Management Advisory Board
Chairman's Report - December 2003

Table of Contents

1.0 Introduction and Executive Summary

2.0 The Management Advisory Board: its mandate

3.0 The Management Advisory Board: its activities

4.0 The MAB: its composition and operational practices

5.0 The OSB's Financial Framework: in need of adjustments

6.0 Conclusion

Appendix A

1.0 Introduction and Executive Summary

1.1 This Report is submitted by the Chairman on behalf of the Management Advisory Board (MAB) to the Superintendent of Bankruptcy, the Assistant-Deputy Minister, Operations and the Deputy Minister, Industry Canada, pursuant to its Terms of Reference.

1.2 The MAB was established by the Superintendent at the time the Office of the Superintendent of Bankruptcy (OSB) was set up as a Special Operating Agency (SOA). By its Terms of Reference, the MAB is to act as a source of external advice and guidance for the OSB with regard to its strategies, business plans and management practices, given that the SOA status implies greater administrative autonomy and accountability for results, as well as access to revenues.

1.3 The MAB has met regularly since inception and has reviewed and commented on the OSB’s most important activities, particularly the yearly Business Plans and the programs proposed for the achievement of its strategic objectives, and has also monitored progress against Plans, either through the OSB’s Year-end Reports or through specific progress reports (about which detailed information is to be found in Section 3.0).

1.4 Thus, the MAB is in a position to observe that:

• 1.4.1 The OSB, operating as a SOA, remains firmly committed to its Mission in support of the Superintendent’s legislative mandate, being essentially “to provide an effective, cost efficient and uniform national program that will ensure compliance with the Bankruptcy and Insolvency Act”;

• 1.4.2 The Superintendent and the OSB staff have been keen to seek the advice of the MAB (in addition to regular consultations with relevant groups of stakeholders) about issues of strategic importance or of concern regarding the Bankruptcy and Insolvency System as a whole with a view constantly to enhancing the effectiveness and efficiency of its operations and to introducing timely improvements and adjustments to its services and operating practices as are called for by the rapidly evolving and increasingly demanding environment in which it operates;

• 1.4.3 The mandate of the MAB, as it currently stands, is appropriately formulated and does not need to be amended; however, in order to optimize its representativeness and its ability to provide the range of expertise the mandate calls for, a number of adjustments are recommended (in Sections 4.0) with regard to the terms of appointment of both the members and the Chairperson, and with regard to the periodic rotation of the membership;

• 1.4.4 With regard to the financial framework under which the OSB operates: 

  • 1.4.4.1 the OSB, as a SOA, enjoys an enhanced degree of administrative and financial autonomy which, in turn, implies a commitment to recover its direct operating costs through the user fees and levies it is authorized to collect, the overall purpose being to make the OSB financially self-sufficient and self-funded;

  • 1.4.4.2 however, the financial framework presently governing the OSB’s operations lacks consistency with the intended purpose in that it does not allow it to have access to the totality of the revenues it generates, nor to supplementary financial resources as and when required to support essential but non-revenue generating functions, such as debtor and trustee compliance oversight functions or other public policy functions, thus putting at risk the effectiveness and the integrity of the Canadian Bankruptcy and Insolvency system as a whole;

  • 1.4.4.3 accordingly, the MAB feels particularly strongly that the present financial framework should be adjusted so that the OSB is not inhibited, for lack of financial resources alone, from undertaking such action or performing such functions as are inherent to the Superintendent’s statutory mandate, though not revenue generating, more particularly the Debtor and Trustee Compliance Monitoring functions which have been identified as priority strategic objectives in support of the OSB Mission “to maintain investor, lender and public confidence in the Canadian marketplace by protecting the integrity of the Bankruptcy and Insolvency system”;

  • 1.4.4.4 therefore, this being cause for serious concern, the MAB strongly recommends that a comprehensive review of the present financial framework be undertaken by the Department with a view to formulating (in the form of proposals for eventual consideration by Treasury Board) such adjustments and such supplementary or alternative forms of funding as may be found necessary and effective to ensure that adequate financial resources will be available to enable the OSB to satisfy fully and in a timely manner the Superintendent’s statutory mandate, including public policy and other non-revenue generating functions.

1.5 This Report provides a welcome opportunity for the MAB to commend the Superintendent’s leadership and the OSB staff for their professional competence and the exceptional dedication with which they assume and discharge the duties and responsibilities of the OSB mandate under the law, and for their sustained commitment to efficiency and effectiveness in providing the services they are accountable for in relation to the Canadian Bankruptcy and Insolvency System.

