Canadian insolvency law amendments providing super-priority status for unpaid wages (including vacation pay arrears) and unpaid pension plan contributions that will rank ahead of all "ordinary" secured creditors upon a bankruptcy or receivership became effective as of July 7, 2008.
These amendments will only apply to any bankruptcy or receivership which is initiated on or after July 7, 2008.
As a result, it is expected that lenders providing operating facilities based on a borrower's working capital will now take an additional reserve from a borrower's working capital borrowing base (i.e., reduce the borrower's borrowing capacity) in an amount equal to the assessed value of these new super-priority claims.
In a bankruptcy or receivership, super-priority rights now exist for an employee's claim for unpaid wages, salaries, commissions or "compensation" for services rendered during the six months immediately before the date of the initial bankruptcy event or receivership to a maximum of $2,000 per employee.  "Compensation" is defined to include vacation pay but specifically excludes termination or severance pay.
This amount will now be a statutorily secured claim on all of the current assets of a bankrupt or employer in receivership which will rank above every other claim or security against the debtor’s "current assets". The only exceptions to this priority ranking are the special rights which currently exist for 30-day goods suppliers under section 81.1 of the Bankruptcy and Insolvency Act (the "BIA"), farmers and fishers under section 81.2 of the BIA, and what have come to be known as the deemed trust source deduction amounts (i.e., any unremitted employee income tax withholdings, Canada Pension Plan contributions and employment insurance premiums).
The amendments specifically preclude any officer or director from being able to benefit from this super-priority claim status. In addition, employee's not dealing at arm's length with the debtor will also not be able to benefit from the super-priority claim status unless the trustee or receiver concludes that his/her terms of employment would be substantially similar to those that would have existed had the person been at arm's length.
These amendments change Canadian bankruptcy law in a very important way. Prior to July 7, 2008, wage arrears including accrued vacation pay (to the maximum amounts of $2,000 and additional $1,000 referred to above) were a preferred claim in a bankruptcy ranking behind existing secured creditors but ahead of a bankrupt’s unsecured creditors. This is now no longer the case, at least to the extent of the bankrupt’s "current assets". If the unpaid wages claim cannot be fully satisfied from the "current assets" of a bankrupt, any remaining deficiency will then rank as a preferred claim behind existing secured creditors but ahead of the bankrupt’s unsecured creditors.
In a receivership, under the law in Ontario before July 7, 2008, accrued vacation pay had priority over an existing secured lender’s security in accounts and inventory and its proceeds. Importantly, this trumping did not apply to purchase-money security interests in the debtor’s inventory. Now, "ordinary" wage and compensation arrears will trump existing secured lenders including those who hold purchase-money security interests in the debtor’s inventory.
While accrued and unpaid wages may be a limited "rolling" sum based only on the exposure over an applicable pay period (e.g., every two weeks), the same cannot be said for accrued and unpaid vacation pay which, depending on the number of employees, may be a very significant amount at any particular time. Accordingly, it would not be imprudent to now treat an amount representing at least $2,000 per employee as a priority claim which will rank ahead of any existing secured creditor.
Unpaid Pension Plan Contributions
In a bankruptcy or receivership, super-priority right status has also now been given to the unpaid pension plan contributions for any federally or provincially regulated pension plan. The unpaid contributions that have this status are unpaid: (i) deducted employee contributions; (ii) required employer contributions to a defined contribution provision; and (iii) "normal cost" that an employer is required to pay. "Normal costs" are not likely to include any special payment requirements imposed as a result of an existing solvency deficiency in a defined benefit pension plan and would not include the amount of any existing pension plan deficit.
These unpaid pension plan contributions will now be a statutorily secured claim on all of the assets of the bankrupt or employer in receivership which ranks above every other claim or security against the debtor’s assets, regardless of when that other claim or security arose. The only exceptions to this priority ranking are the special rights which currently exist for 30-day goods suppliers under section 81.1 of the BIA, farmers and fishers under section 81.2 of the BIA, the deemed trust source deductions described under the Unpaid Wages section above, and the special priority that the amendments afford to unpaid wages claims as discussed above.
Prior to July 7, 2008, such unpaid pension plan contributions (even if subject to a deemed trust under provincial pension benefits legislation) have generally been held to be unsecured claims in a bankruptcy.
In a receivership, under the law in Ontario prior to July 7, 2008, such unpaid pension plan contributions had priority over an existing secured lender’s security in accounts and inventory and its proceeds. Importantly, this trumping did not apply to purchase-money security interests in the debtor’s inventory. As of July 7, 2008, unpaid pension plan contributions will trump all existing secured lenders over all assets (not just accounts and inventory), and this will include secured lenders and suppliers with purchase-money security interests in the debtor’s inventory.
The amendments proclaimed in force as of July 7, 2008 contain a number of other elements in addition to the super-priority status afforded unpaid wage and pension contribution claims.
Briefly, the more material of such amendments are:
- bringing into force the Wage Earner Protection Program Act which primarily puts additional reporting and administrative obligations onto trustees and receivers and provides the means for the federal government to pay employees certain unpaid wage claims and, thereon, become subrogated to their rights against the debtor;
- amending the existing provisions in the BIA in connection with fully implementing the International Interests in Mobile Equipment (aircraft equipment) Act, S.C. 2005, c.3; and
- protecting property in an RRSP, RRIF and DPSP from being available for distribution to one's creditors upon a bankruptcy (other than contributions made in the 12 months prior to the date of bankruptcy
If you would like additional information about this or any other financial restructuring and insolvency topic, please contact
, Robin Schwill or Natasha MacParland in our Toronto office at (416) 863-0900 or Denis Ferland , Mark Schrager or Alain Gaul in our Montréal office at (514) 841-6400.
Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.
The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.
 And an additional $1,000 maximum per employee for the disbursements of a traveling salesperson.