Debates of Dec. 3rd, 2004

Bankruptcy and Insolvency Act

[David McGuinty, Liberal, Ottawa South, ON]

Mr. Speaker, it is a pleasure to respond to Bill C-281. I congratulate the member for Winnipeg Centre. There is no doubt that wage earners need protection when their employers go bankrupt. Everyone in the House is concerned about this problem and has been for a long time.

Over the years different options for wage earners' protection have been considered. They have been considered here and each with its own benefits and drawbacks.

I would like to offer up some comments as a former unionized worker, as a former small businessman and as a recovering corporate lawyer.

In examining the various options, one question has to be answered and it is this. Is this approach fair to all parties? Make no mistake, bankruptcy means there will be a shortfall and not all debts will be paid. All parties suffer in a bankruptcy, including employees, creditors, suppliers and the owners of the company.

Our challenge here is to find the proper balance in the protection of these various interests.

While it is difficult to say that the protection of workers, the backbone of our economy, can go too far, I believe Bill C-281 does just that. It goes too far. The bill throws all balance and equity out the window. It represents a radical departure from the existing system, one that if adopted into law, could have a dramatic effect on the economy and the very workers that it seeks to protect.

Let me explain. The solution proposed in Bill C-281 is straightforward, an unlimited super priority for all employment related claims to all of the assets of the bankrupt company. In addition to wages and vacation pay, it would add termination, severance pay and other benefits. It could also add protection for pensions, including unfunded liabilities.

The liabilities, in particular the unfunded liabilities, can be huge, outstripping the value of the company's assets and the company's ability to pay.

Due to the magnitude of the super priority contemplated in the bill, it could have serious effects on credit and capital access, particularly for higher risk new businesses, particularly high technology companies, over 1,500 of which exist, for example, in my region here in the National Capital region.

Creditor claims, even those that are secured under the appropriate law, would fall below employment related claims. If all the company's assets go to satisfy worker claims, there would be nothing left to pay remaining creditors. Creditors would be less certain about their ability to collect debts owed to them and it could be assumed would be less interested in investing in Canadian companies.

We must also consider smaller creditors, such as trades people and suppliers. These individuals are in many cases no more capable of protecting their interests than workers. Small businesses and independent contractors take risks when they supply other companies, and our system must respect their efforts as well as their claims in bankruptcies.

Again, we come back to the issue of balance. The underlying factor is that disharmony in the system will have potential economic costs. If credit is not available, businesses will not expand and they might even contract. If business does not expand, new jobs are not created and labourers will see less demand and less opportunities for their services.

The protection of wages must not be examined in a vacuum. Insolvency reform cannot eliminate risk or harm. It should strive to strike the best possible balance of the needs of all parties in a bankruptcy proceeding. The fact is that bankruptcy is about not having enough money to go around. The issue is how best to allocate that shortfall when everyone deserves to be paid.

Bill C-281 does not strike the right balance. It attempts to benefit one group in the equation, while placing an unfair burden on the others. To be sure, the super priority proposed by the bill is not the issue. Indeed, it might be a proper approach to take, but the balance proposed in this bill is off.

It is the position of the government that finding the right balance will require additional study. Reform in this area should wait for the results of the Industry Canada review of this and other insolvency related issues.

I would like to address one other element of the bill that has not received enough attention. The proposed bill also amends the Canada Business Corporations Act. I would commend to my colleague, the member of the NDP, to listen and learn carefully about how the Canada Business Corporations Act actually grants the minister of labour the power to appoint an adjudicator to hear and resolve wage claims by employees.

While it can be appreciated that everyone's best interests are served when claims of this sort are settled quickly, it is unclear as to why the bill would replace the courts as the mechanism for settling these disputes.

The Canada Business Corporations Act already has provisions for wage liability for directors. Right now the directors of a corporation are jointly and severally liable for six months of wages owing to employees in the event of a bankruptcy. This is an absolute liability. There is no statutory defence. These claims, even in a moderate sized corporation, can achieve sums in the millions of dollars.

The courts already have the expertise to deal with large claims of this kind. The small claims courts can deal with situations that involve only a few employees. In any event, given that wage liability is absolute, all that remains for a court to do is satisfy itself that the claim is valid and order the payment. The bill adds little except to set up a parallel system without some of the usual due process rules, including a specific prohibition of a right of appeal. Due process in my estimation should not be capriciously discarded. Despite the cost, the rigorous standard created by an absolute liability offence justifies having the safeguards consistent with a formal court proceeding.

