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To the degree that the system is not equitable, swift, predictable in out come, and proof against predatory behaviour by persons wishing to exploit the system as part of the market in corporate control, the price of capital for all firms will rise. Such unnecessary risk poses a dead weight burden on the entire national economy as the price of credit rises to an unhealthy new equilibrium.

In the Air Canada case, the system appears to be working well. A re organized Air Canada is scheduled to emerge from creditor protection on September 30 with reasonable prospects, in the views of the credi tors most concerned, of success thereafter. Some $9 billion in debt will be cut by more than half, new equity of $1.1 billion raised, new aircraft financed within the new debt structure, and costs will have been sub stantially lowered. The former shareholders will get nothing, and the former directors will be fired. The new owners once and future credi tors, for the most part will have decided to keep the present managers in place, apparently judging that they were not entirely responsible for the 2003 insolvency and cannot be immediately replaced by demon strably superior ones.

The system worked in other senses, too. The 2000 bid for CAIL in volved politically well connected people. Unperturbed, a fearless Court dismissed the bid for failing to respect the plain language of the law, and the politicians did not try to trump the judgment by changing the rules in the middle of the game. The Court also demonstrated the desir ability of a statute with sufficient flexibility to allow an unconventional ruling based on a balance of risks, as in the case of Mr. Justice Farleys allowance of a super priority for the Lufthansa code sharing arrange ment.

Finally, the system worked in the governments favour as well. By re fraining from subsidy or nationalization the government kept manage ment, financiers and unions at the bargaining table. Only when it be came clear, for example, that the government was not going to socialize the pension obligation that the unions finally bargained in earnest. In sticking to its role as designer of the bankruptcy system the govern ment attained its greatest and paradoxically least visible victory: the continued assurance to capital markets that Canada had a well functioning system and that lenders would not have generally to in crease credit costs across the whole economy.

Political restraint aside, the elements of success, in summary, are the following.

Competent supervision. Less than zero sum games require strong referees. The judicial system in Canada produces competent, inde pendent, and apparently incorruptible judges. Appointments to all the superior courts are made by federal order in council in practice, by the prime minister on the recommendation of the attorney general and minister of justice, following advice from the bar and senior public ser vants in the Department of Justice. Once appointed, they are free of political constraint, as they may serve until 75. They may be removed only by a resolution of both Houses of Parliament, following censure by the Canadian Judicial Council, which is composed of the Chief and As sociate Chief Justices of the provinces and the Chief Justice of the Su preme Court of Canada. Judicial salaries are set by independent com missions to avoid even the impression that governments could affect outcomes by withholding pay. These salaries place judges in the top two to three percent of Canadian incomes not, perhaps, as much as senior partners in large law firms might make, but more than enough for a comfortable life, and with a generous pension on retirement. The so cial prestige that attaches to being a judge is worth forswearing the very highest incomes, at least for a sufficient number of lawyers, and is itself a strong incentive to maintaining probity.

Under the BIA, as noted, the Office of the Superintendent of Bank ruptcy licenses trustees, regulates their behaviour261, and sanctions malfeasances. Nor is this done privately: all sanctions are published for the world to see262. Parties aggrieved by trustee improprieties may complain to the Superintendent, who has a duty to investigate, and ul timately to the Court. Trustee fees, as well as the salaries of officials in Office of the Superintendent of Bankruptcy Canada, Code of ethics for trustees in bankruptcy, Ottawa, 2000; see also http://osb bsf.ic.gc.ca.

The OSB Newsletter, published twice annually, publishes summaries of cases dealing with professional conduct matters. The full texts are available under the heading Trus tees and the sub heading Licencing and professional conduct on the website noted above.

the Office of the Superintendent, are sufficient to provide a comfortable living.

Transparency. The power of a free press, abetted by rules of proce dure that require all actions under the CCAA to be open to the scrutiny of interested parties and ultimately the public, is fundamental to main taining probity. In the Air Canada case, the details of restructuring pro posals, the actions of various parties, and the outcomes of negotiations on such matters as collective agreements were reported frequently to the Court by the monitor, and were published instantly on the web. Even minor excursions from lawful propriety would be seized on by one party or another, and would become matters of public notoriety through the press very quickly. As most of the players in this drama, notably banks, accounting consultancies, judges and other officers of the court, and even company directors value their reputations for probity beyond any conceivable pecuniary advantage in a given case, the incentives for good behaviour are strong.

Timeliness. The melting away of the remaining corporate assets dur ing a prolonged insolvency proceeding constitutes a large economic risk. The credit of the firm is necessarily impaired, notwithstanding the stay of proceedings. Old suppliers restrict credit, and new ones do not come forward. Employees, led by the most capable and marketable, consider leaving for more secure situations. Customers find alternative carriers. Time is of the essence in a successful bankruptcy regime. In the Air Canada case, Mr. Justice Farley granted stays under the CCAA for limited periods, always threatening to lift the stay and open the company to liquidation by its creditors if progress toward restructuring was insufficiently swift. The pressure on all parties was unrelenting.

There were no days and few nights off for the parties. Even so, the air line has operated under CCAA for fifteen months at this writing, and is not scheduled to emerge until September 30, 2004. Eighteen months is not long by the standards of Chapter 11, however, which perversely of fers some comfort to lenders and commercial partners of Air Canada.

The complexity of the case has been a matter of daily proof in the press, and the experience of US airline bankruptcies has given observers of the present case a sense that reasonable outcomes are not unlikely.

