Submissions to Government

OSB Funding Paper

February 16, 1999 - Letter Robert O. Sanderson, FCA, CIRP
Chartered Insolvency and Restructuring Professional
CAIRP Chair  

February 16, 1999

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

Dear Marc:

re: OSB funding paper

This is the response of the Board of Directors of the Canadian Association of Insolvency and Restructuring Professionals to "Meeting the Challenge, A Discussion Paper on Funding Options for the Office of the Superintendent of Bankruptcy." It is obvious that much thought has gone into the paper and we congratulate you and your staff for the effort.  

In making our comments, we considered the merits of the options from several perspectives:

1. The practising CIRP/trustee;
2. The five user fee principles of equity, simplicity, public good, value and flexibility;
3. The objectives of the bankruptcy and insolvency system in Canada; and
4. The potential for negative behaviour by creditors, debtors and stakeholders.

Within the limited time available, CAIRP, in consultation with its affiliated provincial insolvency associations have conducted several meetings. As a result of our consultation, we believe that our comments represent a high degree of consensus, although there is no guarantee of unanimity This response is the CAIRP position as enunciated by the Board of Directors after the above consultations.

Before presenting our comments on the specific options and our additional suggestions, there are some general matters we wish to address.

EQUITY REQUIRES CONTRIBUTION FROM GENERAL REVENUES

The paper says that equity is one of the five user principles against which each revenue option will be weighed. We submit that the public at large, and not just those directly involved in the system benefits from an honest, efficient, well-functioning bankruptcy and insolvency system and should bear part of the cost; i.e., from general revenues.

A June 1998 Presentation to the Management Advisory Board of the OSB gave the objectives of the Insolvency system in Canada as being:

• 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

We believe that the system may not be balanced if only debtors, creditors and CIRP/trustees are the source of funds to support these objectives. We need balance and independence in order to avoid "lobbying" positions such as exist in the United States. Perhaps the concept of equity would be easier to apply if we began to talk about a "beneficiary pay" system rather than a "user pay" system.

The Introduction to the funding paper states that "OSB is committed to making clients and stakeholders an integral part of the decision-making process." "Stakeholders" is defined to include the Canadian public at large. If the Canadian public at large has a stake in the system, and we would argue that its stake is being a large beneficiary of the system, why is it not an option to have at least part of the revenue gap closed by an allocation of public funds. We are creating a system where benefits accrue to a broad base while the funding comes from the narrower base of those directly involved with the system.

REGULATORY FAIRNESS

The problem is twofold:

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).

The maintenance of professional standards is essential to a well-functioning insolvency system. The CAIRP and OSB are at one in supporting this function, although we may, on occasion, disagree on the approach. We are concerned that CIRP/trustees are over-regulated. At the same time, the OSB has confirmed that the number of bad trustees is a tiny percentage of the total trustee community. Our great concern is that there are many individuals operating outside the system, who should be operating within the system. These individuals are in breach of s. 245 and are not giving notice of their appointment to the Superintendent of Bankruptcy. We find this objectionable on several grounds:

• This flouts the requirements of the BIA and diminishes the integrity and credibility of the system,
• Revenue from registration fees is lost, necessitating increasing the amount that will be recovered from those who are in compliance.
• It is inequitable to go to great lengths to enforce the BIA against CIRP/trustees and not to enforce it against others operating outside the system but benefiting therefrom.

We can only speculate on the amount of assets are being dealt with unlawfully, outside the system, but would hazard a guess that the amount is substantial. If receivers were required to be CIRP/trustees, the system would gain greater confidence. The OSB would have greater assurance that receivers were competent. Enforcement of s. 245 would be much easier.

Until the Bankruptcy and Insolvency Act is amended, we recommend that s. 245 be enforced with vigour and that significant penalties be imposed on those who do not comply.

COST EFFICIENCIES

We are of the opinion that cost reduction rather than financing should have been the OSB's first priority. As with any business, more emphasis must be placed on limiting costs or else we will be facing the same deficit five years down the road.  

Our respondents overwhelmingly expressed concern that revenue options were examined in great detail, but cost efficiencies were discussed in less than two pages in Section IV. The paper does not provide us with an analysis of the actions and activities of the OSB and whether there is value added to the system for some of these actions. This illustrates the flaw in the definition of "Value" (above). Even though a fee reflects the cost of providing a service, there is no "Value" if the service is not required.

