Debates of Dec. 7th, 1994

Department Of Industry Act

[The Acting Speaker (Mrs. Maheu)]

Is the House ready for the question?

[Some hon. members]

Question.

[The Acting Speaker (Mrs. Maheu)]

Is it the pleasure of the House to adopt the motion?

[Some hon. members]

Agreed.

[Some hon. members]

No.

[The Acting Speaker (Mrs. Maheu)]

All those in favour of the motion will please say yea.

[Some hon. members]

Yea.

[The Acting Speaker (Mrs. Maheu)]

All those opposed will please say nay.

[Some hon. members]

Nay.

[The Acting Speaker (Mrs. Maheu)]

In my opinion the yeas have it.

And more than five members having risen:

Call in the members.

Pursuant to Standing Order 45(5)( a ) I have been requested by the chief government whip to defer the division until a later time.

Accordingly, pursuant to Standing Order 45(5)( a ), the division on the question now before the House stands deferred until 5.30 p.m. tomorrow, at which time the bells to call in the members will be sounded for not more than 15 minutes.

It being 5.30 p.m. the House will now proceed to the consideration of Private Members' Business as listed on the Order Paper.

The House resumed from October 25 consideration of the motion that Bill C-237, an act to amend the Bankruptcy Act (priority of claims), be read the second time and referred to a committee.

Bankruptcy Act

[Don Boudria, Liberal, Glengarry—Prescott—Russell, ON]

On a point of order, Madam Speaker, I think you would find unanimous consent that any division bells called on the private member's item now before the House later this day be deferred as well until tomorrow at 5.30 p.m. There has been consultation with the whips of all parties to defer that vote until that time. I think you would find that consent if you were to seek it, Madam Speaker.

[The Acting Speaker (Mrs. Maheu)]

Is there unanimous consent?

[Some hon. members]

Agreed.

[Jean-Paul Marchand, Bloc, Québec-Est, QC]

Madam Speaker, this bill provides that in cases of bankruptcy wages be paid as a first priority, up to a limit of $9,000 for each worker.

The present Bankruptcy and Insolvency Act passed in 1992 by the Conservative government maintains the preferred claim status for wages when an employer files for bankruptcy. It covers wage-earners by giving them preferred creditor status for wages earned during the six months previous to the bankruptcy, up to a limit of $2,000.

Wage claims rank fourth in the priority of preferred claims. Since claims of secured and preferred creditors must be paid first, there is not always enough money left to cover wage claims. Workers suffer the consequences.

Progress on that issue did not lead to a fair solution for workers. The problem has been dragging on since 1980, when the Standing Senate Committee on Banking, Trade and Commerce mentioned three possible solutions. The first was to give absolute priority to wage claims by putting them first, before those of any other secured creditor. That is exactly what the hon. member for Portneuf suggested today and I want to commend him for that.

Therefore, for almost 14 years now, this House has been analyzing the possibility of amending this legislation which is unfair to workers. For 14 years, by not addressing this problematic issue, this House has shown that it does not give a hoot about the interests of workers and what they produce.

Why hesitate so much on this single issue? Because we have to choose between the workers and the banks. That is the choice we have to make.

Why have we not made any progress? Because successive governments have not had the courage to come to the defence of the most disadvantaged in our society.

We are talking here about a ludicrous situation that has been going on for years. The struggle in this area has been tough. It took 40 years of fierce fighting to have the Bankruptcy Act reviewed in 1992. Extensive consultations were held with the stakeholders and people concerned because many divergent interests were involved.

Undeniably, some social choices are at the basis of such a bill. Unfortunately, and we must be clear on this, each time it has been proposed, the idea of giving first priority to wage claims has always been defeated by the banking lobby. This is obvious in all the documents dealing with this sensitive issue.

Some members claim that this bill would cause a rise in the unemployment rate, since according to them, lending institutions might reduce the amount of credit available to businesses if employees were given absolute priority over other creditors.

