Submissions to Government

OSB Funding Paper

January 10, 2000

Mr. Marc Mayrand
Superintendent of Bankruptcy
Industry Canada
Bankruptcy Branch
Jean Edmonds Tower South
8th Floor - 365 Laurier Ave. West
Ottawa, ON
K1A OC8

Dear Marc:

re: OSB funding paper

INTRODUCTION

The Board of Directors of the Canadian Association of Insolvency and Restructuring Professionals is pleased to provide you with its comments on "A RESPONSE TO "MEETING' THE CHALLENGE ". The Executive Committee of the Association has consulted with provincial insolvency associations and, as with our February 16, 1999 submission, believes that our comments reflect a high degree of consensus from the members of CAIRP (who represent the majority of the trustee community). Our members are actively involved in providing a full range of bankruptcy, insolvency and business recovery services, ranging from consumer bankruptcy to multi-national restructurings. Our member firms include sole practitioners and international firms.

Your analysis of the options and the responses is excellent and provides us with a clear understanding of the rationale behind your draft proposals. Having said that, we still disagree on some issues and many of our comments will repeat our earlier submission.

In this submission, we will examine:

1. GENERAL CONCERNS OF CAIRP
2. Equity
3. Regulatory Fairness
4. Cost Efficiencies  
5. CAIRP's RESPONSE TO THE DRAFT PROPOSALS  
6. OUTLOOK FOR THE FUTURE

IV. OTHER OPTIONS RECOMMENDED BY CAIRP

1. GENERAL CONCERNS OF CAIRP
2. Equity

The response says:

"The OSB considers that its proposals are both equitableand reflect the principle of fair share as they directly affect the beneficiaries of the system and each type of client or stakeholder ñ debtor, trustee or creditor ñ shares in paying the proposed additional funding in a manner which supports the government's user-pay principle.

The public interest is safeguarded since cost-sharing by debtors (higher registration fees), creditors (change to the levy) and trustees (higher licence fees) will allow all three groups to continue to benefit from the bankruptcy and insolvency system."  

Again, we submit that Equity requires a beneficiary-pay system rather than a user-pay system. The cost sharing to fund the deficit in the OSB budget is being borne solely by three user groups, debtors, creditors and trustees. The Public is a major beneficiary of an honest, efficient, well-functioning bankruptcy and insolvency system. The benefits to the Public are:

• Reallocation of resources to productive use
• Encourage risk-taking
• Promote investor confidence
• Encourage reorganization of viable businesses and preservation of existing jobs
• Facilitate arrangements between debtors and creditors
• Debtor rehabilitation
• Deterrent to fraud
• Public record of estates
• Balance competing interests.

It is not equitable for those directly involved in the system to be solely responsible for funding the benefits, which accrue to the Canadian Public at large. We believe that there is a strong argument for OSB to be partly funded from general revenues.

We must also comment on the fact that in the discussion on licence fees, trustees are characterized as beneficiaries of the system (along with creditors, debtors and the Canadian Public at large). Trustees are trained professionals who administer the bankruptcy process for the benefit of the debtors, creditors and Public at large. A Chartered Insolvency and Restructuring Professional (CIRP) / trustee does not receive a benefit in the same sense as the other groups that have been categorized as "beneficiaries". If the definition of "beneficiary" were to apply to anyone who earns a living from working within the system, an employee of the OSB would also be a "beneficiary". So would insolvency lawyers, many of whom practice exclusively in corporate and commercial insolvency files, be beneficiaries in the view of the OSB. Part of the rationale for raising licence fees is that trustees, as beneficiaries, should contribute to the cost gap. Applying the same reasoning would lead us to the conclusion that the employees of the OSB, as beneficiaries of the system should have their salaries cut as their contribution to bridging the gap. CAIRP would not support a salary reduction. In our opinion, OSB staff should be fairly and competitively remunerated in order to be able to attract the high calibre of individual required to deal not only with regulatory maters but also to manage the complexities of the changing insolvency environment. Similarly, lawyers who specialize in insolvency are no different from Chartered Insolvency and Restructuring Professionals, that is to say, professionals who provide professional services for a fee.

