Compensation Funds and Bankruptcy of Travel and Tour Operators in Canada
Michael D. Lipton, Q.C.* Elkind & Lipton

Part I - Overview
Air travel can be traumatic enough without having to worry about whether or not the ticket you have just purchased from your travel agent will be honoured by the airline that you have chosen to use. The intermediates that exist between the travelling consumer and the airline can be cause for some concern with regards to a potential bankruptcy within the "consumer chain." A typical chain begins with an air travelling consumer buying a ticket from a travel agent appointed as a duly authorized agent of the airline pursuant to the "International Air Transport Association" [hereinafter an IATA agent]. Sometimes, the agent is not an IATA agent and must purchase the ticket from an IATA travel agent or travel wholesaler who would then purchase the ticket from the airline. Air travelling consumers must put their faith in this consumer chain when they purchase a ticket from an intermediate and not directly through the airline. What has happened from time to time is that some of these intermediates have gone bankrupt before the travelling consumer is able to enjoy the travel services. This has destroyed vacations, sometimes on the eve of departure, and at times even stranded travelling consumers abroad. The travel industry realized the devastating effect this type of bankruptcy has on consumers and has taken steps to remedy what could otherwise be a harrowing experience for the affected travelling consumer.

The underlying problem with a travel intermediate bankruptcy is that the consumer is often unaware of the financial problems of a travel industry intermediate. The bankruptcy legislation focuses mainly on creditors and their claims against the property of the debtor. The problem with the consumer's claim on the property of the bankrupt is that it is an unsecured one unless it can be asserted that the money paid for travel services is trust money. Consumers typically do not secure their claims because they do not expect the company they deal with to go bankrupt. It is unfair to treat the air travelling consumer as a typical creditor. Expecting consumers to secure claims against travel agents is unreasonable. Consumers often purchase tickets over the phone or on-line and are expecting the consumer chain to work properly. There is no reason to expect a breakdown in this chain. A potential bankruptcy does not enter the decision tree of the average consumer at the instant he/she decides to purchase a ticket. Typically when you pay for any travel service, it is reasonable to assume that you will not have problems receiving that travel service. From the standpoint of the consumer, a bankruptcy is not clearly foreseeable. Sadly, bankruptcy legislation by itself does not adequately cover the special needs of the travel industry and the unsuspecting consumer.

One of the prime purposes of the Canadian Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3 [hereinafter the B & I Act] is for the orderly and fair distribution of the property of a bankrupt among his/her creditors by an equal process. Distribution of the bankrupt's property will begin with the secured creditors. What can the travelling consumer do? If the travelling consumer purchased travel services from a travel agent or wholesaler who has gone bankrupt, the travelling consumer has in essence paid for a travel service he or she will never get to use. The one section of the B & I Act that could potentially protect the consumer is section 67 which deals with property held by the bankrupt in trust for another person. Such property is not the property of the bankrupt and accordingly is not divisible amongst his or her creditors. Property such as money could be impressed with a trust when the three certainties can be established namely, certainty of intention, certainty of subject matter and certainty of object. An example where a trust would be created pursuant to the three certainties would be a situation where an insolvent travel agent collects money from the travelling consumer for future travel. The travelling consumer makes this payment to the travel agent for a specific purpose; i.e. to acquire travel services for the said consumer. The insolvent travel agent acknowledges this purpose by depositing the funds into a separate trust account. If the money is traceable from the travelling consumer to a trust account maintained by the insolvent travel agent, the consumer may be able to assert that the money paid to the insolvent travel agent is impressed with a trust and not part of the property of the bankrupt.

In Canada, there is a division of legislative powers between the federal parliament and the provincial legislatures in accordance with the Canadian constitution. The legislative authority over bankruptcy and insolvency matters is a federal matter. Provincial legislatures have authority over matters that directly affect the travel industry and the rights and remedies available to the consumer. How this division of powers operates depends upon the provincial schemes that provide protection for consumers in case of a failure to provide travel services by a travel intermediate. Of the ten provinces in Canada only three provinces have legislation offering travel protection to the consumer: British Columbia (B.C.), Quebec and Ontario. These are the three largest provinces in Canada accounting for approximately 80% of Canada's population. The compensation schemes which the provincial legislation have established involve a Compensation Fund that can be accessed by a person within the consumer chain who has been affected by a travel intermediate bankruptcy. The legislation in these three provinces is similar but there are no agreements linking the acts together. Details of the legislation and how a bankruptcy of a travel intermediate affects the consumer and what steps can be taken to ensure that a consumers' interests are protected will be reviewed later in this paper.

