Review of the Trustee Licensing Regulatory Framework
Consultation Paper – Annex H to L
1. Historic Background
- Policy applicable to corporations on July 1, 1989
The Trustee Licensing Policy that came into effect in 1993 included, first of all, a definition of "proprietary identity": Translation
"'Proprietary identity' refers to a situation in which the individuals, who as owners, partners, directors, officers or shareholders, exclusively own and administer the affairs or services of the trustee in bankruptcy, are the same individuals who exclusively own and administer a public accounting practice."
In addition, the rule applicable to the corporate name varied depending on whether or not there was "proprietary identity":
"When there is proprietary identity, the name of the corporate trustee may be the same as the name used for the related public accounting practice…"
"When there is proprietary identity and the name of the corporate trustee is not the same as the name of the public accounting firm, the corporate name may only include the names of the individual trustee or trustees working for the corporation."
"When there is no proprietary identity, the name of the corporate trustee may only include the names of the individual trustee or trustees working for the corporation."
"The name of the corporate trustee must be such that the Superintendent is satisfied that the public will not be prejudiced or misled."
This policy did not have the binding nature of a directive.
- March 31, 2000, Directive on Trustee Licensing
The first Directive on Trustee Licensing, dated March 31, 2000, discarded the notion of "proprietary identity":
"The name of the corporate trustee must consist of one of the following:
- the name of one or more individual trustees;
- a name derived from the name of an accounting firm; or
- a combination of a) and b);
provided that the Superintendent is satisfied that the public will not be prejudiced or misled."
- August 15, 2005, amendment to the Directive
The Directive on Trustee Licensing was amended on August 15, 2005, to allow a trustee firm to operate under a corporate name that included the name of a deceased or retired associate. While restricting the corporate name to the names of trustees or accountants, the amendment also removed the obligation to satisfy the Superintendent of Bankruptcy that the public would not be prejudiced or misled.
"The name of a corporate trustee shall only be composed of the names of one or more trustees or accountants that are practising or have actively practised either as trustees or accountants."
- September 18, 2009, amendment to the Directive
The amendment of September 18, 2009, was intended to relax the rules governing the name of a firm so as to grandfather those firms that had acted as a monitor under the Companies' Creditors Arrangement Act (CCAA) between September 30, 1997, and September 18, 2009. This allowed those firms to continue to use their established names as monitors under the amended CCAA:
- Subject to paragraph 20(2) of this Directive, the name of a corporate trustee shall only be composed of the names of one or more trustees or accountants that are practising or have actively practised either as trustees or accountants.
- The name of a corporate trustee may consist of the name of a monitor appointed in Companies' Creditors Arrangement Act (CCAA) proceedings commenced after September 30, 1997, and before the day on which subsection 1(1) of Chapter 36 of the Statutes of Canada, 2007, comes into force.
2. Directive on Advertising by Trustees (Directive No. 29)
Paragraph 5 of the Directive on Advertising by Trustees has an impact on the name of the trustee firm:
A trustee shall not advertise, directly or indirectly, in a manner that:
- is false or misleading;
- contravenes professional good taste or fails to uphold professional courtesy;
- reflects unfavourably on the competence or integrity of any trustee;
- refers to the trustee as a specialist in a particular industry or area of insolvency; or
- involves a statement, the content of which the trustee cannot substantiate.
3. Philosophy of Change
There are two general principles underlying our interest in changing the current situation:
- maintain a fair balance between market demand and protection of the public; and
- promote free competition while enabling a firm to develop value added in its corporate name.