2.0 The Management Advisory Board: its mandate

2.1 In order to have an appropriate understanding of the mandate assigned to the Management Advisory Board (MAB), it is important to note the particular care with which its role was defined to avoid incompatibilities or conflicts with the Superintendent’s mandate under the law. Indeed, apart from the administrative and operational responsibilities which the Superintendent must assume as a senior officer within the Department of Industry, the Superintendent’s mandate consists largely of quasi-judicial responsibilities which, as such, cannot be shared with, or made dependent on, a board, advisory as it may be.

2.2 Accordingly, the MAB was assigned a purely advisory role, and as such, it does not have the authority to direct the Superintendent nor the Office of the Superintendent of Bankruptcy (OSB), and conversely, the Superintendent is not accountable to the MAB. Nevertheless, it is expected to play a meaningful part in the overall administration of the Canadian Bankruptcy and Insolvency System, namely “to provide an external validation of overall management practices” as specified in the Terms of Reference.

2.3 Indeed, at a time when the public is increasingly demanding of those entrusted with the responsibility to provide public services or to perform public policy functions, it is essential that the tasks for which they will be held accountable, are performed with the highest concern for efficiency and transparency. This is precisely what has guided the development of governance principles in recent years, especially in the corporate world. In this regard, the collective expertise of a group like the MAB as well as the individual experience of its members can be particularly useful and beneficial to the OSB.

2.4 Therefore, the MAB has seen its mandate as calling for advice on governance as well as on management processes considering that it was established by the Superintendent in recognition of the “need for the OSB to continuously gain exposure to innovative management practices and to ensure that these practices are appropriate to its strategic direction, operation of a revolving fund, and specific commitments arising from its annual business plan.”

2.5 While the above quotation sums up broadly what was expected of the MAB, the Terms of Reference specify a number of matters on which it is expected to provide “advice to the Superintendent and to the Department on the management of the Office of the Superintendent of Bankruptcy. In particular, the Board will:

• review and comment on the annual OSB Business Plan;
• evaluate the financial and business performance of the OSB against their Business Plan;
• review the costs and revenues and comment on the Office’s recommendations to maintain financial self-sufficiency;
• assess the OSB’s longer term business strategies for dealing with major issues; and
• advise the OSB on ways of improving public awareness and the development of appropriate relationships with the insolvency community.

2.6 On the basis of its interpretation of the mandate that was assigned to it at the outset, and taking account of the wide range of topics reviewed to this date (as reported in Section 3 herein), the MAB is of the view that its mandate as presently defined in the Terms of Reference is entirely adequate and does not need to be amended. Indeed, it is couched in broad enough terms to enable it to address or to raise on its own initiative, any issue pertaining to the OSB’s managerial practices and about which advice may enhance the efficiency of the OSB’s operations in relation to the administration of the Canadian Bankruptcy and Insolvency system.

2.7 However, as will be seen from Section 4.0 of this Report, a number of recommendations are made regarding the composition of the MAB and the process governing the selection of members. There are also recommendations in Section 5.0 concerning the funding of the OSB’s operations, an issue which the MAB considers critical.

3.0 The Management Advisory Board: its activities

3.1 Since inception, the MAB has reviewed and provided advice to the Superintendent on a number of issues related to the management of the OSB as called for by its Terms of Reference. The status of each of the issues so reviewed is briefly described below.

3.2 It should be noted, however, that in addition to the issues specifically reported herein, the MAB has carried out regular reviews of the OSB’s annual Business Plans and of the results achieved against the strategic and management objectives identified in those plans. Similar reviews have also been conducted of the 5-year Plans.

3.3 Those reviews have served two important purposes. First, they have enabled the MAB to provide timely comments and advice on the courses of action proposed, and to assess performance against targets. Secondly, they have served the equally essential purpose of enabling the MAB to visualize the OSB’s operations and challenges in the perspective of its mandate as a whole and over a longer timeframe. Indeed, each annual Business Plan includes an analysis of the overall environment and economic conditions under which the OSB expects to operate and from which trends and file volumes can be assessed along with the corresponding revenues and operating costs. They represented an appropriate background against which the strategic and management objectives and priorities could be reviewed each year in response to the evolving environment.