The analysis goes on to say "An increase in annual licence fees is relatively simple to administer and is equitable in itself because all trustees directly benefit from the OSB's services." Our Introduction raises "Cost Efficiencies" as one of our concerns and we repeat that the entire discussion has been dominated by increasing revenues, not by reducing costs. There is no analysis of the benefits delivered by the OSB to trustees or of the potential cost savings in delivering these benefits. This is an important point because the rationale for a licence fee increase includes the comment that the proposed fee would "Ö bring the yearly trustee fee up to the dues levels paid by other professional bodies". With respect, we would submit that this is flawed logic. Other professional bodies are self-regulating bodies. Members of these bodies participate in the governance structure and have control over licensing, discipline, what other services to provide and what fees to charge. In this case the OSB decides what "benefits" to provide trustees and our members have no control over how much the OSB spends to deliver those "benefits".

In conclusion, we agree with the evaluation criteria that were outlined in "Meeting the Challenge"but we do not agree that the draft proposals satisfy them completely, particularly the criteria of Equity and Fair share.

 

b. Regulatory Fairness

CAIRP counts the following among its core goals:

• To promote public confidence in the integrity and value of the insolvency process in Canada.
• To promote continuous improvement in the insolvency system.

In our previous submission, we made the observations that:

1. We are of the view that a substantial number of transactions of unknown magnitude are being driven outside the system. The result is an increase in self-help remedies, a loss of transparency in the system and increased risk of abuse.
2. A large amount of resources are being spent on regulating some of the participants in the system (CIRP/trustees), while others are unregulated (for example, receivers, liquidators and auctioneers).

These two observations are linked in that CAIRP's recommendation to increase and enforce penalties for non-compliance with s. 245 of the Bankruptcy and Insolvency Act would have the following positive effects:

• greater confidence in the integrity of the bankruptcy and insolvency system
• greater assurance that receivers are competent
• increase registration revenues
• ensure that Revenue Canada's deemed trust claims are recognized
• eliminate CAIRP members' sense of inequity that receivers, auctioneers, bailiffs and liquidators are free to ignore the law without consequence by the OSB.

If the current registration fees are adequate to cover OSB's costs with respect to receiverships, increasing the level of compliance would result in a reduction of the fee and still achieve greater fairness in the system. Even though greater penalties benefit the Consolidated Revenue Fund and do not go to the OSB, they would encourage compliance. Notwithstanding that CAIRP's proposal requires an amendment to the BIA, this does not mean that the recommendation should be rejected. Instead, it should be kept on the table along with other longer term solutions to the OSB funding gap, which can form a package of amendments for the next phase of insolvency reform.

We also believe that Equity is better served and that the system is healthier if every receiver is required to be a CIRP or a trustee. Receivers will then be subject to the regulation of, OSB, CAIRP, or both. They will have passed tests of knowledge and practical ability to be able to practise. A higher degree of compliance may result in lower registration fees.  

Anecdotal evidence indicates that the Small Business Loans (SBL) Program (now falling under the Canada Small Business Financing Act) may be turning over a substantial number of files to de facto receivers who are not complying with the registration requirements under the BIA. Industry Canada has the responsibility for supervising the SBL Program and receiverships and has the information necessary to determine the level of compliance with s. 245. We would urge the OSB to initiate an Industry Canada study on the degree of compliance within the SBL Program.

c. Cost Efficiencies

We reiterate our concern that cost reduction has taken a back seat to increasing revenue, particularly since CAIRP continues to oppose the proposals for registration fee increases. The current OSB response continues to avoid any substantial discussion of cost efficiencies. We are troubled by the reliance on $2 million of savings from the Service Provider Initiative. The response already raises the caveat that if the Service Provider Initiative savings do not materialize, "the OSB would have little choice but to return to its fee structure to make further revisions".

The Service Provider Initiative savings are not expected to be realized until 2003-04. Given that the next phase of amendments to the BIA should be completed by 2003, we strongly suggest that the solutions requiring amendments to the BIA should be considered now. We do not understand why, in the detailed analysis of the options "Amendment to the Act" is considered a negative when such amendments may be as viable as the antiCAIRPted savings from the Service Provider Initiative. Amending the Act to implement further proposals that will achieve cost-savings or generate revenue provides a safety net in the event that the Service Provider Initiative savings do not materialize, or take longer to produce results. Implementing other alternatives may make it possible to roll back registration fee increases.  