A. Maintain a fair balance between market demand and protection of the public
At the time of the 2005 amendments, the Superintendent of Bankruptcy wrote the following:
"Our review of the relevant regulations of various provincial accounting bodies revealed a trend towards liberalizing the rules governing the corporate names of accounting firms. For example, l'Ordre des comptables agréés du Québec (OCAQ) informed us that as per the new regulation allowing professional engagements to be exercised through a corporation… through shares, from now on accounting firms will be allowed to have names that make no mention of individual OCAQ members. In the past, accounting firms could only have names composed of personal names, i.e., made up of the names of an individual or individuals in that firm. That is no longer the case because accounting firms are now allowed to adopt a corporate name made up of ordinary words, a combination of letters, or even a made-up word. This has necessarily had an impact on the naming of trustee firms with regard to the old section 23 of the Directive, which stipulated that the name of a corporate trustee must consist of the name of one or more individual trustees, a name derived from the name of an accounting firm or a combination of the two.
The OSB generally considers developments in other professional bodies and as much as possible attempts to harmonize its standards governing trustee firms with those applicable to other comparable professionals. However, again today, given the characteristics of the insolvency market, we believe it is still necessary to protect the public from the confusion that could result from the offer of parallel services by unregulated firms and to ensure the distinctive and exclusive nature of firms offering professional trustee services. That is why we do not feel it is appropriate to adopt as liberal an approach as other professional bodies with regard to corporate names."
B. Promote free competition while enabling a firm to develop value added in its corporate name
Developing a corporate name in the area of professional services may require significant investments and constant effort. A firm's corporate name may be linked to the name of the principal officer or his/her profession; the particular reputation of one of its officers or former officers; even the reputation of the firm itself and the people involved in it; finally, it may be associated with the particular nature of the services offered. This is particularly true in the context of globalization of markets and professional practices in the 21st century.
Regulation that is too restrictive in the area of corporate names would protect the acquired rights of a limited group of firms but would limit competition because it would prevent new firms from benefiting from the same advantages. However, regulation that is too liberal would serve to dilute the economic value of some corporate names. For example, in referring to the Canadian Association of Insolvency and Restructuring Professionals' practice standards, the Directive on Advertising by Trustees specifies that placing an extra "A" in front of a firm's name constitutes false advertising.
Closed Company (or Private Company) and Share Ownership
A closed, or private, company traditionally has the following characteristics:
- the number of shareholders is limited to fifty (50);
- the company is prohibited from making any public offering; and
- prior approval of the officers is required for transferring shares in the company.
This notion of a closed company is no longer used in numerous jurisdictions. Instead, the inverse concepts of "distributing company" and "reporting issuer" are used. This situation creates difficulties for enforcing the Directive on Trustee Licensing. The purpose of this provision in the Directive was to ensure that trustee firms were not listed on a stock exchange.Large American restructuring companies are not subject to such a requirement.
Moreover, the Directive does not contain any other restrictions with regard to shareholders and company control. The company may be controlled by any person, whether or not that person is a licensed trustee.
Since 2002Footnote 1, every individual trustee, including those working for a corporate trustee, plus every corporate trustee has been required to pay an annual fee of $850. Prior to 2002, the fee had been $400. The only trustees not subject to paying the fee are honorary licence holders and Office of the Superintendent of Bankruptcy (OSB) employees. Accordingly, even inactive trustees who do not perform any of the functions of a trustee are required to pay the $850 fee that is mandated in the rules. Currently, there are approximately 1,025 individual trustees and 253 corporate trustees. The current annual invoicing process is highly automated and straight forward. In the weeks preceding invoicing (September–October), the OSB, with the assistance of the trustee firms involved, revises the lists of trustees and then in November all trustees are electronically invoiced. Payment is then made by cheque or credit card.
One of the main services provided by the OSB relates to its supervisory role regarding the performance of trustees in complying with their duties under the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. Specific supervisory tasks performed by the OSB include reviews of trustee practices and complaint investigations.
Some trustees require a disproportionately high level of attention and additional supervisory resources by the OSB due to issues of non-compliance. Trustees should be held accountable for their actions in terms of non-compliance.