Of course jobs must be protected, but one can hardly argue that the success of an SME depends on whether it can avoid paying employees the wages, leave and pension fund contributions they rightly earned.

We must also consider the precarious situation facing employees who have no way to recover wages in arrears. We cannot endorse the principle of protecting the banks and letting employees who earn a modest wage fend for themselves.

Of course bankruptcy is an unpleasant situation and it always means someone will have to pay. In this instance, the House has the option of identifying four preferred creditors and deciding which creditor will be first in line to be reimbursed. These four creditors are: the government, suppliers, lenders and employees.

The House must now decide which of the four is best able to absorb the loss resulting from the bankrupt individual's lack of assets to reimburse each creditor. Who has the most to lose and who is the most vulnerable? Is it the government? Is it the suppliers? Let me explain my point of view.

For the government, despite the dismal state of its finances, the loss would be negligible, compared with the national debt.

As for the suppliers, they can claim losses due to bad debts and thus reduce their taxable income.

I am not worried about the lending institutions. They can consider bad debts as an incentive to improve their follow-up in the future, which should increase their sense of responsibility to society instead of encouraging them to ignore their customers' problems the way they do now.

Finally, we have the employees, who have no way of absorbing the losses they suffer following a bankruptcy. In fact, under our existing legislation, employees are forced to absorb these losses. They have no alternative, no way out.

This is not intended to be an exhaustive analysis of the subject, but employees are not only penalized by being unable to recover their salaries but also because they will not be reimbursed for expenses incurred during their period of employment: food, transportation and accommodation, in some cases.

Why up to $9,000? Because even when employers pay their employees wages every week or every two weeks, in some cases where substantial amounts well in excess of the $2,000 guaranteed thus far may have accumulated. Money owed to the employees in excess of this ceiling is not reimbursed and they have to absorb their loss.

In my view, this bill is a tool to motivate workers, a tool to foster productivity. Workers will be encouraged to take chances and accept compromises to help their SME go through rough times, if they are assured that at the end of the day, they will get their salary or their investment back, that is to say that they will recover their outlay before the government, banks and suppliers.

This is a far cry from the present legislation which makes workers bear the brunt of the losses by paying them back last, while we know full well that they do not get one extra penny when business is booming.

The government, by refusing to amend this unfair act, is applying double standards more than ever. I believe that amending the act and putting employees at the top of the list of preferred claims would be a matter of basic social justice, but it would seem that fairness is not a priority for the Liberal Party.

I will draw a parallel with the family trusts the Liberals are intent on protecting. This is another example of double standards where the rich are favoured at the expense of the poorest members of society.

Just as banks are protected by the Bankruptcy Act which makes sure that they are paid before the employees, the rich are protected once again through family trusts which make it possible for them to be granted a tax exemption for up to 80 years. This is a tax loophole available to the rich, while there is talk of taxing RRSPs, a plan designed for private sector employees who do not have a generous pension plan.

I repeat, this is a case of double standards.

It must be said: maintaining family trusts and the Liberals' refusal to change the order of priority of claims guaranteed under the Bankruptcy Act, serve only one purpose: to protect the wealthiest members of society.

Indeed, the family trusts the Liberals are steadfastly defending are not used by middle-income families. In this respect, I would like to quote the findings of a study by Ernst and Young which showed assets averaged $47 million in a random sample of 121 family trusts.

I repeat, Madam Speaker, this is a blatant case of double standards.

[Herb Grubel, Reform, Capilano—Howe Sound, BC]

Madam Speaker, I oppose this bill to amend the Bankruptcy Act because it would result in inefficiencies and an unfair burden on the general public.

I can understand the motive behind the proposed legislation. Why should banks, funeral businesses and accounting firms be paid out of the proceeds of a bankrupt firm before workers who typically have fewer resources than these enterprises?

The new law presumably would reduce profits of these firms without any dire social consequences while it would prevent the misery for the families of workers who can ill-afford to lose income they have earned. However, this view is shortsighted.