3.4 The Planning and Reporting process is kept under constant review so that adjustments and refinements can be incorporated in light of experience with the result that over the years, the process has become an effective and fully integrated management tool. It is worthy of note that the MAB was advised at its June 2003 meeting that further improvements were being contemplated so as to strengthen the Risk and Performance Management features of the process in the forthcoming year.

3.5 Apart from the regular reviews of the OSB’s Business Plans, the main topics and issues reviewed by the MAB since inception are as follows: 

• 3.5.1 Electronic Filing: This was identified by the Superintendent as a project of strategic importance, the purpose of which was to improve the efficiency of document filing by Trustees and to optimise the uniformity and accuracy of data. In view of its specialized nature, a sub-committee of the MAB was formed to advise the OSB on the management of the project, and particularly on the procurement process as well as on the identification of the key risks involved. Phase I of the Project was launched in December 2002 for summary bankruptcies, and a progress report was submitted to the MAB at the June 2003 meeting as part of the Year-End Review. As the Sub-committee is composed of those members of the MAB who have relevant experience or expertise, it is expected that it will continue to follow the development of the Project so as to be available to provide advice on issues that may arise in completing the subsequent phases of this initiative.

• 3.5.2 New Fee Structure:  The Superintendent submitted and obtained approval from the Governor-in-Council of a new user fee grid in June 2001. Prior to that submission, the MAB had reviewed the results of the public consultations that the OSB had conducted in that respect. Various alternatives were considered with regard to the proposed increases, and advice was provided on a range of alternatives most likely to ensure the proper level of revenues while maintaining fairness to all stakeholders.

• 3.5.3 National Insolvency Forum:  It is in late Spring of 1999 that this new form of stakeholder consultation was launched by the OSB with a view to bringing together insolvency stakeholders and practitioners to obtain their views as to how the insolvency system could be improved. The Forum identified the strengths and shortcomings of the system, and generated a wide range of suggestions as to how the existing process could be streamlined and made more efficient and cost-effective. The MAB reviewed the Forum Report at the time of its finalization in March of 2000. This Report and its discussion provided the MAB with a comprehensive overview of the Canadian Bankruptcy and Insolvency system and contributed significantly to enabling the members to provide useful advice on the various programs subsequently developed by the OSB in response to the Forum’s individual findings.

• 3.5.4 Trustee Survey*:  In the Spring of 2002, the OSB conducted an on-line survey amongst Trustees in order to obtain their views on the OSB programs and services, and on its performance in delivering those programs and services. While the response indicated a high degree of satisfaction, the survey revealed a number of areas for improvement. The MAB examined the results of the survey and provided advice with regard to those areas requiring an improved approach on the part of the OSB. A follow-up plan addressing the key issues raised in the survey was reviewed by the MAB at its meeting of April 2003.

• 3.5.5 Creditor Survey*:  This survey is to be conducted shortly with a view to sharing its findings with the MAB when completed, and obtain its views as to how the OSB should respond to the survey.

• 3.5.6 Debtor Survey*:  This survey was conducted in early 2003, and preliminary findings were presented to the MAB at its June 2003 meeting with a view to obtaining its advice as to the action that its findings may call for, particularly with regard to the OSB’s visibility with this very important stakeholder group.

• (*Note: The purpose of these surveys is to give a comprehensive overview of the effectiveness of the OSB’s services as perceived by those stakeholder groups. The MAB provided input to the questionnaires on which these surveys were to be conducted.)

• 3.5.7 Trustee Compliance Strategy**:  In order to maximize the effectiveness of the Bankruptcy and Insolvency system, the OSB undertook to restructure and refocus its Trustee Compliance Monitoring strategy (along with its Debtor Compliance Strategy reported below) with a view to ensuring that trustees act according to the Bankruptcy and Insolvency Act, Rules and Directives in all aspects of their practice. The general direction of the proposed strategy was presented to, and discussed with the MAB in January 2001 as part of a 5-year Plan outlining the OSB Compliance Priorities. As part of this strategy, the OSB now plans to launch a national initiative, in the summer of 2003, to ensure a more timely and orderly administration of insolvency estates by trustees.

• 3.5.8 Debtor Compliance Strategy**:  The OSB’s objective in this regard is to develop and implement effective programs and processes in identifying key risks for abuse. The MAB was informed that a pilot project was under way and that its advice would be sought on the business case that the OSB intends to develop in order to secure proper funding in support of its strategy. Compliance monitoring being an essential component of the Superintendent’s mandate, the MAB fully supports the high priority ranking that the OSB has given to this strategy.