Under the provisions of the bill, the adjudicator may summon and enforce the attendance of witnesses, compel testimony, compel the production of documents, administer oaths and order directors to pay employees the wages owing. This sounds like a court to me. Substitute the word judge for adjudicator and we have a system very much like that which currently exists, and one that operates transparently, fairly, and without the additional layers of bureaucracy. I see no need for these provisions.

The government agrees that wage protection is deserving of attention and is actively exploring the options to deal with this important issue. The solution put forward in Bill C-281 is neither practical nor reasonable, insofar as its effects on other stakeholders. It ignores the concept of balance. It favours one group to the exclusion of all others. It ignores the economic impact of unlimited super priority. It ignores the interests of the many creditors, both large and small, who by taking risks and supporting Canadian business, allow our economy to flourish and allow so many of the hundreds of thousands of jobs to be created in the first place.

[Ed Komarnicki, Conservative, Souris—Moose Mountain, SK]

Mr. Speaker, I would like to make some brief remarks with respect to Bill C-281.

There is no question that when it comes to protecting the rights of workers and their wages and salaries, every member of the House would agree that those are important issues which need to be addressed. Workers need to be protected. We have many human tragedy stories that would indicate people have suffered through loss of pensions, entitlements or severance pay. It is not a question of whether those rights need to be protected. The big issue is how they are best protected without creating problems in other places and with regard to other interested parties.

There are obvious examples in a bankruptcy of people who have to take economic loss. Many suppliers are even below the worker in terms of unsecured status. They too suffer significantly.

When a business comes into being, there are many dreams, aspirations and hopes by many parties. Fundamental to getting that business started is the ability to raise capital and operating funds to buy inventory, goods and supplies and to have the plant and the process operate. Most people would go to banks, credit unions or third parties to obtain finances to get their businesses started and to establish those jobs in the first place. Those parties provide funds in return for security. It could be hard assets, inventory or floating charge debentures, but they take those things in exchange for providing cash. They expect to realize on that security. That is why secured creditors have been given preference.

I find it hard to understand how employees are in a situation where pensions are unfunded to the degree they are without some policing taking place. The one who provides the funding expects to get the cash back when the business fails. If we start to destroy the concept of secure transactions, we will be unable to start businesses and create the jobs. We need to be careful.

When we look at the scheme that presently exists under section 36 of the Bankruptcy Act, secured creditors are first, then preferred creditors and outside of bankruptcy fees and costs, the workers are number four. Then it goes to unsecured creditors. Workers are protected to the sum of $2,000 in past wages.

The previous bill introduced by the member talked about super priority status for workers, and it was limited to $10,000. Why was it limited to $10,000? It was for good reason. It is hard to estimate or understand the amount and value of unfunded pensions, et cetera. The present bill places the workers ahead of all creditors, regardless of time and dollars. How is a person, who is advancing funds, to know what these liabilities may be?

If this bill were passed, there would be severance, which would depend on the length of time the worker was employed. There would be unfunded pensions. A lack of money in the pension fund could be created by it being actuarially unsound by the economic conditions, or by perhaps negotiations through collective bargaining agreements that would enhance the pension which has not yet been funded or to which no contributions have yet been made. These amounts could be huge, but unknown at the time the business started up and unknown at the time the financing was advanced. The only thing that can happen is they would have to plan for a contingency. They would have to plan for what the eventuality may be, which would then restrict credit, lower the amount that could be loaned or increase the interest rate.

This is not the way we want to go. This is not the way we want to deal with business, taking the problem from one area and placing it in another, particularly when the secured creditor has little to do with funding pensions and policing how that happens.

We must look at other alternatives that would preserve the current lending system and that would look at protecting the workers. I think that is a valid concern.

It is interesting to note that workers in other jurisdictions, the United Kingdom, the United States and Australia are not given a super or high priority status over secured creditors. They have considered something akin to a worker's protection fund where there is a contribution from the employer, the employee and perhaps from the government. These funds are then used in part to protect workers. It is funded by the people who are affected and the people who have some control of the government.

In each of the jurisdictions they have limitations, so there is some certainty as to what is involved. The United States has put a cap in dollars but has given them a preferred status. It is those kinds of options that need to be reviewed. These are options that take into account the rights of the workers and the security of the market. They ensure that trade and commerce can continue, that we are able to do business as we have known business to be done, and it does not take a resolution that resolves one problem and creates another.

It is for this reason that I feel this particular bill ought not to be approved. It should be opposed. We should look at a bill, introduced in proper time, that takes into consideration all of the stakeholders, all of the parties that are involved, and addresses the issue fairly and into the future.