In a free society and under current law funeral businesses and accounting firms do not have to take business for which they are not paid. The proposed law does not envisage changing this condition. Therefore when an estate is to be dissolved and it is clear that if after the payment of labour there is no money left for funeral expenses and accounting services, who will do this work?

I see only one answer to this question. A government will have to undertake the task or at least pay for it out of general tax revenue. People have to be buried, accounts have to be settled to meet the requirements of property laws that have existed for centuries.

Under either approach the public ends up paying for these services. Therefore, the proposed legislation will enrich workers of a bankrupt company at the expense of the general public. I do not see the fairness of this outcome, especially because the wages earned by workers in different occupations and industry tend to compensate them for all kinds of risks in the first place. I will return to a discussion of this proposition in a moment.

Let me now turn to the not so obvious consequences of ranking secured loans below wages. This rule will increase the interest rates which lenders charge to businesses for loans for the purchase of tangible assets. This is not a malicious plot of capitalists. By doing so lenders will simply meet their fiduciary responsibility.

I venture to guess that none of us in this House would be very happy if our savings in a bank or credit union were used to lend to risky borrowers without proper risk premium and collateral. We would be very unhappy if the fiduciary holders of our money did not pool risky investments and did not make sure that on average interest earned on the pool minus payments for bankruptcy losses is equal to what they could have earned by investing our money in secure government bonds.

This is of course what lenders to business do. Therefore any government legislation like the one proposed which increases the rate of loss from loans requires an increase in the interest rate charged to all members in the pool of risky loans. One rather obvious consequence of this action is that borrowers' profits are reduced. They will try to raise the cost of their services and products to compensate for this reduction. This can be done only to a limited extent, otherwise they would have already charged higher prices before the interest costs went up.

To the extent that they succeed and get higher prices, the money which goes to workers first in line in a bankruptcy proceeding comes from the general consumer. I see no fairness in this. A less obvious effect of the higher loan rates to business is that some firms will not be started at all. As a result the demand for labour and the wage rate are lowered.

In addition, the average amount of capital held by business will be smaller. Therefore, labour productivity and wages will be lower. In effect, the rest of labour is forced to pay for the income earned by the workers in a bankrupt firm indirectly through higher interest rates charged by lenders. I see no fairness in this.

Finally, it should be noted that the probability of bankruptcy of firms can be predicted to some degree by the characteristics of an industry, a firm or the personality of the employer. Workers are smart and know how to look after their own interests. They enter employment contracts considering their pay in light of a wide range of conditions, including the risk of their employer going bankrupt. The idea of buyer beware is relevant to goods and services as well as the sale of one's labour.

The vast majority of workers therefore will accept employment where the risk of bankruptcy exists only if their wages reflect properly this condition. Otherwise they will find employment elsewhere. They will continue to stay with a company only if they feel their wages properly reflect the risk they are taking.

The motives for doing so are complex. I certainly would not hang around and work for a company about to go bankrupt and unable to pay me wages owed unless the prospective benefits are fully worth it.

I would postulate that the wages of workers, everything else remaining the same, are higher the greater a firm's risk of bankruptcy. The proposed law would remove or significantly lower the risk of wage losses from such events. This would encourage such workers to accept employment in such industries at lower wages. They would therefore on average be no better off than they were under the present law, except that the efficiency of the economy would be reduced because there would be an over expansion of risky firms and industries and a job and output reducing tax on the rest of the workers.

There are always some people who do not obey the principle of buyer beware or who have poor judgment about the prospect of a company's bankruptcy and ability to pay owed wages. I think the number of these people is small. I have confidence in workers.

Canadian workers are not dumb or unaware of the functioning of markets. Helping those few through the proposed legislation is very indirect and costly for reasons just discussed. Help for them should come through education and the publication of relevant information. Unions could play an important role in this process. They have the resources and are driven by the right humanitarian motives. Those who cannot be reached by these direct methods and who need help have to be taken care of by existing systems of private charity and public aid.