• 3.5.9 Personal Insolvency Task Force:  The key recommendations set forth in this Task Force report, released in August 2002, were reviewed by the MAB along with a study by the OSB of the characteristics of personal insolvencies. The objective of this study was to improve the level of knowledge regarding individuals filing consumer proposals or summary administration bankruptcies.

• 3.5.10 Parliamentary Report:  As required by the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), both Acts are to be referred to a Committee of Parliament for review every five years. The Report on the Operation and Administration of the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act (September 2002) was prepared by INDUSTRY CANADA and tabled before Parliament in December 2002 to satisfy that requirement. While the Report as such was not reviewed by the MAB prior to its submission to Parliament, most of the issues addressed in the report to Parliament had been reviewed previously as reported herein, and accordingly, had been the object of discussions and advice from the MAB as part of its work program. Furthermore, the MAB received a comprehensive presentation of the Report in January 2003 in anticipation of the presentation that was subsequently made to the Senate Committee on Banking and Trade in May of 2003.

• 3.5.11 Composition and Operation of the Mab:  A committee of the MAB was struck to deal with issues related to the composition and operation of the board, such as succession, rotation, representativeness of the membership, etc. The deliberations of the committee are reported in Section 4.0 of this Report.

• 3.5.12 Information Technology (IT) PLAN:  In response to the objective set by the Government of making information and services available to Canadians on-line, one of the OSB’s strategic objectives calls for information products and access to all its services to be provided electronically over time. To that end, the OSB developed a five-year IT Strategic Plan which the MAB reviewed, and its comments and suggestions were then taken into account in the finalization of the Plan. Similarly, the MAB received a presentation on the OSB Information Products Business Plan for the period 2001/2004.

• 3.5.13 Human Resources Strategy:  As the successful outcome of planned projects and the efficiency of operational programs depend in a large measure on the quality, qualifications and motivation of the staff involved, ‘Organizational Health’ was identified by the OSB as one of its Strategic Management Objectives. The MAB has accordingly provided advice on the HR component of that objective. In this regard, the MAB has noted with satisfaction the very positive results obtained by the OSB from the Public Service Employee Survey carried out in 2002. That survey provided an assessment of the work environment at the OSB from a variety of viewpoints, such as job satisfaction, value and ethics, training and career development, labour relations. The MAB was informed that a formal HR Strategy is being developed and should be submitted to the MAB for comments shortly.

• 3.5.14 Annual Report:  As mentioned above, the MAB is provided yearly with a year-end report from the OSB through which progress achieved in the course of the preceding year is reported with regard to the objectives and programs identified in the Business Plan. In 2003, the OSB submitted for discussion a new Performance Management Framework designed to manage performance against the strategic objectives, to measure the extent to which risks are being addressed and to demonstrate performance to both internal and external clients, stakeholders and employees. The MAB was also informed that a formal Annual Report will be submitted shortly in draft form for comments. This Report being the first one from the OSB will provide information with regard to the OSB activities of interest primarily to external stakeholders and participants in the administration of the Bankruptcy and Insolvency System.

• 3.5.15 Prevention Programs and Debtor Education:  While this item has not been specifically on the Agenda, it has been raised frequently by the members of the MAB. It is not specifically part of the OSB mandate, but it is nonetheless recognized as an issue that warrants consideration. The MAB was informed that the OSB is currently working on the preparation of a plan and draft material expected to be submitted to the MAB for comments and advice some time in 2004.

3.6 **Compliance: an Essential Strategic Priority:  In view of the public policy nature of the ultimate purpose for which the Bankruptcy and Insolvency System was set up, compliance with the law and the Superintendent’s directives and regulations by all parties concerned, is critical to its effectiveness. Indeed, the system’s effectiveness cannot be measured by reference only to the supporting administrative and operational processes. Therefore, the MAB supports the high level of priority the Superintendent has assigned to the development of the Trustee and Debtor Compliance Strategies reported on in this Section. However, given that the functions expected to be required of the OSB in this regard will require substantial resources and considering further that, unlike other fee-based services provided by the OSB, the compliance-related functions cannot be expected to generate revenues as they do not lend themselves to fees or tariffs, the MAB is highly concerned that the revenues to which the OSB has access under the present financial framework will not be sufficient to support adequately the compliance oversight functions, and even less sufficient to support the enforcement functions. At stake here is not only the responsibility inherent to the Superintendent’s mandate of ensuring that the law is complied with but also the risk that, in the absence of appropriate measures, the credibility, integrity and reliability of the Bankruptcy and Insolvency System as whole be undermined. Consequently, the MAB feels particularly strongly that the OSB’s ability to carry out such essential functions should not be constrained by the scarcity of financial resources alone, it specifically recommended (see Section 5.0) that the Department undertake a comprehensive review of the financial framework presently governing the OSB so as to ensure that adequate financial resources will be available to enable the OSB to satisfy fully and in a timely manner the Superintendent’s statutory mandate, including the public policy and other non-revenue generating functions, such as those related to the Trustee and Debtor Compliance Strategies.