One further point on the Service Provider Initiative is that cost savings for our members may not be immediate, although the effect of licence fees and possibly increased registration fees will have an immediate financial consequence for them. Members may have to invest in new hardware, software and staff training in order to achieve cost savings from e-filing and other services. Until they are able to implement new systems, they may be penalized by having to pay more for paper filing. We suggest that there be a reasonable period to allow users to implement new systems before considering a two-tier fee structure to encourage stakeholders to use e-commerce.

Meeting the Challenge provided a brief commentary on cost savings. In Section IV (making the OSB more business-like and efficient) the outline of activities, which includes the Service Provider Initiative is forecast to reduce OSB's cost of supervising bankruptcies and proposals by roughly 20% over the coming five year planning period. Table 6 in Section III puts that saving at $3.3 million out of costs of $16.67 million, based on 1996 figures. The Service Provider Initiative is estimated to contribute $2 million in savings. The current proposals are expected to close a $6.5 million gap. Do we understand correctly that the additional savings of $1.3 million will cover increasing overhead costs?  

 

II. CAIRP's RESPONSE TO THE DRAFT PROPOSALS  

Registration fee revenues

1. Increase the registration fees for summary administrations from $50 to $75.
2. Increase the registration fees for consumer proposals from $50 to $100.
3. Increase the registration fees for repeated summary administrations from $50 to $150.

CAIRP continues to find Option 1 unacceptable. We are less troubled by the fee increases proposed in Options 2 and 3. The rationale for the fee increases for summary administrations incorrectly assumes that the fee increases can be passed on to debtors and that access to the system by consumer debtors will not be affected. If debtors truly paid the increased fees, the proposal would satisfy the user-pay concept. We agree that it is a good solution for the OSB because revenues are more predictable and paid at the opening of a file. However, the OSB position on trustees being able to make convenient long term fee agreements with debtors without holding up the sincere bankrupt's discharge is at odds with increased registration fees. In many low asset files, debtor access will either be denied or delayed or the trustee will find the increased fee reducing his or her return on the estate.

The response also expresses confidence "Öthat all consumers who are in need will be provided with access to the system through the Bankruptcy Access Program". The position of the OSB that it is not acceptable for a trustee to require payments from a bankrupt following his or her discharge and to require any such amounts to be returned could jeopardize the current success of the Bankruptcy Assistance Program (BAP).  

A number of our members have reported that their firms accept two to three BAP files per month and it is their policy to pay the filing fees. In many cases, these estates do not yield enough even to pay the disbursements. Technically, these fees are the responsibility of the estate but our members are personally bearing the cost. If the OSB goes ahead with the increased fee schedule, we recommend that at least the filing fees in BAP estates be waived. Waiving the filing fees would reduce the potential access problem created by higher filing fees.

CIRP's /trustees are reluctantly, facing the prospect of having to change their practices, practices that facilitated access to the system. As noted above, our members often pay the registration fees in the expectation, (which is not always realized), that they can collect at a later date. If the bankrupt is unable to pay, the member has considered the fee to be his or her contribution to the system. Since the increased registration fees will be in effect long before the potential cost savings from the Service Provider Initiative, fee increases are an imminent constraint to our members recovering a fair remuneration for their services without any offset from reduced costs.

 

Levy

Increase the Superintendent's levy to 100% of the first $200 of dividends in summary administrations with no further levy on any dividends over $200.  

We agree.  

We agree with the OSB rationale that the change is directed at consumer estates, where the largest gap exists between revenues and costs. We agree that it will reduce processing of large numbers of small dividend cheques. We agree with creditors concerns that further increases in the 5% levy goes beyond the user-pay principle and become a form of taxation. However, we disagree with the comment that this is equitable because creditors and debtors pay their fair share of the $6.5 million shortfall (approximately $3 million each). Again, we submit that other beneficiaries of the system, mainly the Public at large are not making any contribution to the shortfall.

 

Trustee licence

Increase the annual trustee licence fee renewals to $850.

Our previous submission stated that some increase is acceptable. We also agree that it would be appropriate to apply the increased fee revenue to conservatory or other disciplinary measures. However it is misleading to speak of setting up a reserve fund because the actual costs of these measures has exceeded $1 million for each of the past several years.

We must repeat that we do not consider this measure to be fair because there are many unlicensed and unregulated parties (receivers, liquidators, bailiffs, auctioneers) who often compete with licensed trustees and who, at this time, are not paying any license fees.

