On May 21, 2010 the Financial Post published an Opinion article"Preferred creditor status for pensions would weaken their sponsors" authored by former Deputy Prime Minister, John Manley. Mr. Manley was a Director of Nortel Networks from 2004 to 2009, and is now chief executive officer of the Canadian Council of CEOs. His article contained a number of misleading statements about the proposal to give preference to claims of pensioners over those of bondholders in the bankruptcy court. On behalf of NRPC, Don Sproule responded with the following statement. (Part of his statement was also published as a letter to the editor of the Financial Post on May 29, 2010)

 

Pensioners need Bankruptcy Reform not Empty Promises

Donald Sproule, National Chair of Nortel Retirees and Former Employees Protection Canada


In a recent Opinion piece, John Manley, currently chief executive of the Canadian Council of Chief Executives, wrote that "preferred creditor status for pensions would weaken their sponsors". He apparently believes that it is good business practice to promise a pension and health benefits as part of an employee's compensation package but to renege when times get tough.


Mr. Manley speaks from first hand experience. Following his departure from federal politics, from 2004 until 2009 he was on the Board of Directors of Nortel Networks. Mr. Manley must have had a good view of the decision-making process that led to Nortel's descent into junk bond financing and its eventual filing for bankruptcy protection in January 2009. The company left behind a massive deficit in its pension plan, an under-funded Health and Welfare trust for its long-term disabled employees and thousands of laid-off workers who were given no severance pay. Since then these unfortunate people have discovered how much power Canadian bankruptcy law gives to junk bondholders and how little it protects them.


Who are the junk bond lenders? They are sophisticated financiers who specialize in risky investments and charge a high price for their loans. They play an important role in financial markets, and in the past at least, have reaped rewards from helping struggling companies turn themselves around. Today, with the advent of the unregulated credit default swap (CDS) and in a country with weak laws like Canada, bondholders can also make money by pushing a company over a cliff, into a so-called strategic bankruptcy.


Canada's archaic bankruptcy laws make this all too easy. The claims of bondholders, suppliers and employees are all considered to be unsecured. As stated in the laws this allows "for a fair and orderly treatment of creditors". The Nortel liquidation process demonstrates how false this has become. Pensioners, and other employee claimants like the long-term disabled and the laid-off, have no means to protect themselves in the bankruptcy process and fall to the bottom of the heap. They and the taxpayer, because of the costs to EI and social programs, end up paying the bills.


This is what happens in a modern bankruptcy. The junk bondholder purchases a CDS to insure his investment. When a credit "event", occurs, such as the company filing for bankruptcy protection, the bondholder is paid off for his "loss" yet retains his bonds for a second claim in the bankruptcy process. The net result can be a handsome profit, especially as in the Nortel situation, the bondholders can put claims against both the Canadian and US estates.


Again in the Nortel case, large suppliers have demonstrated their leverage by negotiating full settlements of their claims from the purchasers of the company's businesses. Even small business creditors are in a better position to protect themselves than retirees and workers. They can choose not to do business with companies with shaky credit or insist on pre-payment. They can even purchase accounts receivable insurance to protect themselves.


To add insult to injury during the liquidation process, the executives of the company with the support of the bondholders, are permitted by the court to pay themselves huge bonuses for successfully selling off the company. Pensioners and the other employee claimants can only watch the assets disappear and wait for the axe to fall on their incomes.


Mr. Manley's resumé includes 16 years as a federal Liberal MP and stints as Minister of Industry, Minister of Finance and Deputy Prime Minister. According to published Nortel information, in 2006 alone he received $165,000 in Director fees. He is reported today as having directorships with 10 different companies.


By contrast Nortel pensioners with 30 years of service receive an average monthly payment of less than $1500. A pensioner's widow typically gets about $900. At the end of September this year, these modest pensions will be cut by at least 30% because of the pension deficit. And all health, dental and life insurance benefits will also disappear.


To learn about the importance and ease of protecting employees and pensioners, Mr. Manley and his fellow CEOs need only look at the G7 nations and the rest of the OECD. The great majority of these developed countries provide either generous state-funded pension systems, pension guarantee programs or some kind of preference for employee and retiree claims in the bankruptcy process. They have been able to achieve this without damaging their economies or capital markets! Does Canada really need to build its own economic success on the backs of the elderly and the disadvantaged?


Shame on you, Mr. Manley! Protecting employees and pensioners isn't a new problem. It has been addressed successfully elsewhere and preferred status in bankruptcy is one of the practical solutions. Here in Canada there is no need for further contemplation and delay. It's time for making a decision so we can finally have justice in bankruptcy.

 

[OTTAWA] Like all pensioners caught in bankruptcy proceedings, the members of NRPC are pleased that Bill C-501 was voted on today in the House of Commons and moved on to Committee. If eventually passed into law, this Bill will change Canada's archaic bankruptcy laws to give higher priority to pensioner claims in the bankruptcy court.