Part II - The Legislation
In Canada, the B & I Act defines how a bankruptcy occurs, namely: (1) by a voluntary assignment by a debtor; (2) by a petition to the court made by one or more creditors; (3) by a debtor's restructuring proposal being repealed by his/her unsecured creditors or by the court; and (4) by annulment of a restructuring proposal by the court - this would typically happen when a debtor is not able to honour the financial obligations of his/her own proposal.

Once a receiving order is made under the B & I Act, the administration of a bankruptcy is performed by a trustee who is supervised by a board of inspectors elected by creditors. Procedurally, the property and assets of the bankrupt vest in the trustee. Actions of the trustee regarding the bankrupt's assets that affect creditors are subject to approval of the inspectors. A stay of proceedings is imposed on all unsecured creditors. This means that their claims for the bankrupt's property are frozen. Secured creditors have priority over the bankrupt's assets if they can authenticate their respective claims for security.

As indicated, this legislation, on its face, is not particularly favourable to the travelling consumer. As an unsecured creditor, an affected consumer would have to line up behind secured creditors to receive their money back. This is where section 67 of the B & I Act could be used to protect the travelling consumer from having their money carved up and given to other creditors. The section states that: "The property of the bankrupt divisible among his creditors shall not comprise property held by the bankrupt in trust for any other person." In fact, the travel industry recognized the need to protect consumers from the bankruptcy of travel agents and tour operators by requiring them to keep trust accounts for consumer money. In Ontario, section 36 (1) of the Regulation made under the Travel Industry Act, R.S.O. 1990, c. T. 19 [hereinafter the TIA] states that "A registrant shall maintain a trust account to protect customer funds." This directs travel intermediates to keep and maintain trust accounts to ensure that customer funds paid for future travel are shielded from claims against a bankrupt travel intermediate's property. These interacting sections work together to protect the consumer from an unexpected bankruptcy. There is similar legislation in B.C.'s Travel Agents Act and in Quebec's Travel Agents Act.

Section 36 (1) of the Regulation made under the TIA requiring the maintenance of a trust account by a travel intermediate has filled in the lacuna that exists between the bankruptcy legislation and the special needs of the travel industry. Section 36 (1) places the onus on the travel intermediate to segregate consumer funds for future travel by depositing them in a separate trust account maintained at a bank or other similar financial institution. This onus could potentially make the travel intermediate personally liable for mismanaging funds that are supposed to be held in trust and consequently offers a level of protection for the travelling consumer.

Part III - Infrastructure Established Under Legislation
In 1974, the Ontario government enacted the TIA which required travel agents and wholesalers who conducted business within Ontario to be registered and to contribute to a Compensation Fund established to protect consumers in circumstances where the travel agent or wholesaler became bankrupt. Over the years, the industry demonstrated its responsibility in dealing with the public and as a result the government determined that it had matured sufficiently to regulate itself. Accordingly, the "Travel Industry Council of Ontario" [hereinafter TICO] was established in 1997 to administer the Act as well as the Compensation Fund. TICO is a professional organization representing approximately 3000 travel agents and travel wholesalers who registered under the TIA and are authorized to sell travel services. Since 1997, TICO has appointed the Registrar who administers the TIA. The members of the board of directors of TICO administer the Compensation Fund and are chosen from various constituencies that participate in the travel industry. Outside of approving an annual business plan and appointing some members of the board, the government has little influence over TICO and the administration of the TIA and the Compensation Fund.

The powers that TICO has in Ontario include are quite extensive. Section 7 of the TIA gives the Registrar the power to suspend the registration of a travel agent or wholesaler effective immediately. The registrant has a right to appeal this ruling to an independent tribunal. Section 6 of the TIA gives the Registrar the power to issue a proposal to revoke the registration of a travel agent or travel wholesaler that takes effect 15 days hence unless the proposal is opposed in which case a hearing is held before the tribunal. Section 21 of the TIA gives the Director, another official appointed under the TIA, the power to freeze all of the assets of the debtor. As counsel for TICO, I have first hand experience with how these protections work together in a travel intermediate bankruptcy.