Predictability of outcomes. A good bankruptcy system must offer all concerned parties an ability to predict outcomes and thus to arrange their own affairs in the most advantageous way possible in the circum stances. This is as true with the myriad details of the process as it is with the overall case itself. If a creditor knows that there is an objective and Court supervised process for compromising his rights equitably with those of others in his circumstances, if the priority of creditors is known and unchallengeable, if there is light at the end of the tunnel in terms of equity for compromised debt (or in the limit in terms of a dividend from the bankrupt estate), then market players will be content to let the process unfold in a rational manner. In the Air Canada case, the pre dictability of process and outcomes meant that collapse during restruc turing was much less likely. From a public policy point of view, there is much value in a legal process that is allowed to accumulate precedents over a long period of time. Overly frequent or radical changes in the ba sic procedure may cause years of heightened uncertainty. It is in this sense that a government that can restrain itself from intervening even (or especially) in notorious and embarrassing cases is helping to im prove long term confidence and keep down the cost of credit generally.

Balance between liquidation and reorganization. There is no doubt that in large cases with substantial externalities the mood of the times has swung away from the debtor friendly UK laws of 1904 and toward regimes that give every opportunity for the survival of a reorgan ized company. Small bankruptcies, however, pose few such external costs. The continued co existence, as the Senate Committee recom mends, of the BIA and the CCAA thus accords with economic common sense. The BIA handles small business and consumer cases efficiently, while CCAA allows judges considerable discretion within a general framework of procedures to design a process that has a high probability of a successful outcome.

Generality of process. Both CCAA and BIA are designed to work with firms in any sector or region. With the small exception of the Winding Up Act for financial institutions, the same legal framework applies to all in solvent companies263. This seems appropriate as the fundamentals of The exception is state owned or Crown corporations that are agents of government i.e., have a public policy purpose that transcends commerce but as they rely on the full faith and credit of the Crown, their insolvency is impossible without the prior bankruptcy of the country as a whole.

debt, credit and solvency are quite general, applying to all organiza tions.

It is hard to draw broad lessons from single cases, but the Air Can ada case will likely cause Parliament to reflect on one or two of the re forms being recommended by the Senate Committee, as well as certain established practices. For instance, if the failed management and board are to be left in place during a restructuring, might there not be strictures against conflicts of interest Trinity Time Investments, the Li equity vehicle, promised large financial rewards from its own pocket, be it said, not Air Canadas to Robert Milton and Calin Rovinescu if they were the successful bidders. This raised apprehensions of bias in the preference shown to this bid for some time thereafter. It is not clear that the presiding judge, short of inventing a new aspect of inherent jurisdiction under the CCAA, was in much of a position to quash this side deal.

On the other hand, the labour negotiations, while exhausting, were ultimately successful. No fewer than seven different unions had to ac cept their share of an aggregate of $1.1 billion in cost reductions to meet the conditions established by Deutsche Bank and GECAS, the main providers of new capital in the plan of arrangement. In the end past the deadline, after much public histrionics and private hard bar gaining, they did. It is to be expected that the details of these new agreements are more acceptable to both sides than an abrogation and redefinition by one side only. Faced with the stark alternative of liquida tion the unions bargained for their lives. The case makes it more difficult to argue for importing a Chapter 11 style right of management to repu diate collective agreements.

Air Canadas reorganization is not yet complete. A number of steps remain to be taken, any of which could in principle imperil success or push back the forecast completion date of September 30, 2004. Never theless the main steps have been taken.

7.5. Matters of special interest in Russia In general, how is probity assured How are the interests of all parties, including owners, assured The proximal answer is that disin terested professionals are interposed between creditors and debtors:

trustees, judges and receivers. Strongly reinforcing the probity of these professionals is the extensive transparency afforded bankruptcy cases, with forced disclosure of relevant information to all parties, the involve ment of all creditors on a committee and the delegation of some of their powers to inspectors. Simply put, there are too many players involved in a corporate bankruptcy to allow improper behaviour to pass unnoticed.

How are receivers and trustees regulated A senior federal offi cial, the Superintendent of Bankruptcy, whose office has extensive and detailed oversight of trustee activities, regulates trustees. The Superin tendent establishes standards for the training of trustees, examines them, grants licenses as long as their professional qualifications con tinue to meet the established standards, hears complaints and where necessary takes disciplinary action.

How are priorities for the distribution of bankrupt estates estab lished These contentious priorities, including those of the state itself, are established by Parliament under Section 136 of the BIA.

Has an insurance fund been considered to protect certain classes of creditors from malfeasance by regulated officials No; in such a case, a creditor would have a claim against the tortious official, and perhaps against the Superintendent if there has been negligent oversight. If malfeasance is by a civil servant the Crown may be sued.

There has from time to time been consideration of a special fund, per haps an offshoot of the Employment Insurance scheme, which would bear the costs of a super priority to unpaid wage claims, but that is an other matter. Malfeasance of this kind is quite rare.

How are insolvent state corporations dealt with If such corpora tions are agents of Her Majesty, the normal case, they operate with the full faith and credit of the state. Insolvency is thus impossible in principle, as there is no end to the credit that will be extended in such a case. In practice, the federal Treasury Board Secretariat and Depart ment of Finance exercise sufficient controls over Crown corporations that threatening situations are dealt with before they become danger ous. Two examples: when the federal government privatized the Cana dian National Railway in 1996 it was necessary to clean up its balance sheet quite substantially before a reasonable sale could be concluded.

And the concentration of exposures on the books of the Export Devel opment Corporation is such that it is unlikely that it could borrow at rea sonable rates without reliance on the financial resources of the gov ernment as a whole.

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