It is not something we can resolve in what is happening today in a particular situation. It is what we do to resolve an industry issue that is of concern to us. We need to address worker protection. We must address the issue of pensions. Some of that may need to be addressed through pension legislation separate and apart from the bankruptcy legislation. In any event, it must be a broader perspective. It must have a broader view. It must take all of the interests into account when it is being drafted.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

Mr. Speaker, I want to thank my colleague from Winnipeg Centre for having introduced Bill C-281. As I have already said elsewhere, if he had not introduced it, I would have been happy to do so in my capacity as Bloc Québécois labour critic.

There is no point in repeating that the Bloc Québécois supports the bill in principle. Obviously, employees normally have no way to protect themselves when their employer experiences financial difficulties. Unlike financial institutions, which have more than one source of income, employees do not have the same ability to absorb a loss of income for hours they have already worked.

Obviously, it is difficult for employees to assess the risks of working for a particular company. When an employer has financial problems, its best resources may decide to leave to avoid losing any income, which would further decrease the employer's chances of resolving his problems.

I want to reiterate the commitments the Bloc Québécois made during the last election campaign. The BQ committed to proposing amendments to the Bankruptcy and Insolvency Act so that the wages and pension funds of employees would be the first debts paid if a company went bankrupt.

The current situation, as we know, is inadequate. Under the current legislation, an employee who has worked all his or her life for the same firm can end up without any income if that company goes bankrupt. The employee loses not only future salary income, but also all contributions to the company pension plan.

For example, in 2003, the workers and retirees of the Canadian Steel Foundries in Montreal found themselves with an unfunded pension fund when the foundry closed. In that case, the guaranteed creditors were owed $5 million, which left nothing to pay for the system's unfunded liabilities, such as the pension fund, amounting to $260,000. The employees' pension benefits were reduced but the bank was able to recover its $5 million.

The Bloc Québécois voted in favour of a motion brought before the House by the NDP in October 2003, asking the government to amend the Bankruptcy Act to ensure that the wages and pensions of employees would be the first debts paid in case of bankruptcy. Unfortunately, the Liberal Party voted against that motion and the bill was not passed.

Today, as I said, the Bloc will vote in favour of this bill but during the adoption process, it will propose certain amendments. For example, the Bloc will propose the creation of a fund to guarantee pension benefits, which could provide protection to participants in pension plans that are unfunded when the business closes. Such a fund exists in Ontario.

The wage guarantee has not been changed since 1975. The $2,000 amount would be equal to around $7,300 in 2004 dollars, according to the Bank of Canada's conversion as of December 3, 2004. It should be increased and indexed.

The fact is that the rights of creditors and the rights of workers are seriously out of balance. Secured creditors are usually the ones who can forgo that guarantee, that is, they can survive financially without a guarantee.

Creditors at the top of the list, financial institutions and large suppliers, have the expertise not only to assess a company's risks, but also to create a guarantee in a legal context. In contrast, employees do not have the opportunity nor very often the information they would need to obtain any guarantee that their hours of work will really be rewarded.

Employees cannot easily absorb a loss of income, unlike financial institutions that have several sources of income.

Even though the proceeds of their activities might be higher than wages, financial institutions diversify their risk, which a regular employee cannot do.

Thus, by giving first priority to unpaid wages, Bill C-281 would reduce the burden on an employee who has just lost his job and, need I remind you, would be a better social measure.

It is important to note that there is no guarantee employees would receive the full value of their unpaid wages, since the amount paid would depend on the value of assets being liquidated. Nonetheless, the money paid back would be even less if we kept the current system.

Some have said that making unpaid wages a first priority might inhibit the borrowing capacity of the companies, particularly those with a very large payroll. Some also say that the rules for borrowing could become stricter and that interest rates could increase if lenders no longer had priority status.

In response to these arguments, let us remember that financial institutions broadly diversify their risks and that wages are often much lower than capital costs.

These days, pay day is usually every two weeks, which greatly limits the risk of having huge amounts to pay in wages.

Passing this bill would shake up the bankruptcy and insolvency rules and standards, which have for too long gone undisturbed.

However, this restructuring is more than necessary, since the business world is constantly changing and workers can no longer be so sure about the future of the companies that employ them.

It is wrong not to ensure a minimum of protection for workers' wages and certain benefits, such as the pension funds they contribute to their entire lives while their employer has enjoyed profits.

To those who claim that amending the act will cause major problems for companies in terms of financing, they should never forget that the operation and success of a company depend in large part on its workers.

It is unthinkable that in the quest for profits and the lowest possible operating costs, we are failing to show due respect for workers.