Even if the re-engineering includes a cost-benefit analysis or value added review of functions performed by OSB, we submit that this process lacks transparency. We can understand that the Superintendent of Bankruptcy is the CEO of the OSB and is not going to allow users, clients and stakeholders to vote on how he runs his agency. However, it would have been preferable to provide more information on what cost-efficiencies have been/ will be implemented. Whatever the facts may be, the treatment of costs in this funding paper leaves negative perceptions.

CAIRP is most willing to explore with you, the assumption of various activities for which the 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.

COMMENTS ON THE 15 OPTIONS  

Option 1: Increase levy on summary administrations 5% to 10%

Not acceptable.

• While some Associations were prepared to accept this option, the consensus was that the revenue generated would be unpredictable, creditors are being penalized and that other options are better.

Option 2: Increase the levy on summary administration to 100% of the first $200 of dividends with no levy on subsequent dividends.

Acceptable.

• This option received the highest level of acceptance.  
• All creditors in the estate bear the cost equitably.
• It will not affect access.
• It will eliminate processing of many small dividend cheques thereby increasing the efficiency of the process.

Option 3: Lower the levy on bankruptcies to 2.25%, but calculate it on total realized assets in the estate, instead of on dividends paid.

Not acceptable.

• The result will be another cost absorbed by our members when the assets do not generate the minimum estate administration cost. This contravenes the user pay/ beneficiary pay principle.
• Unduly complicates the administration of the file and the treatment of secured creditors' claims and deemed trust claims.
• What happens to Section 81 claims to Revenue Canada?

Option 4: Lower the levy to .5 ñ 1% of dividends but impose it on all assets in the estate, including those realized by secured creditors.

Unacceptable.

• This will drive more transactions outside the system. [Please refer to our opening comments on enforcing the receivership provisions of the Act.]
• It is difficult to administer anything based on assets not under the control of the CIRP/trustee.

Option 5: Increase the registration fee on summary administrations to $100.

Unacceptable.

• Like options 6 & 7, this option will either make access  
• The discussion paper only mentions limiting access as a disadvantage. This incorrectly assumes that all cost increases in summary administrations can be passed on by our members to the bankrupt.
• A 100% increase is excessive.
• In order to provide access, our members often pay the current filing fee of $50 in the hope that they can recover it later. Where the bankrupt is completely unable to pay, our members consider this their contribution to the system. A higher fee could affect this practice.

Option 6: Increase the registration fee for all bankruptcies by 65%.

Unacceptable.

• Like options 5 & 7, this option will either make access more difficult or result in an additional loss to our members.
• We are not sure that, as stated in the discussion paper, having less of an impact on accessibility than option 5 is an advantage. It is still a negative option.

Option 7: Replace the current registration fee with a flat registration fee of $100 for all bankruptcies and proposals.

Unacceptable.

• Like options 5 & 6, this option will either make access more difficult or result in an additional loss to our members.

Option 8: Increase the annual renewal fee to maintain a bankruptcy trustee license by 50%, 100% or 200%.

Some increase is acceptable.

• Our members are prepared to accept a reasonable fee increase in order to make a contribution towards bridging the gap.
• The analysis of the advantages and disadvantages does not recognize that of the 800 active trustees, many work in larger firms. There is a price point at which a firm with several trustees will reduce the number of licences in the firm.  
• It is not particularly equitable to impose fee increases on licensed trustees while as pointed out in our opening statements, there are many unlicensed, unregulated parties who benefit from the system.

Option 9: Establish a sliding scale for trustee fees, based on the volume and type of estates administered by the trustee in the previous year.

Unacceptable.

• Administration would be complex and fees may be out of proportion to the revenue generated.  
• A mistake in a large asset file for which the license fee was very small might be very costly while a mistake in a high volume practice may not be as material. On the other hand, large asset files are handled by large firms and they fix their own mistakes.

Option 10: Impose a surcharge on trustee license fee based on the cost of discipline and conservatory measures undertaken by the OSB in the previous year.

Unacceptable.

• There has to be a linkage between the costs of discipline and the power to remove licences.
• We could support this if CAIRP had the power to impose disciplinary measures and had full control over disciplinary and conservatory costs.
• We support surcharges against those who are guilty of offences and would also support them paying fines and the costs of proceedings against them. The compliant CIRP/trustees will not pay for the bad few and will not support rules and regulations aimed at controlling only the bad few.