4.0 The MAB: its composition and operational practices

4.1 While the Terms of Reference specify that the members of the MAB are to be chosen by the Deputy Minister, Industry Canada (on the basis of recommendations from the Superintendent and the Assistant-Deputy Minister of Operations), the MAB is nevertheless made specifically “responsible for establishing a mechanism to ensure a rotation of members that will ensure an effective balance between the flow of new ideas and ensuring consistency in the advisory process.”. The task having been assigned to a sub-committee, it is on the basis of its analysis and proposals that the comments and recommendations herein were evolved by the MAB.

4.2 At the outset, account was taken of the provisions of the Terms of Reference which govern the composition of the MAB’s membership and the selection of members, particularly those regarding the MAB’s main attributes, namely ‘expertise’ and ‘representativeness’. These attributes are identified in the Terms of Reference as follows: “Consideration shall be given to the ability of potential members to convey and apply relevant personal experience and expertise to the directions, operations and management practices of OSB’s business. Consideration will also be given to geographic and gender representation as well as size of organization.”.

4.3 While the issue of membership rotation could not be disassociated from those requirements, the review took note of a number of related points. First, with regard to the personal experience and expertise expected of each individual member, it was noted that the MAB’s ability to perform its advisory function in an optimum manner depends not only on the individual qualifications of its members but also and foremost, on the overall balance of expertise and experience available, so that collectively, the MAB members will be in a position to offer the wide range of advice its mandate calls for. Secondly, the requirement concerning representativeness, also essential, should not be expected to be satisfied simply by increasing the size of the Board as the expected benefits could then be offset by the inefficiency that often characterizes unduly large groups.

4.4 In this regard, it was noted that in addition to specifying that “the Board will comprise between ten and twelve members chosen from the private sector plus a chairperson.”, the Terms of Reference provide for a number of seats to be filled by members selected from specified bodies such as the Canadian Insolvency Practitioners Association and the Canadian Bankers Association. It also provides for some members to be selected from constituencies such as the debtors and debt counsellor community, the bankruptcy courts or insolvency legal practitioners as may be nominated by the Insolvency Institute of Canada, and finally, for “between four and eight members [to be] chosen from a mix of various businesses, both domestic and multinational, the academic community and other public organizations.”.

4.5 Constraining as these specifications may appear to be, they nevertheless have enabled the MAB so far to have access to valuable expertise and knowledge, and have provided for a relatively well balanced board from inception. It was further noted in that respect that since inception, some natural rotation of members had effectively been achieved as a result of a number of members having retired either because they no longer held the position which qualified them to serve on the Board or for other reasons. Through that informal process of rotation, eight seats have become vacant and have been filled anew over a period of five years.

4.6 However, it is felt that the rotation process should be more systematic. This can be achieved by placing a limit on the overall length of board service expected of members. In this respect, the Terms of Reference presently provide for members to be appointed for a three-year term, with the possibility of an undetermined extension “with the consent of the Chairperson and the Superintendent …where there is a need to retain specific expertise” as provided for under the present Terms of Reference.

4.7 It is, therefore, suggested that the initial term should not be extended for more than an additional three years for a maximum of six years of service on the MAB. While this would undeniably accelerate the rotation process, it would also place a more reasonable limit on the overall commitment expected of members whose service on the board is generally in addition to their regular professional duties.