Part IV - A Practical Example
A practical example which demonstrates the interplay of the TIA and the B & I Act legislation recently occurred. In this case, a travel agent who was also a travel wholesaler (registered as such under the TIA) was having problems in meeting his day to day obligations generally as they became due - eventually bouncing several checks to his creditors. A creditor airline issued a petition in bankruptcy against the travel agent registrant. The travel agent registrant filed a dispute challenging the petition. The matter was put over to a hearing. In the meantime, the petitioning creditor sought and obtained an order of the court appointing an interim receiver to preserve the registrant's assets. The Registrar under the TIA issued a temporary suspension order and a proposal seeking to revoke the registration of the travel agent registrant. Additionally, a freeze order was also issued and delivered to the registrant's bank freezing all money in its trust and general accounts.

Money for future travel which was paid into the registrant's trust accounts immediately before and after the interim receiver's appointment were subject to the freeze order under section 21 of the TIA. Consumers paid the money to the registrant because they were unaware of the financial condition of the registrant from whom they purchased their travel services. The interim receiver brought an application to the Registrar in Bankruptcy seeking directions from the court concerning the disposition of the funds that were the subject matter of the freeze order issued under the TIA. The interim receiver was particularly concerned with the disposition of consumer funds received by him after his appointment that related to future travel. The debtor/registrant brought a cross application seeking an order declaring that all of the money held by the interim receiver was impressed with a trust on behalf of the consumers. Submissions were made to the Registrar in Bankruptcy who determined that the money paid by consumers for future travel and received by the interim receiver after his appointment was subject to the three certainties and thus was impressed with a trust. The Registrar in Bankruptcy noted that the money could be both identified and traced to specific consumers and had not been co-mingled with other funds. As a result, he directed that the money be refunded to the specific consumers who were able to apply the money to purchase alternative travel services.

Part V - The Ontario Compensation Fund
In Ontario, three classes of people are allowed to claim against the fund: a consumer, a travel agent, and a travel wholesaler. Sections 50 to 52 of the Regulations under the TIA govern these claims. They provide as follows;

Section 50 (1) A customer is entitled to be reimbursed for travel services paid for but not provided if, (a) the customer made payment for the travel services directly to or through a registered travel agent; (b) the customer has made a demand for payment from the registered travel agent or the appropriate registered wholesaler.

Section 51(1) A travel agent is entitled to be reimbursed for money paid by the travel agent to reimburse a customer or to provide alternative travel services to the customer if the customer paid the travel agent and if, (a) the travel agent acted in good faith and at arm's length with a travel wholesaler; (b) the travel agent passed all or part of the customer's money to the travel wholesaler; and (c) the travel services were not provided to the customer.

Section 52(1) A travel wholesaler is entitled to be reimbursed for money paid by the travel wholesaler to reimburse a customer for travel services paid for but not provided or to provide the customer with travel services for which the travel wholesaler has not been paid by the travel agent if, (a) the travel wholesaler has acted in good faith and at arm's length with a registrant who is a travel agent; (b) the travel agent has failed to pass all or part of the customer's money to the travel wholesaler; (c) the travel wholesaler has had no dealing with the travel agent in which the travel agent has failed to pass the customer's money to the travel wholesaler in respect of travel services or has otherwise been in default in dealing with the travel wholesaler; and (d) the travel wholesaler has taken reasonable measures in the circumstances to ensure that the travel agent is reliable and financially responsible.

Simply put, if a consumer purchases travel services from a travel agent who goes bankrupt leaving the consumer without travel services, he/she can claim against the fund. If the travel agent receives money from the consumer and passes it on to the travel wholesaler who then goes bankrupt, the travel agent can reimburse or provide alternative travel services to the consumer and then claim against the fund. Similarly, if a travel agent goes bankrupt before paying the travel wholesaler in full, the travel wholesaler can reimburse or provide alternative travel services to the consumer and then claim against the fund.

