Review of the Trustee Licensing Regulatory Framework
Consultation Paper - Part One

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Introduction

This consultation document is being issued with the objective of updating the Office of the Superintendent of Bankruptcy's (OSB's) licensing regulatory framework to ensure that it is reflective of the current environment, that the licensing process is complete and transparent, and that the public interest is respected.

The licensing regulatory framework is an essential component in promoting the integrity of the insolvency system by ensuring that well-qualified, competent, ethical and financially capable individuals are licensed to act as trustees in administering insolvent estates and applying the Bankruptcy and Insolvency Act.

In addition to the Bankruptcy and Insolvency Act (sections 13 to 13.2 and 14.08 to 14.1) and the Code of Ethics for Trustees in Bankruptcy (Rules 34 to 53), the licensing regulatory framework is principally governed by the Directive on Trustee Licensing (Directive No. 13R2). This Directive, which dates back to March 31, 2000, sets out the required qualifications and criteria for obtaining and maintaining a trustee licence. Provisions relating to the names of corporate trustees were amended on August 15, 2005, and September 18, 2009; other technical amendments were made on April 4, 2006. Note that the Directive is based on the old Trustee Licensing Policy, which dates back to 1989.

In addition, the Policy on Multi-Jurisdictional Licences, in effect since July 1, 2006, sets out various elements that are considered in reviewing a trustee's application to extend his or her licence to a province in which he or she does not maintain a resident office. The policy is intended to ensure consistency in the application of the rules for extending licences to other districts.

Finally, the Directive on Advertising by Trustees (Directive No. 29), dated September 18, 2009, outlines the position of the Superintendent of Bankruptcy concerning advertising by trustees in general.

1. Office of the Superintendent of Bankruptcy

The mission of the Office of the Superintendent of Bankruptcy is to contribute to a fair and efficient marketplace by protecting the integrity of the bankruptcy and insolvency system on behalf of investors, lenders and the public. Its mandate is to supervise the administration of all estates and matters to which the Bankruptcy and Insolvency Act applies. In exercising its duties and powers, the OSB takes as its strategic objectives:

• to maintain an efficient and effective regulatory framework;
• to promote awareness of the rights and responsibilities of stakeholders in the insolvency system;
• to ensure trustee and debtor compliance with the legislative and regulatory framework; and
• to be an integral source of information on Canadian insolvency matters.

The objective of the licensing regulatory framework is to maintain an efficient and effective licensing framework that would inspire the confidence of stakeholders in the Canadian insolvency system. More specifically, the licensing regulatory framework has the following goals:

• to protect the public interest so that users of insolvency services are competently served by duly licensed professionals responding to the needs of the "professional services market" such that regulation is neither too restrictive (thereby promoting the competitiveness of trustee firms), nor too permissive (thereby maintaining the integrity and quality of professional services);
• to ensure clear and transparent rules that enable trustees in bankruptcy and licensing candidates to make informed decisions; and
• to ensure that there are no unreasonable constraints in the licensing process that could impede the recruitment of new trustees.

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2. Stakeholders

The insolvency system is one of the pillars supporting Canadian credit markets. By providing a regulatory framework that is consistent, open, transparent, honest and capable of resolving creditor/debtor disputes effectively, the marketplace is able to price its credit risk accordingly. The better the system works, the lower the risks and the lower the cost of credit. Therefore, there are a number of stakeholders whose views are important for maintaining the credibility of the licensing regulatory framework, including insolvency practitioners, investors, creditors' groups, consumer associations, court representatives, credit counsellors, turnaround management professionals, receivers and auctioneers.

Another important player in the regulatory framework is the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). The association is a non-profit corporation established in 1979 to "advance the practice of insolvency administration and the public interest related to it." While membership in CAIRP is not mandatory, the association includes approximately 880 general members acting as trustees in bankruptcy, receivers, agents, monitors and consultants in insolvency matters. The association has developed professional conduct rules and standards of professional practice that its members must respect.