[Marc Godbout, Liberal, Ottawa—Orléans, ON]

Mr. Speaker, the protection of wage earners when their employers go bankrupt is not a partisan issue, nor should it be. All of us in the House are concerned about this problem. We agree, I am sure, that wage earners, whose employers have gone bankrupt, leaving wages and other benefits unpaid, are vulnerable. Over the years, different governments have considered options for wage earner protection. Each option has both benefits and drawbacks. I am confident that members on all sides would like to see the most equitable solution possible and are prepared to work toward the solution.

I wish to congratulate the member from Winnipeg for having brought this to the attention of the House. As a starting point for this debate, let me note that the government agrees that wage protection is deserving of attention. I can also tell the House that the government is actively exploring options in order to deal with this important issue.

To better assess the bill, let me describe the features of the current act. To protect employees, the Bankruptcy and Insolvency Act makes employees preferred creditors when their employer goes bankrupt. That places them ahead of ordinary creditors but behind secured creditors. This preferred status is limited to $2,000 in wages earned in the six months before bankruptcy, including vacation pay. Amounts in excess of $2,000 remain as ordinary claims. It also protects up to $1,000 in disbursements for sales people.

The provision for wage liability also exists in the Canada Business Corporations Act. Right now directors of corporations are jointly and severally liable to employees for six months wages in the event of a bankruptcy. This is an absolute liability.

Bill C-281 would radically alter the situation. It fails in some ways to reflect the many other parties in a bankruptcy. Bill C-281 proposes to give unlimited super priority protection to all employment-related claims. In addition to wages and vacation pay, it would add termination and severance pay and other benefits. It would also add protection for pensions, including unfunded liability. In that respect, I personally have some sympathy for that aspect of the bill.

Upon bankruptcy, these claims would be moved ahead of all other creditors. For any shortfalls in recovery, directors of a company would have personal liability that would be determined, not in court but by an adjudicator, without right of appeal.

There are a great many drawbacks to this bill.

The amount of the termination and severance pay and unfunded pension plan liability could far exceed the total wages owing, potentially reaching several billions. As a result, this super priority will, without a doubt, have a negative impact on credit availability and commercial loan rates, which will make business start ups or expansions more difficult than ever, in a number of situations.

As for the clauses relating to directors' responsibilities, the bill does not add very much, except to set in place a parallel system without some of the usual recourses. Regardless of cost, the standard of rigour imposed by absolute liability would justify the existence of guidelines compatible with formal legal procedures.

Bill C-281 puts pension claims in the same basket as wage claims, despite the fact that pensions are covered by separate legislative regimes, and in a number of instances by provincial legislation. Mechanisms making it possible to address pension issues are already in place in these forums, and concerns relating to unfunded pension liabilities should be raised there to ensure employee protection.

Finally, even with this type of protection in place, payments would not be guaranteed, nor would they be made promptly. Many stakeholders maintain that the promptness and certainty of payment are essential to worker protection. Creation of a wage protection fund is one valid option, which merits a thorough study, along with super priority and other factors.

The significance of this bill is that while it does go a great deal further in protecting workers, the scope of what it includes shifts an unreasonable burden to other stakeholders. As a result, it could have a detrimental impact on the ability of businesses to access credit and increase employment opportunities for Canadians.

This is not what our insolvency system is about. Bankruptcy laws are a significant part of our marketplace framework. The bill would have a negative effect on commercial activity. Creditors grant credit based upon the assessment of risk. Bill C-281 would significantly increase that risk. While some of the creditors who may be adversely affected are those often thought of as being able to take care of themselves, such as large institutions, some are individual contractors and small businesses that are no better able to face the loss than employees.

In fact, small businesses and new start-ups are two of the most vulnerable groups when it comes to insolvency because they are hit twice. As creditors, they cannot afford the greater losses that the bill would cause. Greater costs of borrowing as debtors makes it less likely that they can get started and thus create jobs.

We must be mindful of these effects, as we all know the importance to the Canadian economy of small and mid-sized enterprises.

Our system must respect the risks taken by small businesses and independent contractors that also have claims in bankruptcies. It must respect the security interests of creditors. It must respect the efforts of directors who try to ensure the survival of the company. And yes, it certainly must respect employees. The fact is that bankruptcy is about not having enough money to go around. The issue is how best to allocate that shortfall when everyone deserves to be paid.

I am not saying that superpriority should be rejected as a way of handling wage and pension contribution claims in bankruptcy, but I am stressing that it is a complex issue, that it has a long history and that it involves certain trade-offs. The economic effect of any change needs to be thoroughly considered.