The expected revenue gain of $410,000 may not materialize. Instead, large firms may restrict the number of staff who hold licences. The head of one such firm has commented that there is no competitive advantage to have 15 licences instead of two licences in an office. In considering the quantum of licence fees, we suggest that the OSB also take into consideration that the cost of acquiring a licence has increased. Under the NIQP, the fee for the final written examination has increased from $400 to $700. CIPA supported the increase because it more accurately reflects the cost of delivering and marking the examination but believes that the global cost should be taken into account. In addition, there is a $300 fee for appearing before the Oral Board of Examiners, so that the licence acquisition fee in the final year of the qualification process is $1,000.

We also suggest that any measure that discourages individuals who are practising full-time in insolvency from obtaining a licence is not in the best interests of the bankruptcy and insolvency system. The Public takes comfort from the fact that active participants are licensed and we would think that the regulator would prefer to have these individuals licensed in order to fulfil his monitoring and disciplinary responsibilities.

The OSB could consider a sliding scale of licence fees based on the number of licences held by a firm. For example, the fee could be discounted for the first ten licences in a firm and the next ten etc.

The comments we made in section a. Equity, above, bear repeating. The rationale for a licence fee increase includes the comment that the proposed fee would “… bring the yearly trustee fee up to the dues levels paid by other professional bodies”. This is flawed logic. Comparing licence fees to fees charged by other professional bodies is comparing apples to oranges. Other professional bodies are self-regulating bodies. Members of these bodies participate in the governance structure and have control over licensing, discipline, what other services to provide and what fees to charge. In this case the OSB decides what “benefits” to provide trustees and our members have no control over how much the OSB spends to deliver those “benefits”.

The OSB should keep in mind that CIPA members pay fees not only to CIPA but also, in most cases, to another professional body. The total burden of professional and licence fees is substantial. At the same time it benefits the system to have its active practitioners subject to the professionalism and discipline of these other bodies.

An increase of over 100% is excessive and may have negative effects that far outweigh the modest amount of revenue that is gained. The increase is particularly harsh on sole practitioners who also hold a corporate licence. Sole practitioners will see their annual licence fees increase from $800 to $1,700.


Miscellaneous

An additional $75 would be paid to convert a summary administration to an ordinary administration.

We agree that it is reasonable that all ordinary administrations pay the same filing fee.

A new $30 fee will be charged for processing estate claims by creditors and their agents against unclaimed dividends being held in trust.

We agree that it is reasonable for the OSB to recover the cost of processing these claims directly from the claimants against the fund.


III. OUTLOOK FOR THE FUTURE


Earlier, we expressed our opinion that increased registration fees for summary administrations could have immediate negative effects on access, trustee remuneration or both. In making a decision on which of the original proposals would be selected as the draft proposals for implementation, the OSB has treated having to amend the BIA as a negative factor in evaluating the original proposals and the further suggestions received in response to “Meeting the Challenge”. The expected $2 million in savings from the Service Provider Initiative are not expected to materialize until 2003-04 and the current recommendation anticipates running a $2 million deficit until then. Given the caveats regarding the savings from the Service Provider Initiative, we would be far more comfortable if other alternatives were considered for implementation in the review of the BIA that should be completed by 2002. If the Service Provider Initiative savings materialize, the additional savings from the other alternatives proposed could be used to strengthen the system further. If the Service Provider Initiative savings do not materialize, the alternatives provide a backstop against even more severe fee increases.

The OSB cannot keep coming back to the well for more. The resolutions to the funding gap should not be short term, nor should they be a source of easy money. By this we mean that like the OSB, our members require some predictability and stability when they are formulating their business plans. They cannot be subject to constantly increasing fees. We are particularly sensitive to this because, as we said above, we do not feel that all of the beneficiaries of the system are being considered as a source of funds. The Framework document explaining the transformation of the OSB into a Special Operating Agency (SOA) gives the objective of the insolvency system as:

“The objective of insolvency administration in Canada is to promote investment confidence in the Canadian marketplace by providing a fair and effective system for the restoration of assets to productive use, a framework for debtor rehabilitation, a deterrent to fraud, and a public record of estates. This Government policy direction is carried out jointly by the OSB, private-sector licensed trustees, and bankruptcy courts across the country.”

The same document describes the mandate of the OSB as including:

“… the OSB plays an important role in Industry Canada's marketplace services
framework, as it contributes to the efficient and effective functioning of the marketplace, maintains investor confidence, and provides a source of strategic information for business.”