In sum, the present law regulating the order in which obligations of estates are settled in the case of a bankruptcy or death have existed for centuries. Institutions which have survived for so long should never be changed without very good cause.

They may appear to create injustices for some, but closer examination of their effects typically will reveal that serious unforeseen consequences are likely to arise if they are changed. The long survival of such institutions strongly implies that past efforts to improve them have failed.

I believe that my analysis of the indirect effects of the proposed change in the bankruptcy law support this view of the sociobiological evolution of institutions. I urge members of this Parliament to vote against these proposed changes.

[Chuck Strahl, Reform, Fraser Valley East, BC]

Madam Speaker, the purpose of the bill before us today is to move employees from fourth to first place in the legal order of precedence when a bankruptcy occurs. If it was passed, this bill would provide that when the assets of a bankrupt person or corporation were divided, the first people to receive payment would be employees instead of other people like funeral directors, lawyers and administrators, and secured claimants.

Funeral expenses, legal and administrative fees are not the main obstacle presented by this bill. Those who currently have the first right of payment are secured creditors, which is a broader and more significant category involving mortgage holders. These secured creditors are the ones who would suffer most from the enormous changes the bill would bring about in our financial system.

What are we really talking about when we speak of the order of precedence in the Bankruptcy Act? We are describing levels of risk. The one in first place on the order of precedence is taking the least risk in the case of bankruptcy, because the first one will be the first one paid out.

We know that all business ventures do not succeed. Some make it but some do not. When an employee or a lender enters into a contract with a business person, the risk of business failure is always there. The place one takes on the order of precedence will determine just how much risk one is willing to undergo.

Employees are now fourth on the list, so employees bear more risk than some others. This means they should carefully consider whether they want to give their time to a business they suspect might fail. The hon. member who spoke previous to me already pointed out that they are smart enough to make that decision already. It goes without saying that if lenders were moved lower in the order of precedence, they would have to consider more carefully than they do already whether or not to lend money to a business.

If we change the order of precedence on a broad, nationwide basis, we are making a determination about risk and who should bear it. We are also making a statement about what is most necessary in society for the efficient functioning of business. Given that we all want private enterprise to flourish, we must make the rules in such a way as to facilitate the most efficient way for all Canadians and the marketplace to prosper.

Government could put up all sorts of artificial and unnecessary barriers to the free functioning of the marketplace for one political reason or another at the expense of the efficiency in the marketplace.

For instance, the environment is important so the government could pass a zero emissions law for the auto industry, stating that automobiles could not pollute at all. In this impossible example it is obvious that the auto industry would immediately grind to a screeching halt. I merely want to demonstrate that in considering what laws to pass, governments must strike a balance between the efficiency of the market and the kind of business it wants to foster.

From that example let us move back to the matter at hand. If an employee was first on the order of precedence, the employee would be taking the least risk in the case of bankruptcy and the lender would have to incur more risk than before. This consideration of greater risk would have inevitable efficiency results in the marketplace. I want to describe what they might be.

Certainly there would be one positive result, namely that of paying back employees who were not paid full wages or severance pay if a person or corporation went bankrupt. This would be nice for the employees. Employees are important and necessary actors in our financial system and deserve due consideration. But this is the only positive effect I have been able to think of in this bill.

This scenario is directly analogous to the auto industry I was just talking about. I maintain that the passage of Bill C-237 would have a harmful effect on employment in general in the country. It would make small business less efficient and slow the pace of economic activity across the nation. Just like a zero

emissions policy in the automobile sector would do more harm than good, I am convinced that the sum total of harm caused to employees would be vastly greater than the losses they now suffer as a result of being in fourth place on the order of precedence.

The first harmful effect a change in the order of precedence would cause would be a reduction I believe in the overall employment in Canada. A company which needed, for example, $1 million and wanted to employ 25 people would not be able to compete for funding with a company that also wanted a $1 million loan but was only going to employ 10 people.