4.8 Limiting the overall length of board service would also contribute to optimising representativeness in that it would provide periodic opportunities to explore, and seek candidates from, a wider range of relevant constituencies. Indeed, beyond the constituencies and stakeholder groups which are allowed to nominate members under the Terms of Reference, the following have been identified as potential sources of candidates to be considered:

• creditors (institutional as well as trade and retail)
• debtors (credit counselling associations, small business groups),
• trustees (who are the main ‘deliverers’ of OSB programs)
• judicial community (as its members are directly involved in the administration of the insolvency system),
• legal profession (as lawyers are involved either on the creditor side or the debtor side of a bankruptcy),
• economists (considering the direct relationship between volumes of bankruptcies and economic trends),
• information technology specialists (as OSB’s services are increasingly dependent on technology),
• communications/media practitioners (in response to the need specified in the MAB’s Terms of Reference to improve public awareness and relationships with the insolvency community),
• individuals with expertise in human resources management and training (as this forms part of one of OSB’s strategic management objectives)
• academic community unless someone from that community could also be related to one or the other of the areas of expertise mentioned above.

4.9 The review also considered the question of the selection process and the term of office of the Chairperson. Like the MAB members, the Chairperson is to be selected by the Deputy Minister, Industry Canada on recommendations from the Superintendent and the Assistant Deputy Minister of Operations. The proposed incumbent may be selected from amongst the membership of the MAB and the initial three-year term may be extended with the consent of the Deputy Minister “where there is a need to retain specific expertise or to ensure continuity and consistency in the advisory process.”.

4.10 In this regard, it is felt that, as in the case of the members themselves, the Chair’s maximum term of office should not be left unspecified although, due to the nature of the function, provision should be made to foster stability and continuity. To that end, a term not exceeding twelve years, prior board service included, if any, was considered appropriate under the circumstances.

4.11 Therefore, on the basis of the foregoing, the MAB recommends:

• 4.11.1 that the initial appointment of members for a three-year term not be extended for more than an additional term of three years, thus restricting board service to a maximum of six years.

• 4.11.2 that the initial three-year term of appointment to the Chair and subsequent extensions thereof not be allowed to cover a period of more than twelve years, including prior board service, if any.

4.12 Furthermore, in response to the Terms of Reference requiring that a mechanism be established to support membership rotation, the MAB will: 

• 4.12.1 review annually the composition of its membership with a view to identifying constituencies and professional disciplines from which candidates should be sought to fill actual and expected vacancies in order to ensure balanced representation and expertise having regard to the requirements of its mandate and the OSB’s plans and priorities; and

• 4.12.2 present its views, and possibly names of potential candidates, to the Superintendent for consideration by the Deputy Minister for appointment in due course; and

• 4.12.3 incorporate the foregoing into a more detailed procedure to be used as a guideline for the application of the Terms of Reference regarding the composition of the MAB.

5.0 The OSB's Financial Framework: in need of adjustments

5.1 As a Special Operating Agency (SOA), the OSB enjoys an enhanced degree of administrative and financial autonomy which, in turn, implies a commitment to recover its direct operating costs through its revenues, the overall purpose being to make the OSB financially self-sufficient and self-funded. However, the financial framework presently governing the OSB’s operations lacks consistency with the intended purpose in that it does not allow it to have access to the totality of the revenues it generates, nor access to additional financial resources as and when required to support essential but non-revenue generating functions which form an integral part of the Superintendent’s statutory mandate. Therefore, the MAB feels strongly that the present financial framework should be reviewed and adjusted so as to make it consistent with, and supportive of the purpose intended at the time the OSB was set up as an SOA.

5.2 First, self-sufficiency being the objective, it should follow that the OSB should have access to the totality of the revenues it collects from the users of its services, considering that the various fees and levies it charges are its sole source of income. However, under the financial framework as it currently stands, revenues exceeding budgeted expenditures in a given year cannot be retained and accumulated for application to subsequent years’ operations. Revenues collected in a given year in excess of 5% of operating expenditures in that year are forfeited and returned to the Consolidated Revenue Fund.

5.3 However, in order to alleviate that constraint, the Department and Treasury Board authorized the OSB, a few years ago, to apply a procedure known as “the vote-net arrangement” whereby the OSB is now allowed to increase its base operating budget every year by a predetermined share of the user fees expected to be generated in that year and to apply it to other operating costs, such as those related to the performance of non-revenue generating functions that the statutory mandate calls for. Although the introduction of the “vote-net arrangement” has undeniably had a positive effect, it has nevertheless fallen short of giving the OSB access to the totality of its revenues as fees and levies collected each year in relation to the processing of insolvency files have consistently exceeded budgeted expenditures, thus causing a balance of unused income to be returned to the Consolidated Revenue Fund.