Option 11: In addition to increasing the cost of applying for a licence from $300 to $400, introduce administrative fees for such things as late payment licence activation and change of licence status.

Acceptable.

• This option is consistent with the user pay principle as long as the charges are reasonable.

Option 12: Require trustees to post a performance bond or maintain an insurance policy of $1 million, with the OSB as beneficiary, to be forfeited in the event of a serious disciplinary action, such as a conservatory measure.

Acceptable subject to:

• risk-rated premiums; e.g., CAIRP members receive a better rate
• being linked to option 13
• negotiation of any other conditions required to make implementation equitable
  
  Firms should have the option of providing acceptable alternative coverage, again to avoid the majority paying for the sins of a few.

Option 13: Require the creation of an indemnity fund to be used to pay for trustee discipline costs and conservatory measures.

Acceptable subject to:

• CIPA having the power to impose disciplinary measures and having control over disciplinary and conservatory costs

 

• CIPA controlling the fund

 

• the funding coming from sources who will benefit (including creditors) by the creation of the fund and not just from the trustees who are in compliance

- negotiation of any other conditions required to make implementation equitable

The number of trustees who commit serious offences is a very, very small percentage of the total trustee population. Our members do not accept the concept of the trustees who are not a compliance problem having to pay for the non-compliant trustees unless CIPA controls disciplinary actions against licences.


Option 14: Develop and sell new information products and services, and charge for existing services currently being provided for free.

Acceptable.

• The charges must be reasonable.

 

• Trustees should be exempted from paying for services which are mandatory for a trustee; e.g., search for previous bankruptcies.

Option 15: Set new fees for existing services or introduce services for which fees would be charged.

a) change in the filing status of an estate

Acceptable.


b) mediation services

Acceptable.

• The person requesting the mediation should pay unless it is the case where the trustee is required by law to request mediation.

c) training and conference charges

Unacceptable.

• OSB should not be in the business.

 

• There were several different response to this option, perhaps because of how the various respondents interpreted “training and conferences”. OSB already charges for infosessions on new amendments although we feel that there should not be a charge for communication and dissemination of information.

d) late charges

Acceptable.


e) processing claims against trust accounts


Acceptable.


f) non-statutory services provided by senior bankruptcy officers

Acceptable subject to:

• agreement on what those non-statutory services are

 

• no billings by official receivers to trustees

This is not an option if it has the effect of discouraging members from calling their official receiver. Greater communication, understanding and cooperation should not be sacrificed for the sake of a few dollars.

g) other administrative services

Unacceptable.

• Our members do not want to be forced to pay for services they have no option of refusing; e.g., having to hold first meetings of creditors at the official receiver’s office.

OTHER OPTIONS

The CIPA suggests that OSB assess the merits of the following additional sources if revenue.

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.  

2. unclaimed dividends:  

• after 2 years from the time received, unclaimed dividends belong to the OSB.

3. consumer filing fee:

• there will be additional fees if a file is open longer than 12 months after the bankrupt’s discharge; the fee will be $25 per year until the file is closed; the benefit may be in altering behaviour as well as raising money;
• As an alternative, the time period could be defined as 24 months after the date of bankruptcy.

4. 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.  

5. increase or create a substantial fine for non-compliance with receivership requirements:

• The merits of this proposal have been thoroughly discussed in our opening remarks.

6. registration fee for administrators of consumer proposals and BIA counsellors:

• It is not unreasonable to pay a registration fee since the Act gives these administrators and counsellors the right to perform certain functions. Trustees’ fees would be inclusive of these fees.  

 

• This should be an annual fee. Trustees pay an annual renewal fee for the privilege of continuing to practise. An annual fee also assists in keeping track of who is active and where they are practising.

We hope that our comments will prove to be useful and that they will contribute towards developing solutions that will allow the OSB and the bankruptcy and insolvency system to meet their objectives. We hope that the solutions will foster support from the users and stakeholders. We remain committed to working together with the OSB to maintain the integrity and value of the system of insolvency administration throughout Canada.


Yours very truly,





Robert O. Sanderson, FCA, CIP
Chartered Insolvency Practitioner
CIPA Chair