3. Insolvency Field

Trustees administer the complete range of insolvency engagements from the largest corporate restructurings to bankruptcies for indigent consumers. They perform their duties, as insolvency specialists, by operating through various types of business entities, such as multidisciplinary international consulting firms, national and international public accounting firms, and regional public accounting firms, or as sole practitioners.

Many trustees specialize in various areas or "niches" of the insolvency field, with some firms restricting their practices to large corporate cases while other firms deal only with consumers. As well, some firms offer the full range of insolvency services while others offer a full range of expertise or services (not only insolvency services) dedicated to a specific industry; for example, a firm may have developed expertise in restructuring the forestry or health industry.

The following are highlights from the latest statistical data on trustees:

• In 2008, the number of trustee firms holding a corporate trustee licence increased to 253, with only 28 trustees practising without a corporate licence. In comparison, in 1992, 196 trustee firms administered insolvency files under a corporate licence, while 96 trustees practised without a corporate licence.
• In 2008, 69 percent of trustees had training in accounting, while in 1992, more than 84 percent of trustees were accountants.
• Between 2000 and 2008, the net increase in the number of trustees was 20 individual trustees, taking into consideration trustees who left the domain.
• In 2008, 238 trustees operated as sole practitioners and only 4.0 percent of trustee firms employed 10 or more trustees.
• Since 2000, the average number of open summary administration files, by trustee, increased by nearly 20 percent, and individual proposal files by 87 percent. Ordinary administration bankruptcy files of individuals and corporations decreased by 10 percent and 6 percent respectively.

The licensing regulatory framework has been developed over the years. We believe that the time has come to determine whether it still meets the needs of the insolvency field, and to make any changes that may be required. The market evolves very quickly and we can identify a number of factors that will influence the future of the trustee profession:

• the relative number of new estates due to the economic conditions;
• interest of various groups to be licensed to offer insolvency-related services;
• composition of and demographic changes in the population of trustees;
• constant need to improve training and continuing education programs for trustees in bankruptcy;
• need to compete with other professions for applicants to the program as evidenced by the decreasing number of new candidates entering the program;
• trend toward specialization and increased advertising;
• behaviour or level of engagement by debtors and creditors; and
• use of technology.

4. Consultation Process

This document is divided into three parts: the first part deals with the licensing process, i.e., criteria for licensing and qualifications for practising as a trustee; the second part relates to trustees' administrative practices; and the third part concerns issues related to trustees' fiduciary duties.

The Office of the Superintendent of Bankruptcy is committed to consulting with trustees, candidates for a trustee licence and other stakeholders in the credit community in the development of amendments to the Directive on Trustee Licensing. You are invited to forward your comments on any or all of the issues identified in each part of this document. Once views have been received, a proposed draft of changes accepted by the Superintendent of Bankruptcy will be circulated for final comments.

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Part One: Licensing Process

Issue Number 1

Harmonization of the Directive on Trustee Licensing (Directive No. 13R2) with the Memorandum of Understanding between the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals (CAIRP)

Current Context

Currently, there are differences between the Directive on Trustee Licensing and the Memorandum of Understanding between the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals relating to prerequisite qualifications, number of attempts at the oral examination, amount of time a candidate has to complete the program at each stage and obtain a licence, and exemptions.

• Prerequisite Qualifications

The Office of the Superintendent of Bankruptcy (OSB) will harmonize the Directive on Trustee Licensing with the Memorandum of Understanding between the Superintendent of Bankruptcy and CAIRP. For details on specific changes contemplated, see "Harmonization Proposal" (Annex A, Section C).