5.4 Furthermore, revenues lag behind expenditures by significant intervals, which impacts the OSB’s cash flow as cash outflows (expenses) are not matched by cash inflows (revenues). Indeed, operating expenses are incurred from the very moment an insolvency file is registered with the OSB whereas the corresponding fees are not collected in full until the file is closed some years later. In fact, while the bulk of the OSB’s work occurs in the first year of an insolvency, more than 50% of the associated revenues is paid gradually over the following four years.

5.5 Such mismatching of revenues and expenses makes the OSB particularly vulnerable to sudden and significant volume increases. Indeed, expenses related to the processing of incoming insolvency files are a function of volume while volume growth is itself a function of economic conditions. Accordingly, forecasting volume growth is just as difficult as forecasting the performance of the economy as a whole as fluctuations may vary significantly at times of economic slowdowns or recessions. In fact, over the last thirty years or so, total insolvency filings have increased by an average compound rate of approximately 10% per year. However, the annual growth rate has varied significantly from one period to another, going from a yearly rate as high as 21% at times of economic recessions to rates of less than 5% in other periods, or even to decreases in periods of economic recovery. Furthermore, the impact of economic factors is different on business bankruptcies than on consumer bankruptcies, thus making forecasting even more complex. For example, business bankruptcies are more closely linked to economic cycles and changes in key economic indicators such as changes in GDP growth and variations in lending and inflation rates, while consumer bankruptcies appear to be influenced more by changes in consumer credit, personal indebtedness and unemployment rates.

5.6 That is the kind of situation the OSB was confronted with in the mid-1990s and which led to fee increases and to the introduction of the “vote-net arrangement” mentioned above. Thus, the OSB was able to bring its revenues back in line with the ongoing operational expenditure requirements, and also to proceed with the capital investments required to support the development of the strategic Electronic Filing Initiative. However, the same situation could occur again in the future as the OSB remains susceptible to unforeseeable and significant fluctuations in its workload as a result of equally unforeseeable fluctuations of the economy. Such circumstances imply the corresponding risk of the OSB having no alternative but to suspend or defer non-revenue generating functions (such as compliance oversight functions) and redirect the resources so released to the more pressing and non-discretionary insolvency file processing functions.

5.7 Finally, effective as the “vote-net arrangement” has been so far in providing the OSB with a larger share of the revenues it generates, it cannot be expected to provide the funds required to cover fully the cost of all statutory functions in addition to the cost directly related to the processing of insolvency files, nor can such costs be expected to be recovered in full strictly from fee increases. Yet, in the absence of adequate financial resources, the Superintendent is unlikely to be able to perform a number of essential public policy but non-revenue generating functions, such as debtor and trustee compliance oversight functions, thus putting at risk the effectiveness and the integrity of the Canadian Bankruptcy and Insolvency system as a whole.

5.8 In that context, consideration must be given to supplementary sources of funds. It is in that perspective that consideration was given a few years ago to the concept of a Revolving Fund. The MAB was briefed by the Superintendent on that proposal. However, it appears that it is no longer being considered by Treasury Board. There are, however, supplementary sources of funds which, in view of their origin, could justifiably be accessible to the Superintendent. This is the case in particular of the unclaimed dividends and undistributed funds from bankrupt estates which are currently placed in an account administered by the Superintendent. As the recent Report on the Operation and Administration of the Bankruptcy and Insolvency Act (i.e. the Minister’s Report to Parliament) specifies, the amount accumulated in that account stood at more than $7,000,000.00 as at January 2002. Considering the source of those funds, it would be justifiable to re-invest them at least in part into the insolvency system, thus contributing to the recovery of at least part of those OSB’s direct operating costs that cannot be recovered through the fees and levies charged for processing insolvency files. There are other sources of funds, some mentioned in the Parliamentary Report, that could also be considered as capable of providing additional financial resources to the OSB.

5.9 In short, this is a cause for serious concern and accordingly, the MAB is strongly of the view that the financial framework under which the OSB is to operate in the future should be adjusted or redesigned not only to allow it to have access to the totality of the income it generates but also to ensure that it is not inhibited, for lack of adequate or timely financial resources alone, from undertaking such action or performing such functions as are inherent to the Superintendent’s statutory mandate. This would ensure consistency with the purpose for which the OSB was set up as a SOA, and more specifically, would enable it to attend to those public policy functions that are part and parcel of the Superintendent’s statutory mandate, though not revenue generating. It would also make it possible for the Superintendent to manage the OSB in a truly proactive and totally accountable manner rather than on a strictly reactive manner as it will inevitably continue to be the case if the resources available to the OSB are limited to the revenues generated by the fees and levies collected for the processing of insolvency files.

