Download Bankruptcy and Insolvency / Labour Law

Bankruptcy and Insolvency / Labour Law
Spring 2006
Fasken Martineau DuMoulin LLP
Adoption of Act 47: Protecting Workers when Employers Go Bankrupt
By Serge Guérette
Last November, the Canadian Parliament adopted Bill C-55 entitled an Act to establish the Wage Earner
Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors
Arrangement Act and to make consequential amendments to other Acts, which then became Chapter 47 of
the 2005 statutes (hereinafter “Act 47”). One of the goals of Act 47 is to provide wage earners with better
protection against the consequences of employers going bankrupt. The chapters of this Act will only come
into force on the dates set by order in council. We can expect to wait a few more months, if only to give the
government enough time to develop implementing regulations. The Standing Senate Committee on Banking,
Trade and Commerce has stated that it would like the law only to take effect in late June 2006, giving more
time to the committee to take a closer look at this important legislation and to the government to propose
necessary amendments. Whatever these amendments may be, they most likely will not affect the essential
features of the Act as far as worker protection is concerned.
1)
Wage Earners Protection Program
Among other things, Act 47 enacts the Wage Earner Protection Program Act. This program will allow laidoff workers to obtain from the federal government the payment of wages owed over the six months
immediately preceding the date on which their employer went bankrupt or into receivership (in other words,
when their employer’s property is seized by or on behalf of secured creditors). While accrued vacation pay is
covered, severance or termination compensation is not. Workers will be entitled to a maximum of $3,000 or
four times the maximum weekly earnings insurable under the Employment Insurance Act, less any deduction
applicable under federal or provincial legislation. The program will not apply to employees who have
worked three months or less for an employer, the officers and directors of an employer, individuals with a
controlling interest and managerial staff. The expressions “controlling shareholder” and “managerial staff”
will be defined by regulation.
The Wage Earners Protection Program will be financed by public funds: no specific fund will be created or
program dues charged. However, the federal government will be subrogated to any rights the wage earners
may have against their former employer and its directors.
2)
Better rank for wage earners
Workers have long enjoyed a priority over other unsecured creditors under the Bankruptcy and Insolvency
Act for amounts of up to $2,000 in wages owing over the six months preceding the bankruptcy. But since this
priority was subject to the rights of secured creditors, the bankers of a bankrupted employer need not be
concerned about it. In most cases, no funds were left over to pay workers despite their prior ranking.
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The new act amends the Bankruptcy and Insolvency Act by creating a prior charge, enforceable against the
secured creditors of the bankrupt, on all current assets of the bankrupt for $2,000 in respect of wages owing
for the six months preceding the date of bankruptcy or receivership.
The Bankruptcy and Insolvency Act is amended to include a definition of “current assets”. In practice, this
expression refers to the property of a business normally used to guarantee its revolving operating credit,
essentially its inventory and accounts receivable. This prior charge remains nonetheless subordinate to the
deemed trusts of the government (such as those used to recover payroll deductions) and the right of unpaid
suppliers to reclaim goods delivered within thirty days of the bankruptcy or receivership.
But why is this prior charge limited to $2,000 when the Wage Earners Protection Program covers up to
$3,000 in wages, with the State being moreover subrogated to the rights those wage earners may have against
their former employer? Perhaps this has something to do with the personal liability of company directors for
unpaid wages. Under the Canada Business Corporations Act and the Companies Act (Quebec), directors
have long been personally liable to company employees, subject to certain terms and conditions, for up to six
months of wages and accrued vacation pay. Legislators no doubt wanted directors to remain personally liable
at least for a portion of the unpaid wages even after prior charges are exercised. The federal government will
therefore be able to sue directors on behalf of the employees to the extent prescribed by corporate law for the
difference between amounts paid to employees and amounts recovered from the liquidation of the assets of
the employer-company.
3)
Protection of pension plan contributions
Act 47 also amends the Bankruptcy and Insolvency Act to include a prior charge, this time for unlimited
amounts, on all assets of debtors that go bankrupt or into receivership in order to recover amounts deducted
from workers’ wages for contribution to their supplemental pension plans, and any amount the employer was
supposed to contribute to these plans (not including the actuarial deficit of the plan). This prior charge is
enforceable against secured creditors and ranks immediately after the priority for unpaid wages.
The fact that the number of prior charges, deemed trusts and other rights enforceable against secured
creditors have multiplied does raise concerns over the ability of businesses to borrow against their assets.
Will lenders be able to assess the significance of pension plan contributions payable at any given time? How
will these new prior charges affect the computation of the margin requirement1 of the revolving operating
credit? It is safe to assume that all prudent banks will, whenever possible, make the granting of operating
credit margins conditional on the borrower using the payroll services its institution offers. This is
undoubtedly the best way to ward off unwelcome surprises as far as unpaid wages and payroll deductions are
concerned.
4)
“Hands off my collective agreement!”
Act 47 also contains a number of other interesting provisions respecting proposals under the Bankruptcy and
Insolvency Act and arrangements under the Companies’ Creditors Arrangement Act. For the most part, these
provisions provide a legislative framework for practices that are already recognized by the courts, especially
with respect to repudiation of contracts and interim financing. However, court decisions had yet to settle one
issue conclusively: just how far can a business repudiate a collective agreement that is in effect and force a
union to negotiate a new one? Remember when Air Canada was restructuring; the court threatened to
intervene if the parties did not reach an agreement. The fear that it would do so seems to have been effectual.
But this will no longer be the case. True, Act 47 allows businesses presenting a proposal or an arrangement
to petition the court for authorization to send a notice to bargain to the bargaining agent with a view to revise
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the collective agreement. But this obligation to bargain has no teeth, since courts lack the power to amend
collective agreements without the consent of both parties. Businesses will only have economic arguments to
incite employees to negotiate, having no legal means at their disposal to re-open the agreement. The situation
is different in the United States as the Bankruptcy Code allows a trustee, if certain conditions are met, to ask
the courts to reject a collective agreement if the parties fail to agree to amendments thereto.
Serge Guérette practices in business litigation, in the areas of insolvency, reorganization and, more generally,
corporate and securities litigation. He is regularly involved in the financial and corporate restructuring of public
and private businesses. He represents creditors and debtors in the recovery or workout of secured debts. He
frequently advises purchasers acquiring distressed businesses or purchasing assets in the context of an
insolvency. Mr. Guérette is also active in corporate and securities litigation surrounding mergers, acquisitions
and privatization of public companies, and in oppression remedies.
Serge Guérette can be reached at 514 397 7461 or [email protected].
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1) “Margin requirement”: the maximum percentage of the value of inventory and accounts receivable that the business is
authorized to draw against its operating line of credit.