Dome Petroleum has been at the brink for six long years, but it looks as though the mess may finally be resolved with the company’s pending sale to the Canadian subsidiary of a cash-rich giant, Chicago-based Amoco Corp. Dome’s rescue is fascinating, but it underscores how unlevel the economic playing field is in this country. Dome’s bankers have had the patience of Job when it comes to waiting for payments on the $6.5 billion that Dome owes. Many of the same banks have rarely, if ever, held the bag as long for homeowners, farmers or shopkeepers tardy with their payments. Dome is a good example of how an enterprise can be snatched from the jaws of a horrid bankruptcy that would take decades to unravel. The same support system should exist in Canada for smaller businesses, as is the case in the United States. Unfortunately, it does not.
Into this vacuum comes Harvie Andre, the latest consumer minister to announce his intention to amend the Bankruptcy Act. Canada’s current act has been around since 1949 and it is outmoded, cumbersome and unfair. Andre proposes to fix it, but no one is holding his breath. Six previous proposals to overhaul the act have died on the order paper since 1975, due to a combination of the efforts of banking lobbyists and lack of interest on the part of other legislators. But although good bankruptcy laws elude Canada, they should be an important cornerstone of any economy. Proper legislation would allow troubled, but still viable, enterprises to avoid bankruptcies by keeping away predatory or foolishly impatient banks. And laws should also ensure that, once a bankruptcy is inevitable, all creditors get a fair shake.
In the absence of any decent rules, the corporate carnage has continued unabated in Canada for decades. In 1986, according to federal figures, 8,502 businesses and 21,765 consumers went bust. The debtors owed $3.2 billion in unpaid debts, but their assets fetched only $250 million. And wage earners lost about $30 million in back pay because their employers went under.
But although past ministers failed to deliver the goods, Andre may be a little different. He understands the negative effects of bankruptcy more than most, having been a director of Abacus Cities Ltd. The $500-million real estate company went spectacularly bust in Calgary in
1979. “I do not know if Abacus could have been saved. I shouldn’t comment because I was too close to the case,” the minister told me. “But there are companies every day that go into bankruptcy and that could be saved.”
Under the present act, secured creditors—those lenders entitled to seize assets in case of a loan default—can move in without notice to close down a company in arrears before other creditors have a chance to find out. A company may apply to a court to hold off creditors momentarily, after which it must file a proposal to refinance or restructure the company. That rescue plan must first be approved by at least half of the creditors representing 75 per cent of the money owed by the company, then by the courts. This is both difficult and expensive. That is why, for instance, in 1984 there were 31,600 personal and business bankruptcies, al-
The proposed reforms to Canada ’s Bankruptcy Act will provide breathing space for smaller, threatened enterprises
though only 389 such proposals were applied for in federal courts.
Already approved in principle by cabinet, Andre’s reforms appear better than preceding efforts and will provide breathing room to smaller, threatened enterprises so that they can try to pull off a Dome-style salvage as well as better protect their workers. The amendments to the act would force secured creditors to give the company 10 days’ notice before moving in. The company would then have 30 more days to put forward a rescue plan. Then creditors would have 21 additional days to either approve or reject it.
This is clearly an improvement, although it falls far short of the American-style bankruptcy relief first introduced in 1938 and now known as “Chapter 11.” Under those laws, a U.S. court can grant debtors a breathing space of at least 120 days. That time is frequently extended by the courts, and often protection lasts for years. But, Andre said, “the problem with Chapter 11 is that in the last few years it has been used to nullify existing labor contracts, as in the Continental Airlines case, or to hide from contingent liabilities.” In
Continental’s case, new expensive labor contracts were held in abeyance while Chapter 11 was in effect, thus allowing the struggling company to abrogate promises made to workers.
Continental convinced the court that it needed relief from the labor contract to survive—a valid argument that in the long run would save jobs. But banks, not unions, would be the biggest opponents to Chapter 11-type amendments in Canada because such changes would interfere with their “right” to pull the plug. Banks argue that Chapter 11 will result in tighter credit or higher rates for smaller or riskier companies.
Chapter 11 relief has enhanced, not hampered, small business south of the border. It has salvaged many viable businesses, which might have gone under in Canada. The most striking example involved America’s third-largest oil company, Texaco Inc., on the verge of bankruptcy in 1987. Houstonbased Pennzoil Co. had successfully won a $14.8-billion lawsuit against Texaco, claiming that Texaco had illegally interfered with its planned purchase of Getty Oil Co. Texaco applied for Chapter 11 protection last April, which gave it relief from its creditors while it appealed the verdict. The case was finally settled out of court for $3.9 billion in December, but Texaco is still under Chapter 11 as it attempts to reorganize.
While Andre’s proposals have shortcomings in some areas, they do protect workers. Under present laws, employees caught in a bankruptcy are entitled to only $500 each in back pay, and only after other more secured creditors, such as banks, have moved in. After those creditors have picked the company clean there is rarely anything left for workers owed more than $500. Andre would allow workers to get up to $1,000 in unpaid expenses incurred on behalf of their employer, as well as 90 per cent of their back wages, up to $2,000. And Ottawa will reimburse any shortfalls.
If Andre’s proposals become law, they won’t completely level the playing field. Big banks look after big business, and tend to cling to the Domes and Massey Fergusons and Turbo Resources and other basket cases in the hopes of turning things around. Meanwhile, bankruptcies continue at a rate of 83 per day. But until new, even tougher legislation is imposed on our biggest banks, the carnage will continue among the little guys—a shameful waste of time, energy and talent.
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