5.10 What is at risk under the present financial arrangements are primarily public policy functions, particularly trustee and debtor compliance monitoring functions, which the Superintendent may not be in a position to attend to or which he may have no alternative but to defer or suspend if adequate or timely financial resources are not available. This is an all the more disquieting perspective as the Debtor and Trustee Compliance functions have been identified as priority Strategic Objectives by the Superintendent in support of the OSB Mission which is “To maintain investor, lender and public confidence in the Canadian marketplace by protecting the integrity of the Bankruptcy and Insolvency system.”

5.11 Therefore, the MAB strongly recommends that: 

• 5.11.1 a comprehensive review of the present financial framework be undertaken by the Department with a view to formulating such adjustments and such additional or alternative forms of funding as may be found necessary and effective to ensure that adequate financial resources are available to enable the OSB to satisfy fully and in a timely manner the Superintendent’s statutory mandate, including public policy and other non-revenue generating functions;

• 5.11.2 appropriate recommendations be developed by the Department on the basis of such review for eventual consideration by Treasury Board so that a more appropriate financial framework can be substituted as soon as possible for the present framework;

• 5.11.3 consultations be held with, and advice be sought from the MAB as to the proposed recommendations as well as to the strategy to follow in support of the proposed course of action.

6.0 Conclusion

6.1 As this Report shows, the MAB has covered a wide range of topics, and in so doing, has hopefully provided useful advice to the Superintendent and to the staff of the OSB, as provided for in its Terms of Reference.

6.2 The MAB’s effectiveness was significantly enhanced by the open and constructive relationship that developed from the outset between the Superintendent and the OSB staff on the one hand, and the MAB members on the other.

6.3 In addition to professional expertise, the OSB staff, under the Superintendent’s leadership, have consistently displayed not only willingness but also and foremost, eagerness to derive all benefit possible from the experience and advice of the members of the MAB, which is worthy of note as the MAB’s formal mandate alone would not have been sufficient by itself to generate the results that were anticipated at the time it was set up.

6.4 Accordingly, this Report provides a welcome opportunity for the MAB to commend the Superintendent’s leadership and the OSB staff for their professional competence and the exceptional dedication with which they assume and discharge the duties and responsibilities of the OSB mandate under the law, and for their sustained commitment to efficiency and effectiveness in providing the services they are accountable for in relation to the Canadian Bankruptcy and Insolvency System.

6.5 For its part, the MAB is encouraged to continue to provide advice to the Superintendent and the OSB as its Terms of Reference call for, and thus, to contribute as effectively as it can to the achievement of the objectives which all stakeholders and parties concerned have in common, of ensuring that Canada is provided with an equitable, efficient, reliable and reputable Bankruptcy and Insolvency system.

Appendix A

OSB Management Advisory Board – Current Members List

Chairman: 

Jean-Claude Delorme
since June 1998

Members:

Diana Graham
since February 1999
Vice President, Retail and Small Business Credit – CIBC Risk Management Division

Yanik Harnois
since June 2001
Human Resource Specialist

Robert Sanderson
since March 2000
Insolvency Practitionner

Larry Prentice
since October 2003
Insolvency Practitionner

Uwe Manski
since June 1998
Insolvency Practitionner

David Howden
since June 1998
Director Electronic Service Delivery Implementation – Integrated Service Delivery Division Ontario Ministry of Consumer and Business Services

Francine Bastien
since June 2001
Communications Specialist

Susan Robinson Burns
since April 2002
Lawyer

Joan Huzar
since January 2003
Consumer Council of Canada

George H. Boynton
since June 1998
Informatics Specialist

Jean-Yves Fortin
since June 2002
Lawyer

Andrea Boudreau Ouellet
since April 2002
Vice-Dean of the University of Moncton Law Faculty

OSB Management Advisory Board – Past Members List

Membres: 

Gisèle Samson Verreault

Ivanhoé Beaulieu
From June 1998 to October 1999

Ralph Peterson
From June 1998 to May 1999

Lucille Riedle
From June 1998 to September 2000

Peter Wedlake
From September 2001 to April 2003

Wayne Proctor
From April 2002 to June 2002

Ray Gibbs
From October 1998 to April 2001

Ron Whiting
From June 1998 to January 2001

Pat White
OACCS
From June 1998 to June 2002