It should be noted that travelling consumers do not have carte blanche when seeking compensation. Under section 50(3) of the Regulations under the TIA, a customer is not entitled to be reimbursed in the following circumstances;

• A claim arising out of the failure of an end supplier to provide the travel services.
• Losses or damages incurred by a customer as a result of a failure of an end supplier to provide the travel services.
• A payment to a registrant for any travel services that were provided or for which alternate travel services were provided or made available.
• A payment, including a non-refundable payment, for travel services that were available but not received if the failure to receive the travel services is due to the customer's or the traveller's action or failure to act.
• If the travel services were received as a prize, an award or a goodwill gesture.
• If the customer used a voucher, certificate, coupon or other similar document to obtain the travel services or did not pay for the travel services with case or by a cheque, credit card or other similar cash payment method.
• Any taxes, fees or levies imposed by a government or a government body.
• Any insurance premiums.
• If the claim is based on the cost, value or quality of the travel services or alternate travel services that were provided.
• If the traveller received travel services pursuant to section 60 or 61.

These exceptions are consistent with the main purposes of the Compensation Fund - to protect consumers who paid for travel services from a registered travel agent and did not receive these travel services.

The last exception found in section 50(3) deals with travel services provided pursuant to section 60 or 61. These sections are unique provisions in that they provide for compensation for the travelling consumer in specific circumstances where immediate alternate travel is very important. They state as follows;

Section 60. (1) With the approval of the Director, the board of directors may make payments out of the Compensation Fund in order to enable the immediate departure of a registrant's customer or of a person whose travel services have been paid by the customer if, (a) the customer or person was preparing for immediate departure and was prevented from so doing through no fault of his or her own; (b) the customer has been placed in circumstances where immediate funds are necessary to alleviate suffering to the customer; and (c) the payment is necessary in order to protect the interests of the Compensation Fund.

(2) A payment under subsection (1) shall be no more than $3,500 per person.

Section 61. (1) The Director may direct the Council to make payments from the Compensation Fund in order to, (a) repatriate a registrant's customer who is outside of Ontario and who, because of a failure to provide travel services, is experiencing some hardship or inconvenience; and (b) provide necessary accommodation for that customer prior to the repatriation of the customer.

(2) The maximum amount that may be paid out of the Compensation Fund for repatriating customers is $2 million per event.

Repatriation is defined in the TIA as returning a customer who is either outside of Canada or within Canada but outside of the Province of Ontario to a place within the Province of Ontario. These two sections clearly demonstrate the concern that the travel industry has for the travelling consumer and the protection afforded by the Compensation Fund for the travelling consumer.

Part VI - Compensation Funds in Canada
The Compensation Funds in Ontario, B.C. and Quebec were established at different times. The Ontario fund was established in 1974, while the B.C. fund was established in 1977 and the Quebec fund was established in 1973. In Ontario, there are approximately 3000 registrants who contribute to the Compensation Fund. In B.C. and Quebec, there are approximately 1140 registrants each who contribute to their respective funds. Since 1974, the Ontario fund has paid out $32, 270, 496 to affected travel parties; while the B.C. fund has paid out approximately $5, 000, 000 since inception. The Quebec fund typically pays out approximately $1,000,000 per year to affected parties. In Ontario, there is a $3,500 (Cdn) limit on claims and a $5 million cap on events that would give rise to compensation. In B.C. and Quebec there is no statutory limit on amounts for claims. The Ontario and Quebec funds cover non-residents of their respective provinces while the B.C. fund only covers B.C. residents. The Ontario fund does not protect end supplier failure while both the B.C. and Quebec funds do. The Ontario fund has approximately $13 (Cdn) million in the fund. The B.C. fund has approximately $2.3 (Cdn) million in their fund. The Quebec fund has approximately $5 (Cdn) million in their fund.

Part VII - Conclusion
Travel and tourism is the fastest growing industry in the world. We can find evidence of this in the province of Ontario, Canada. The industry has matured to such an extent that it is now self-regulating. Since the inception of the travel legislation in Canada the purpose of the legislation has not changed, that is to protect the consumer by providing a fair marketplace. The best part of the protection afforded to consumers is the Compensation Fund that provides a tacit parasol of protection from the potential bankruptcy of a travel intermediate.

* WITH ASSISTANCE FROM JOSEPH LIN, ELKIND, LIPTON & JACOBS (TORONTO)

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