This commentary was first published in the Financial Post on March 10, 2009.
Every modern society needs a balanced, well-functioning insolvency law to take care of the inevitable casualties of a free-market economy. This is true even when the economy is buoyant. It becomes imperative when the economy is in recession with bankruptcies mounting.
Insolvency law has two major goals. The first is to provide an orderly procedure for the liquidation of insolvent estates and distribution of the proceeds among the debtor's creditors in a prescribed order. The second goal is to enable viable enterprises to restructure their affairs so as to save jobs and stay in business and, in the case of individuals, to enable them to compromise their debts and avoid the stigma of bankruptcy.
These goals seem simple but their implementation has become increasingly complex because of the size and variety of claims and because bankruptcy law is often called upon to solve problems that have their origins outside bankruptcy. In addition, a major transformation has occurred in the consumer insolvency area because of the phenomenal growth in consumer credit.
As late as 1973, the number of consumer bankruptcies -- 3,647 -- was smaller than the number of business bankruptcies. At the end of 2007, there were 101,206 individual filings and the outstanding volume of consumer debt had increased eightfold, to $383-billion in 2007 from roughly $46-billion in 1980.
Such changes generates the need to update Canada's bankruptcy law at regular intervals to meet the demands placed on it. Canada actually embarked on this road as far back as 1975. Regretfully, the job is still incomplete and both the quality of the reforms and the procedure by which they were brought about leave much to be desired.
Illustrating these difficulties are the reforms introduced by the Paul Martin government in June, 2005, in a 140-page bill. Bill C-55 had no explanatory note -- standard in United Kingdom and United States bills -- and its details caught many by surprise. It contained many controversial provisions, numerous inconsistencies and failed to address some key issues. All this was documented in a 90-page analysis prepared by a group of eight Canadian law school academics specializing in insolvency law.
The bill should therefore have been subjected to careful scrutiny by Parliament. Yet this never happened. The Industry Committee of the House of Commons began hearings on the bill in October, 2005. However, the committee had met only a few times before the bill was pulled out of committee and approved by the House of Commons, without debate, and just before Parliament was dissolved and elections were called.
To complete the rubber stamping, the Ministers of Industry and Labour appeared before the Senate's Banking, Trade and Commerce Committee and persuaded the Committee to give the bill its summary approval as well. To make the request palatable, the ministers promised the committee that the government would not proclaim C-55 before the Senate had had an opportunity to study the bill after the elections and to make its report.
The Martin government was defeated and its successor, the Stephen Harper government, announced its intention to introduce a bill to amend the 2005 amendments. The amending bill, Bill C-12-- also long and complex -- was rushed through the House of Commons in June, 2007, again without debate and without committee hearings.
In an uncanny reprise of the events of December, 2005, the new Minister of Labour and the Parliamentary Secretary to the Minister of Industry appeared before the Senate Banking Committee in December, 2007, and again persuaded the Committee to approve the amendments without hearings or debate.
The reasons given by the government representatives on this occasion was that the government was anxious to draft the regulations necessary before the socially important Wage Earner Protection Program provisions in the new legislation could be proclaimed.
Once again, the Senate Committee was assured there would be no objections to the committee holding hearings on C-55 and the amending bill in the new year, as if somehow this could unscramble a rather stale omelette.
Nevertheless, the Senate Committee held hearing in February and March, 2008, but then shifted its attention to what was described as more urgent tax legislation. The Committee never completed its hearings on the bankruptcy legislation and, not surprisingly, was not able to publish its report before Parliament was dissolved in June, 2008.
This sorry tale contains several important lessons.
The first is the secrecy and lack of transparency with which important legislation is prepared and then rushed through both Houses of Parliament.
The second is the inability of Parliamentary committees to discharge their mandates effectively. This is not just a question of the committees being given sufficient time to do a proper job of scrutiny. It also presupposes that a sufficient number of Industry committee members in the House of Commons, and members of the Banking committee in the Senate, know enough about Canada's insolvency law to be able to understand the issues and to express an opinion about the merits of the recommendations.
The third, and less obvious but equally important lesson is the need for a bankruptcy commission to review Canada's insolvency legislation at regular intervals. The task should not be left to conscientious, but unrepresentative, civil servants working behind closed doors in Ottawa and subject to intense pressures from powerful interest groups.
The commission route has been used very successfully in England and the United States to prepare the ground for major revisions of their insolvency laws.
Its obvious advantages are -- assuming the commissioners are chosen for their competence, experience and diversity of backgrounds -- that the recommendations for change in an unavoidably technical branch of the law will be made with great transparency by a group of professionals.
This does not dispense with the need for Parliamentary scrutiny of the legislation, but it would greatly simplify the role of the Commons and Senate committees.
They would be able to focus their attention on the key policy issues and have the assurance of knowing that the predominantly technical issues had been addressed, openly and after public discussion, by the group of expert commissioners.