One option may consist of increasing the licensing fee where the performance of the trustee is considered "unsatisfactory" for a period of at least two years after having been formally advised to that effect; still under that option, the increase in the licensing fee would be higher for "non-compliant" trustees. As the amount to be paid for "unsatisfactory" trustees and "non-compliant" trustees would be dependent on the compliance costs of the OSB, the increase may be substantial.
Another option would be to scale the fee in the opposite direction. Based on that option, the basic fee would be increased but the amount would be reduced where the performance of the trustee is considered satisfactory.top of page
1. Policy on Multi-Jurisdictional Licences
According to the Policy on Multi-Jurisdictional Licences issued by the Office of the Superintendent of Bankruptcy (OSB) effective July 1, 2006, a succession agreement is a condition to practice for trustees seeking to practice in more than one province at a time. The actual wording of the relevant paragraph is as follows:
"The trustee must conclude a succession agreement in case of death, incapacity or other factors that could prevent him/her from performing engagements. He or she must ensure at all times that there is a successor for the files being administered. This criterion is mandatory in view of the risks inherent in leaving estate files without a trustee."
If the policy rationale is that a succession agreement is mandatory because of the risks inherent in leaving estate files without a trustee, it would appear that this same rationale would also apply to all trustees wherever they practice.
2. Consequences of the Lack of a Succession Agreement
Unfortunately, on some occasions over the last several years, trustees have died without having a succession agreement in place. Anecdotal evidence suggests that, in the vast majority of these cases, the trustees involved were sole practitioners. Invariably, this has resulted in higher costs being incurred by stakeholders and financial losses being suffered by the families and heirs of the trustees involved. As well, the OSB has been forced to intervene, and in some situations it has not been possible to find a trustee willing to take on the open estates of the trustees. To deal with these situations in the future, the OSB may increase its resources to develop internal guardian trustee capacity to administer these files.
3. Article by Naveed Z. Manzoor
In the fall 2009 issue of Rebuilding Success, a publication of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), Naveed Manzoor also supports the idea that succession agreements are essential for all insolvency practitioners. Furthermore, he suggests that CAIRP's Rules of Professional Conduct imply that the "public interest" professional obligation would require that succession agreements be in place.
As well, Manzoor points out that CAIRP has produced a Practice Continuation Agreement template to be used by insolvency practitioners in drafting their succession agreements.Footnote 2
A recent demographic profile of trustees revealed the following data, which also supports the desirability of having succession agreements:
- The average age of trustees is 51, which is six years older than the average age of trustees in 1992, while over the same period the average age of the general population increased by three years.
- Of 349 active trustee firms, 68 percent are sole practitioners, i.e., 238 trustees.
Annual Licensing Report
Many professional bodies, such as members of various provincial bar associations, are required to file annual returns with their governing bodies in which they must provide such information as financial statements, insurance coverage and declarations regarding trust accounts. Some professional bodies also include in their rules of ethics self-reporting of non-compliance and complaints.
Filing of these annual reports ensures a minimum level of oversight for the professionals and serves to demonstrate that the public can have confidence in these professions and that the individual members of the associations are responsible, trustworthy and able to perform their fiduciary duties properly .
To practice, trustees are required to be solvent and have adequate professional liability insurance. As well, they must comply with the Code of Ethics for Trustees, which states in section 34:
"Every trustee shall maintain the high standards of ethics that are central to the maintenance of public trust and confidence in the administration of the Act."
To comply with this section, it is generally understood that trustees should have entered into succession agreements to ensure that their practices continue in the event of their deaths or incapacity. Currently, there is no requirement for trustees to submit an annual report to the Office of the Superintendent of Bankruptcy (OSB) containing information such as financial statements, details of professional liability insurance coverage and confirmation that a succession agreement is in place.