We must admit to some difficulty in reconciling these statements with the funding recommendations, which view only debtors, creditors and trustees as sources of funds. In fairness, the Public at large should contribute its share to closing the gap.


IV. OTHER OPTIONS RECOMMENDED BY CIPA

OSB analyzed several of CIPA’s alternative recommendations. Although they require amendment of the BIA, we do not think that this should prohibit their implementation.


1. Immaterial dividends:

• Any dividend less than $25 per creditor is remitted to the OSB.

 

• Where there are multiple distributions, the total amount could exceed the threshold. There would have to be a credit mechanism to provide for a return of the dividends in these cases.  

It would appear to us that implementation of this proposal ties in nicely with the services that should be developed under the Service Provider Initiative. We would also suggest that it has been several years since the threshold for immaterial dividends (Directive 8, “unclaimed Dividends and Undistributed Funds”) has been adjusted and that the OSB should examine these limits.



2. Unclaimed dividends:  

• after one year from the time received, unclaimed dividends belong to the OSB.

The OSB analysis agrees that it is fair that unclaimed dividends be reinvested in the system. We encourage OSB support for this amendment to the BIA. Please note that in this submission, we have reduced the time period from two years (our recommendation in February 1999), to one year.

3. Cost of re-audit:

• The cost of returning to check for compliance after a failed audit should be borne by the trustee. Again, it is only fair that those who are at fault pay the costs.  

This will encourage trustees to conduct their practices to avoid repeat audits. The analysis expresses concerns that it could be a complex and lengthy procedure to negotiate a fee of this nature with the trustee.

CIPA would be pleased to work with the OSB to develop a procedure to develop an effective and fair means of setting the fees for special audits and also to define what is meant by a “failed audit”. We are not certain that there should be an absolute freedom of negotiation with a trustee who does not meet normal practice standards. These are the cases that are most likely to incur the discipline and conservatory costs if they are not attended to when first detected. On the other hand, we would not want members to bear unnecessary costs because of over-zealous auditors or overly strict definitions that would trigger unnecessary audits.


4. Increase or create a substantial fine for non-compliance with receivership requirements:

• The merits of this proposal have been discussed thoroughly above.

5. Restructurings outside of the BIA:

• Consider restructurings outside of the BIA as potential sources of revenue.

The main point here is that the entire insolvency system should be treated equitably. It is hard to argue that the Companies' Creditors Arrangements Act or the Winding Up Act do not produce many of the same benefits as the BIA.

6. Other filing fees:

• increase filing fees for ordinary administrations and commercial proposals

An increase in the filing fees in ordinary administrations and commercial proposals should be considered as potential sources of revenue. We are aware that the OSB feels that it recovers its costs in this area but the paper does not provide any data to support the conclusion that the cost allocations are correct. We suggest taking a global view. In a proposal, creditors obtain the greatest benefit from the system and even though the fees may reflect a cost recovery, a higher fee can be justified because of the benefits that result. Again, this is the principle of Equity, the beneficiary should contribute. A fair filing fee may be more than required to recover costs, taking into account the benefits received.


7. Joint ventures with CIPA:

In our February 16, 1999 submission we said:

“CIPA is most willing to explore with you, the assumption of various activities for which they OSB is responsible. We are prepared to take on tasks in their entirety or under a joint administration similar to the NIQP model, provided that the funding is fair.”

For example, in the past we worked with the OSB to develop a model Quality Assurance Program (QAP) for CIPA members. We identified that our members would require a reduction in the OSB audit and monitoring as a condition of adopting QAP. If the QAP is implemented, it would reduce the resources expended by OSB, improve trustee compliance and reduce the intrusion into our members’ day-to-day practice, we may all benefit.

CONCLUSION

We appreciate the recognition of many of our previous recommendations in the response analysis. The process of the OSB and the insolvency community engaging in a dialogue to ensure that the bankruptcy and insolvency system remains healthy and productive is extremely positive and we are pleased to play an active role in the discussions. CIPA is prepared to work with the OSB to explore further, options such as an indemnity policy that will cover trustee owners as well as staff in trustees’ offices, or how to set the fees for special audits.

We look forward to our meeting on January 18, 2000 and our discussions with you. Please do not hesitate to call me if there are any matters you wish to discuss in advance of our meeting.

Yours very truly,


Peter D. Wedlake, LL.B, CIP
Chartered Insolvency Practitioner
CIPA Chair

c.c. Mr. Steve Stimpson