The Stel Salaried
Pensioners Organization wishes to thank The Hamilton Spectator for permission
to post the following article by Reporter Tara Perkins published in the
February 25, 2004 edition
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Feb. 25, 2004. 12:39 AM |
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Bankruptcy reforms too late to
affect Stelco restructuring |
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Laws rife with potential conflicts, especially with
supposed watchdogs, report states |
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By Tara Perkins |
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Proposed changes to Canada's bankruptcy laws come too late to affect Stelco's restructuring. A Senate committee told the federal government in November that the laws leave too much room for conflicts of interest, especially surrounding the independent watchdogs that are supposed to protect creditors. It will likely take two years for the government to implement the committee's recommendations, which are partially based on a report - one section is titled "The CCAA Monitor: A Failed Concept" - that says the bankruptcy system has so many potential conflicts it's "an embarrassment." "It is strange and unusual that the Canadian insolvency system, which is so important to Canada's commercial framework and which involves such complex inter-relationships among stakeholders, has virtually no provisions dealing with conflict of interest," the report stated. Written by the Equifax Canada National Insolvency Group, the report paints a picture of a legal system where highly paid experts look out for the interests of the bankrupt company at the expense of the creditors who are owed money, especially the smaller ones. A main target of the report is the court monitor. The monitor is an accounting firm, chosen by the company that's in bankruptcy protection, then appointed by the judge to be an independent watchdog. The monitor has a legal duty to look out for the creditors. "How can the monitor fearlessly uphold the rights of the creditors at the same time as he's helping the debtor come up with a plan?," said Bruce Leonard, head of the Toronto-based International Insolvency Institute. "The creditors want the most that they can get; the debtor wants the least he can give. So there's a conflict there." The report said the "monitor almost always ends up on the side of the reorganizing company," arguing against the creditors it's supposed to protect. The monitor in Stelco's case said he has to work closely with Stelco. "There's no other way to do it," said Alex Morrison, of Ernst & Young. He is also fully accessible to any stakeholder who wants to participate in the restructuring plan. On Stelco's first day in court on Feb. 13, Ernst & Young announced that it had changed lawyers because a partner with the law firm originally representing the company was on Stelco's board of directors. That led to a rebuke from the judge, James Farley, who reminded the court of the need for monitors to be "independent, neutral and beyond reproach." In November, the Senate Committee on Banking, Trade and Commerce told the government it should change the laws that are now guiding Stelco's restructuring. It said the Companies Creditors Arrangement Act (CCAA) allows for "too many real or perceived conflicts of interest." One flaw the committee pointed to is the fact that the monitor's fees are decided on by an agreement between the monitor and the company that's in bankruptcy protection (subject to the judge's approval). And the monitor usually gets paid before creditors do. Equifax's report said it "rarely happens in practice" that the monitor tells the court about any improper conduct on the part of the firm in bankruptcy protection. Part of the problem is that only four major accounting firms continue to be appointed monitor in CCAA cases, the report said, including Ernst & Young. As a result, these firms wind up being used in multiple, conflicting roles, the Equifax report noted. Monitors often act as financial consultants to the company in bankruptcy protection or to major secured creditors. As well, monitors can be the bankruptcy trustee or receiver. And "there are examples of monitors occupying all of these positions at the same time," the report said. Banks lending money to a company in bankruptcy protection often tell the company which monitor to choose, adding another conflict of interest, the report said. tperkins@thespec.com 905-526-4620 |