The risk would be much reduced if there were fewer employees to pay out before the lender received his or her share. This would cause businesses to shy away from labour intensive enterprises and move toward enterprises involving technology even more than labour. People would become less important players in our financial markets as a result of this change and machines would become more important.

The second effect we would feel at a national level would be more important. It would have a direct impact on foreign investment. Capital is very mobile on a global basis and foreigners invest in our economy all the time. If another country had laws that would guarantee them less risk than Canada could, then their money would tend to flow out of Canada and into other safer business enterprises around the world.

Canada depends a lot on foreign capital. We cannot afford to send foreigners a message that they are not welcome here. The loss of their financing would mean less investment and fewer businesses. Again this would have a direct, more serious negative employment effect across the country.

The final effect would be the most serious of all. If lenders had to undergo more risk than they do now in lending they would be forced to think twice before lending at all. This would mean that more marginal business ventures would have a harder time raising capital. When they wanted to borrow money they would have to pay a risk premium, in other words, a higher interest rate for that money. This would mean that many businesses simply would never get off the ground because they would not be able to afford the interest payments on their loans.

Government currently plays a role, unfortunately, by lending to marginal, more risky businesses through agencies like the Western Diversification Fund and the Atlantic Canada Opportunities Agency. But the capacity of governments to do so in the future is being vastly reduced by government debt. Therefore government in this case would not be able to take up the slack in this area of the market.

We all know that many innovations never succeed but a few pay off handsomely. Innovative entrepreneurs are important in our economy and Bill C-237 might discourage them from taking risks. Their ideas would never see the light of day if access to risk capital were reduced.

It is obvious that fewer people would be employed as a result of this restriction on lending capital. What employees gained in wage security they would lose in job security. The old adage that you cannot get something for nothing is truly relevant here. What little you might have gained in one sector of the economy you would lose far more in another. Bill C-237 would have a detrimental effect on employees.

As usual, government meddling with the marketplace would have the most detrimental effect on small businesses. I would remind members that over 97 per cent of all firms in Canada have less than 50 employees. Small business is the engine of economic growth and we want to keep fueling that engine, not choke off its fuel by unnecessary government restrictions such as the one we contemplate here today.

The argument is that we need to be kinder to employees. Somehow we need to make them more secure. But is it really a kindness to give them that kind of security and then throw them on the dole? What kind of effective security is that? It is security for some but it is unemployment for others.

As I said a few moments ago we will all be more prosperous if private enterprise flourishes in Canada. That is a given. All we need to do is discover what rules to set in place that will make this happen. I would remind members that the rules in the Bankruptcy Act are not arbitrary. They represent the interests of people acting in the marketplace over generations of litigation and thousands of cases of business relationships.

I have stated adequately my clear opposition to this motion. It is not because I appreciate workers less than the member for Portneuf. The rules of business should maintain the overall efficiency of private enterprise because the security of private enterprise ensures job security for Canadian workers.

In my opinion, the order of precedence assigns risk in a way that benefits business efficiency. In that way it serves the public interest. It should, therefore, remain intact.

[The Acting Speaker (Mrs. Maheu)]

Before recognizing the hon. member for Portneuf, I would like to say that pursuant to Standing Order 44, no member, unless otherwise provided by Standing or Special Order, may speak twice to a question. It says:

44.(2) A reply shall be allowed to a member who has moved a substantive motion, but not to the mover of an amendment, the previous question or an instruction to a committee.

Therefore, the hon. member for Portneuf has the right to reply.

[Pierre De Savoye, Bloc, Portneuf, QC]

Thank you, Madam Speaker.

Debate on Bill C-237 that I have had the pleasure of introducing is drawing to a close. My Liberal and Reform colleagues showed no real willingness to redress the obvious injustice towards unpaid workers who assume part of the burden of their employer's bankruptcy.

Here is what the Liberals and Reformers argued. First, banks would be reluctant to lend money to companies.