Last year, the Senate Standing Committee on Banking, Trade and Commerce conducted a comprehensive review of our insolvency system. The committee only went so far as to recommend that the existing protection be elevated to a limited superpriority over some assets. It further recommended that pensions not be included in this form of protection and in that aspect I think it did not go too far.

To conclude, I have sketched out these details to make a simple point clear to my hon. colleagues of various stripes.

My point is that this whole issue of wage earner protection in the event of a bankruptcy is of great interest and must be addressed. However, to find a fairer solution than what currently exists will require a great deal of work and thought. The process is already well underway but is not yet complete. The solution put forward in Bill C-281 is neither practical nor reasonable in certain circumstances, because of its impact on other stakeholders.

As I indicated at the beginning, this is not a partisan issue. Different governments have been confronted with this issue, which must be resolved. In 1991, a bill was introduced to establish a wage claim protection program to be financed through payroll, but it was not passed. There are various models for increasing protections, and these were discussed during the period before the amendment of the Bankruptcy and Insolvency Act in 1997. But once again, consensus could not be achieved.

Still, and I stress this point again, while Bill C-281 is certainly well intentioned, it is definitely not the best solution.

Industry Canada is currently working on developing a fair solution to ensure the protection of workers whose employer has declared bankruptcy. Until such time as this work is complete, the government cannot support a bill to amend existing safeguards.

However, I give my personal pledge to work with my hon. colleague to find a solution that is fair to all those involved.

[Ed Broadbent, NDP, Ottawa Centre, ON]

Mr. Speaker, there are many definitions of democracy, but the most succinct one and the one which I have tended to prefer over many years is the one offered by Abraham Lincoln. He said that democracy was government of, by and for the people, not just of and by, but for the people. Political power in a democratic society should be used for the benefit of the average and the poor.

This is a concrete example, it seems to me, of a serious desire to use the capacity of the state that already legislates the benefits of financial institutions, the banks and other investors, to redress the balance on the side of working families. We should approach it from that point of view.

Those who have raised questions about it, those who have praised my colleague's intent with the bill, I hope would vote for it to send it to committee. Then we could have a serious examination of the practical problems that have been raised about generating the necessary investment capital and we would know if we are serious or not.

It would be interesting to hear from people from various government departments and even from the banks. I would love to hear them explain why this would be a serious problem. Maybe the banks could also explain why they are making billions of dollars in profits and they do not pay taxes on their offshore investments in the Caribbean at the same time.

The bill says, to use an old slogan, let us for once put the workers first, the men and women who have devoted 30 or 40 years of their lives to a corporation. Many of us think that is the real investment. I am not denigrating the financial investment. I am just saying that they are both investments. One is through human labour and the other is through capital.

The bill wants us, when we have to make choices, to say that the human labour should be given preference over the capital investment, rather than the other way around. Whether in terms of salaries or wages or in terms of pension benefits, the legitimate claims of workers should be taken ahead of the banks and other financial institutions, suppliers, governments and shareholders if a company goes bankrupt.

Frankly, the only serious argument I have heard against this proposal has been the one that this could somehow deter investment capital. That cannot be dismissed out of hand, but as our colleague from the Bloc Québécois has said, most investment institutions, to understate it considerably, have a widely diverse investment pattern.

If a company went broke in a certain category of its investment, the workers would get, under the provisions of this bill if it passed, the first benefit and the bank would lose some money. Under the present circumstances, it is the workers who lose everything. The banks would lose something here. Normally in capital markets with investments going on in real societies, not just investments here in Canada, they have diverse investments abroad. They will make up for the loss here with what they make elsewhere, which are normally fully adequate profits in their other investments. That is the expectation with the bill.

I come back to my colleagues in the other parties who have raised the investment problem. Why not put a clause in the bill? Why not amend the bill? Why not send the bill to committee and put in an amendment which says that after three years or five years the issue would be revisited? We could take a look at the evidence and, to quote Mr. Diefenbaker's old phrase, if the calamitous disaster should occur as some people think would occur by putting workers first, then we could have a look at it.

Let us try this priority. Let us go ahead and let the working families have the legitimate first claim. If there was a major problem in accumulating capital for investment in our society, after five years, we could look at the bill and then reconsider. I appeal to my colleagues to send the bill to committee.

[The Deputy Speaker]

Order. The hon. member will have a further five minutes when we next get back to the bill.

The time provided for the consideration of private members' business has now expired, and the order is dropped from the Order Paper.

It being 2:30 p.m., this House stands adjourned until Monday, at 11 a.m., pursuant to Standing Order 24(1).

(The House adjourned at 2:30 p.m.)