime mortgages and other exotic lending products. In other words, the population as a whole was not exceptionally indebted, but there was a concentrated group of people with a very particular set of circumstances who did have high levels of debt.

My question for you is whether there is a particular group or cohort of Canadians who have an inordinately high debt, who are particularly vulnerable to an eventual rise in interest rates or unemployment.

[Elisabeth Lang]

We are able to speak to insolvency statistics, and I think you're asking about a group that has not yet filed, so it would be difficult for us to speak to that. The majority of filings, 37%, are done by people ages 35 to 49. I can tell you that for 2019 data, but yes, it's difficult to talk about. I think others would have to speak to the vulnerabilities of the pre-filing group.

[Pierre Poilievre, Conservative, Carleton, ON]

This group of people who are 35 to 49 years old, are they filing in unusually high numbers these days, or are they typically above the average for insolvency filings?

[Elisabeth Lang]

I would have to look back, but I believe this is the typical age group for the majority of the filings. It's typically higher in the 35-to-49 bracket than in other age groups.

[Pierre Poilievre, Conservative, Carleton, ON]

I know that your role starts when the filing actually begins, but I imagine you do have some anticipation and do some planning and have some data to predict what's ahead. Do you have any sense that bankruptcies and insolvencies could become a real pandemic, so to speak, in the next several years, given the enormous amount of debt that people have racked up in the lead-up to COVID-19 and perhaps while it's been going on?

[Elisabeth Lang]

As I said, we don't actually have a forecasting model. We're talking to colleagues to see if one exists. I think even if one existed, it might be truly tested by the current situation, which is more uncertain and has more variables than we would have ever seen before, with things like government supports and creditor forbearance.

We look at the GDP and we listen to experts who say that we may be facing a recession, and we prepare for the possibility of an increase.

[Pierre Poilievre, Conservative, Carleton, ON]

You don't have any predictive modelling that could help us anticipate what's ahead.

[Elisabeth Lang]

No, I'm sorry. I don't.

[Pierre Poilievre, Conservative, Carleton, ON]

Interesting.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Poilievre.

We'll go to Ms. Dzerowicz, followed by Mr. Ste-Marie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

Thank you, Ms. Lang, for your excellent presentation. You covered a lot of territory very quickly, and thank you so much for your service to our nation.

We've mentioned a few times in different ways the impact of the COVID-19 programs on consumer and business insolvencies. Do you actually have numbers? Are you able to say that CERB actually stopped x number of insolvencies, and the wage subsidy actually...? Do you actually delve down, or do you just say that in general this is what we understand has happened?

[Elisabeth Lang]

Based on our statistics that we report monthly on our website, we know that the numbers are down by about 50% this May versus last May. That would be one number you could look at. However, what you don't know is what they would have been, of course.

[Julie Dzerowicz, Liberal, Davenport, ON]

We're not able to to say that this program had more of an impact than another program. You're just able to give the overall bucket.

[Elisabeth Lang]

Yes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Okay. That's helpful.

Have you noticed any deviations from the norm? For example, I live in downtown west Toronto. There is a natural turnover of businesses within different sectors here. Have you started noticing deviations from the norm in different sectors, in different areas?

[Elisabeth Lang]

No, we have not, as of yet.

[Julie Dzerowicz, Liberal, Davenport, ON]

Okay. Are you actually measuring that?

[Elisabeth Lang]

Our statistics on our website report on insolvencies by sector, so you can see that data. But, again, because the numbers are so small and in fact business numbers have been on the decline for a number of years now—we're talking about very small numbers—it's hard to read a lot into that.

[Julie Dzerowicz, Liberal, Davenport, ON]

Okay, that's helpful.

I think there are always going to be comparisons between where we're at in terms of insolvencies and bankruptcies here in Canada versus the U.S., and versus other G7 countries. Do you have an idea of that at this moment?

[Elisabeth Lang]

I reached out to some of my international colleagues very early on to talk about the trends they were seeing and the best practices in dealing with COVID-19 and beyond. I don't have actual stats, but, to a country that participated in my call, everybody was experiencing a significant drop in insolvency rates.

[Julie Dzerowicz, Liberal, Davenport, ON]

Okay.

Is it for similar reasons to what you had mentioned, because it wasn't just programs. I think it was debtors not really going after the money. There were a number of different reasons. Are they for the same reasons as well?