1. Financial Statements
Paragraph 27 of the Directive on Trustee Licensing requires that trustees be solvent at all times and that they have financial resources sufficient to warrant confidence in their ability to properly administer professional engagements. When trustees obtain their licences, they must provide the OSB with a personal balance sheet unless they are working for a trustee firm or, in the case of a corporation, a personal balance sheet of the firm's managing trustee. There is no subsequent requirement for trustees to submit financial statements to the OSB. However, paragraphs 34 and 35 of Appendix A of the Directive allow the OSB to conduct inquiries to ensure that trustees continue to meet the requirements of the Directive and specifically refer to the possibility of trustees having to provide financial statements.
Along with the Directive requiring trustees to remain solvent, section 13(2) of the Bankruptcy and Insolvency Act (BIA) also allows the Superintendent to refuse to grant a licence to an applicant who is insolvent and, by virtue of section 13.2(3) of the BIA, a trustee licence ceases to be valid when a trustee becomes bankrupt.
2. Professional Liability Insurance and Bonding
Paragraph 27 of the Directive on Trustee Licensing requires that trustees "have adequate professional liability insurance and adequate employee dishonesty (also known as fidelity) insurance, a bond or other suitable financial arrangements." As well, paragraphs 14 and 26 require that trustees must continue to meet the requirements of the Directive at all times. The OSB verifies that the trustee is in compliance with this paragraph when the licence is issued, but there is no mechanism for verifying that trustees maintain valid insurance on an annual basis.
Professional liability insurance is an insurance product that covers errors and omissions of the trustee in the context of various trustee services. For example, if the trustee failed to insure property of an estate that was destroyed after filing an assignment, the insurance would cover the trustee for damages that creditors suffered from the loss.
Employee dishonesty insurance, or fidelity insurance, is an insurance product that covers crimes committed against or by an employee during the course of the administration of an estate. For example, if an employee is robbed while en route to the bank to make a deposit, this insurance will cover the trustee for the cash amount stolen. Employee dishonesty insurance does not generally cover fraud committed by an employee.
A bond is a financial instrument that secures the due accounting of property received by trustees and for the due and faithful performance of their duties in the administration of estates. There used to be two kinds of bonds: a "general bond" applicable to the trustee licence as a whole and a "specific bond" applicable to a specific estate.
The general bond (or licensing bond) was abolished in 1992. Before that, providing the bond by the trustee was linked to the issuance of a licence by the Superintendent of Bankruptcy. Indeed, old Section 5(1) read as follows:
"A person desiring the obtain a licence to act as a trustee shall file with the Superintendent an application for a licence … and, when requested by the Superintendent, shall provide such security for the due and faithful performance of his duties in such form and amount as the Superintendent requires."
While the general bond was abolished in 1992, the current Directive on Trustee Licensing provides that the Superintendent can request a trustee to provide such a bond.
The specific bond (or estate bond) is provided for in Section 16(1) of the BIA. According to that section, trustees give security ("in cash or by bond") for the due accounting of property received by them as trustee and for the due and faithful performance of their duties. The BIA is supplemented by the Directive on Estate Security (Directive No. 21) whose purpose is to provide guidance as to when the official receiver will set a security and how to determine the amount.
3. Succession Agreements
As noted above, it is generally understood that trustees should enter into succession agreements to ensure that their practices continue in the event of their deaths or incapacity. For a more complete discussion of succession agreements and related issues, refer to Issue Number 8.
4. Self-Reporting of Non-Compliance and Complaints
As professionals, there should be an obligation to report to the oversight body issues of non-compliance that have been identified by the trustee or by the trustee's agent, such as an internal auditor. Furthermore, to ensure a proper level of service to the public, trustees should report to the OSB all complaints and Court actions taken against them.
- back to footnote reference 1 SOR/2001-155. April 26, 2001. Published in the Canada Gazette on May 9, 2001 (vol. 135, no. 10). While the fee increase came into force on the 30th day after publication, the new licensing fee of $850 was applied for the 2002 renewal.
- back to footnote reference 2 Naveed Z. Manzoor, Succession Planning: It's Not Optional, It's Essential, CAIRP, Rebuilding Success, Fall 2009, page 68.