We wish to express our sincere gratitude to the144 members of all parties who voted to move the Bill to Committee. MP Wayne Marston of the NDP initially introduced a Private Members Bill to give priority to pensioners and terminated workers, which he called the "Nortel Bill". It was the first significant attempt to change Canada's outdated and unfair bankruptcy laws to protect pensioners and employees. The plight of our members was the impetus for that Bill. After prorogation, the bill was reintroduced by MP John Rafferty, NDP, Thunder Bay-Rainy River.

Recently, this Bill has come under extensive lobbying efforts from corporate interests aimed at spreading fears about the impact of any preferences for employee-related claims on the cost of capital. These specious arguments do not hold true based on independent studies and the experience of the majority of OECD countries.

All G7 countries except Canada provide support to pensioners in case of bankruptcy. They have either generous federal pension systems or pension guarantee programs (like the USA and UK), or they give employees and retirees priority in the bankruptcy court. Their capital markets have not been damaged by these acts of fairness.

"Why does Canada need to support its economy by victimizing the elderly and disadvantaged?" said François Meunier, Chair, NRPC Ottawa Region, speaking on behalf of NRPC. "It's time Canada gave its elderly and disadvantaged citizens justice in bankruptcy".

Media Release: For release at 3.00 p.m. on Wednesday, March 31, 2010

NRPC relieved that new Settlement Agreement is approved; will continue to fight for changes to bankruptcy laws. 

OTTAWA: The NRPC is relieved that the presiding judge in Nortel's bankruptcy proceedings today approved the amended Settlement Agreement between Nortel and representatives of its retirees, terminated and long-term disabled employees signed on March 29, 2010. The agreement postpones income cutbacks and benefit losses until later in the year for Nortel's former workers and provides a payment of $3000 to terminated employees who received no severance.

Last week Judge Geoffrey Morawetz ruled that he would not approve the previous version of the Settlement Agreement because of a clause that he deemed to be unfair to other creditors. The controversial clause would have preserved the right of Nortel's former workers to claim preferred status if Canada's bankruptcy laws were to be amended prior to Nortel's final liquidation. It has now been removed.

"We are not giving up the fight to change Canada's unjust bankruptcy laws!" said Don Sproule, National Chair of NRPC. He added: "The judge's earlier ruling indicates that since Nortel and other creditors will object, he would not allow the bankruptcy to move to liquidation under an amended Bankruptcy and Insolvency Act. Our campaign at the federal level must now aim for retroactive legislative changes which could be applied to the current situation".

NRPC will also continue its efforts to persuade the Ontario government to establish a Pension Agency, in line with the recommendations of the 2008 Ontario Expert Commission on Pensions. The Agency would take over and run abandoned pension plans instead of using the remaining assets to buy annuities for retirees. The Nortel pension fund is significantly underfinanced and winding-up the plan to purchase annuities would further reduce pensioners' incomes.

Media Release: To be released at 10.00 a.m. on March 29, 2010

NRPC disappointed that Judge does not approve "Stay of Execution"

OTTAWA: NRPC is disappointed that the presiding judge in Nortel's bankruptcy proceedings has not approved the Settlement Agreement between Nortel and representatives of its retirees, terminated and long-term disabled employees signed on February 8, 2010. In return for significant concessions, the agreement would have provided a "stay of execution" until later in the year for Nortel's beleaguered former workers. Without the agreement all medical and dental coverage will cease on March 31 and Nortel's pension plans could be summarily wound-up. Terminated employees who received no severance will lose a one-time payment of $3,000.

Judge Geoffrey Morawetz ruled in favour of Nortel's junk bondholders, who had claimed in court that a clause in the proposed Agreement was unfair to their interests. The clause preserved the right of Nortel's former workers to claim preferred status if Canada's bankruptcy laws were to be amended prior to Nortel's final liquidation.

NRPC has long been asking for the federal government to give preferred status to employee-related claims in bankruptcy courts. This would place Nortel's former workers above junk bondholders and foreign governments who represent the largest claims against Nortel's assets. The change would also bring Canada into line with most other developed countries.

NRPC is also asking the government of Ontario to establish a Pension Agency, in line with the recommendations of the 2008 Ontario Expert Commission on Pensions. The Agency would take over and run abandoned pension plans instead of using the remaining assets to buy annuities for retirees. The Nortel pension fund is significantly underfinanced and winding-up the plan would further reduce pensioners' incomes.

NRPC leaders are working around the clock to address the crisis created by the judge's decision. "Our pension plans and benefits are now in immediate jeopardy", stated Don Sproule, National Chair of NRPC. "We need the time that would have been provided by the Settlement Agreement for the federal and Ontario governments to make changes to Canada's unjust bankruptcy laws and procedures. This is the right way to mitigate the damage to our most vulnerable citizens".