Second, these same banks would lose patience more quickly when a company was experiencing difficulties.

Third and final argument, such a super priority for wage claims would be unfair to other creditors, including the Crown.

I will start by disproving the first argument. You know as well as I that generally speaking employees have no say in the way their employer runs his business. An employer can mortgage the company using his employees' salaries and wages as collateral. All creditors give legal consent for the money they loan to a company, but not employees. They have no say in the matter. Yet, their salaries, the fruit of their labour, is put up as collateral for other creditors. This is clearly unfair.

Moreover, the government does not get a penny out of unpaid wages. If salaries were to become a super priority, they would be paid to employees and the Department of Revenue would get its share. This disproves argument number 3.

The second point, that banks would be less patient with businesses in difficulty, is an interesting argument since banks are responsible for ensuring that the business to which they lend money is solvent. Banks are well placed to see if a business is able to pay its employees' salaries. If a bank lends to a business that is not able to pay its employees, it means that this institution agrees to let the workers bear the risk of the loan. Such an attitude would be both unjust and unacceptable.

Bill C-237 would force banks to be more responsible in this regard, which is highly desirable, you will agree.

This brings me to the first point. Is it true that this bill will affect the financing of businesses? I remind you that suppliers retain a right of ownership on unpaid supplies. The granting of that right in the past did not affect companies' access to funds.

We should also note that the industry committee recently tabled a report on the Small Businesses Loans Act. Here we have a good opportunity to illustrate the interdependence and complementarity of two measures: Bill C-237 corrects a problem for workers and the committee report enhances business financing. Consequently, the argument that business credit could be restricted does not hold any more. That did not happen in the case of a similar measure concerning suppliers and besides, the Small Businesses Loans Act could provide for that.

May I remind you that the Parliamentary Secretary to the Minister of Industry said in the second part of the debate on this bill, on October 25, that "until we have the banks acting more progressively and until their attitudes change toward small business, this bill should be defeated".

That is the main repugnant reason why some Liberals objected to this bill. That is also the main reason why all bills advocating the super priority of wage claims have failed for more than 20 years. Not for practical or economic reasons, but simply because we should wait for the banks to change their attitudes.

Well, I say no. Our workers have been subjected for too long already to the financial institution lobby. Over the past 20 years or so, in parliamentary committees, advisory committees and a stunning amount of legislation, banks have been used as an excuse to reject any piece of legislation on the priority status of wage claims, and every government has given in to the powerful banks.

In closing, let me repeat the arguments for this bill. First of all, this measure is intended to protect the driving force behind our economy, the workers. Next, the principle of priority for wage claims is one that makes up for the injustice done to workers by giving them the rank to which their work give them an indisputable right.

Moreover, this proposal will ensure that salaried employees will have better chances to be paid and paid more quickly. Let me add that the superpriority will allow them to be paid without any cost to the taxpayers. In fact, the government will get its share.

Besides, it is obvious that the risk that this superpriority would restrict credit for businesses has been deliberately exaggerated. That will not be the case. Finally, need we point out that it is not up to the workers to guarantee, with their wages, and without their consent, financial decisions made by their employers.

In its red book, the Liberal Party claims that it is committed to the principle of social solidarity, and I quote from page 73. It is stated that many of the laws and policies that previous Liberal governments enacted remain the basis of our system of social support, "through which we pool our resources to create programs that benefit all Canadians and help to sustain people through difficult times".

Therefore I ask the government members to fulfil that commitment in supporting Bill C-237 so that it can be referred to a

committee where it will be improved before coming back to this House, so that the public can be better served.

[The Acting Speaker (Mrs. Maheu)]

Is the House ready for the question?

[Some hon. members]

Question.

[The Acting Speaker (Mrs. Maheu)]

Is it the pleasure of the House to adopt the motion?

[Some hon. members]

Agreed.

[Some hon. members]

No.

[The Acting Speaker (Mrs. Maheu)]

All those in favour of the motion will please say yea.