• Three-Attempts Rule over a 10-year Period

An oral examination is the Superintendent's only assessment tool for deciding whether a candidate should be licensed. This oral examination is not being called into question. According to the old Memorandum of Understanding between the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals, a candidate could only take the oral examination three times over a 10-year period commencing on the date of enrolment in the National Insolvency Qualification Program (NIQP). This restriction was reproduced in Appendix A (paragraph 7) of theDirective on Trustee Licensing. According to the rules of the mandatory training program, candidates who use up all three attempts at the oral examination within the 10-year period must re-enrol in the program, although exceptions have been made. Such candidates will normally be allowed to advance directly — but only once — to the National Insolvency Examination (written exam) without retaking the mandatory courses. If they pass the written examination, they have another three chances to pass the oral exam. If they fail the written exam, they must retake the mandatory courses.

The new Memorandum of Understanding, which took effect on October 8, 2009, does not include this restriction.

• Rule on Four Members to Compose a Board of Examination

According to Appendix A (paragraph 20) of the Directive, a board of examination shall consist of four persons: a trustee (selected by CAIRP), a lawyer (selected by the Superintendent of Bankruptcy), a person designated by the Regional Director to act as Assistant Superintendent and a representative of the Superintendent of Bankruptcy. There may be (rare) cases where it is not possible to have four members on the board of examination; for example, a member of a board of examination may unexpectedly find himself/herself in a conflict of interest situation, or facing illness or other serious impediment.

For additional background information, refer to:

• Annex A: Harmonization of the Directive on Trustee Licensing (Directive No. 13R2) with the Memorandum of Understanding between the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals (CAIRP)
• Annex B: Criteria to obtain a trustee licence – paragraphs 5 to 13 of the directive on trustee licensing
• Annex C: Process regarding issuance of an individual trustee licence – Paragraphs 1 to 14 of Appendix A of the Directive on Trustee Licensing

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Issue Number 2 — Dual Licensing, Specialized Licences and Administrators of Consumer Proposals

Current Context

The expression "dual licensing" refers to two types of trustee practices — commercial and consumer. Currently, the Superintendent of Bankruptcy issues only one type of licence: a trustee licence; however, the licence may have limitations imposed on the trustee in terms of accepting or administering either commercial or consumer estates. Candidates for a trustee licence must successfully pass an oral board of examination that tests their ability to apply knowledge required for both types of practices before being granted a licence by the Superintendent. If a candidate receives weak scores related to one of the practices, the licence may be refused depending on other scores or can be limited to either corporate or consumer estates.

Another reality is that trustees, like many other professionals, tend to specialize in one or two areas; over time, there is a risk that they won't remain current or competent to respond to issues and processes pertinent to the other type of practice. To counter this risk, many professions, including the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) have included compulsory provisions for professional development.

Another form of specialization relates to the administration of consumer proposals. While trustees may act as administrators, the Superintendent also has the authority to appoint or designate persons as administrators of consumer proposals who are not trustees. To date, these appointments have been limited to provincial representatives but the Bankruptcy and Insolvency Act does not stipulate this limitation. Currently, Nova Scotia is the only province remaining active through its representatives as administrators of consumer proposals.

For additional background information, refer to:

• Annex D: Dual licensing, specialized licences and administrators of consumer proposals
• Annex E: Report of the subcommittee of CIPA on dual licensing – June 1994

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Issue Number 3 — Probationary Conditions for Newly Licensed Trustees

Current Context

Currently, probationary conditions apply to newly licensed trustees for a minimum period of 24 months.

For additional background information, refer to:

• Annex F: Probationary conditions

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Issue Number 4 — Reactivation of the Licence in the Event of the Trustee's Bankruptcy

Current Context

According to the Bankruptcy and Insolvency Act, a trustee licence is cancelled if the trustee becomes bankrupt. However, the Superintendent of Bankruptcy can reactivate an invalidated licence "on written representations made by the trustee… subject to such conditions and limitations as the Superintendent considers appropriate" [subsections 13.2(3) and 13.2(4)]. Moreover, the Directive on Trustee Licensing states that "the trustee must satisfy the Superintendent that reinstatement of the licence will not impair public confidence in the bankruptcy and insolvency system."

For additional background information, refer to:

• Annex G: Insolvency of a trustee