COVID-19 – Employee Entitlements During Bankruptcy and Insolvency

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  • March 30, 2020

COVID-19 – Employee Entitlements During Bankruptcy and Insolvency

Employers across Canada are struggling to deal with the economic impact of the COVID-19 pandemic. On March 25, 2020, the Office of the Superintendent of Bankruptcy published a message to debtors encouraging them to inform themselves of the economic measures the Canadian government is implementing to help individuals and companies. Nonetheless, some businesses ultimately may decide that the best option is to declare bankruptcy.

Overview of Bankruptcy, Receivership, and CCAA

Under the Bankruptcy and Insolvency Act (BIA), when a company becomes bankrupt, a trustee is appointed to manage and protect the company’s assets. The trustee has the authority to continue operating the bankrupt corporation and typically has the duty to liquidate the company’s assets for the benefit of the creditors.  The trustee also has the power to terminate all of the company’s employees.

In receivership, a manager (or receiver) is appointed either privately or through the court. Receivers take control of the bankrupt corporation’s assets and arranges for their sale, or will continue to operate the business pending the sale of the assets or, alternatively, the sale of the bankrupt company as a going concern.

Under the Companies’ Creditors Arrangement Act (CCAA), the company can file for protection under the CCAA and try to avoid bankruptcy by attempting to restructure its debts. The CCAA requires that a monitor be appointed to act as an officer of the court in monitoring and reporting on the debtor company’s business.

The Employee Entitlement in the event of Bankruptcy or Receivership

  1. Wage Claims

In the event of bankruptcy, an employee’s claim for unpaid wages has priority over other creditors. Section 87 of the BC Employment Standards Act (ESA), without requiring action by any party, creates a statutory lien for wages in favour of the Director of Employment Standards. The statutory lien has priority over all other claims, with the exception of earlier mortgages or debentures registered against land, when money has been advanced under those mortgages or debentures.  Such mortgages and debentures are specifically exempted under s. 87(5) of the ESA.

The statutory lien for unpaid wages is a charge on the real and personal property of a debtor for payment of a debt or claim. The lien dates from the time that wages were earned and is enforceable against the employer or another person named in a determination, settlement agreement or an order.

A lien for unpaid wages remains until all outstanding wages are paid or a claim for unpaid wages is resolved by a settlement. The “Assets” that the lien attaches to include both real and personal assets. “Real assets” refer to land and anything fixed to land, such as buildings. “Personal assets” are moveable property such as vehicles, stocks, bank accounts, or machinery. The lien remains with the assets even if they are sold. If a determination remains unpaid, the director may hold the purchaser of the assets liable for the amount of the lien.

Further, it is important to note that the lien created by section 87 of the ESA applies to unpaid wages determined by a decision or order filed under s. 102 or s. 135 of the Labour Relations Code; however, a lien in this context is not created until that decision or order is filed in court.

Under section 87(3) of the ESA, a lien for unpaid wages gives the Director of Employment Standards the right to receive the proceeds for the sale of assets in preference over other creditors including: any claim or right of the government including, but not limited to, the claims and rights of the Workers’ Compensation Board; any claim or right arising through contract, account receivable, insurance claim or sale of goods; and any security interest within the meaning of the BC Personal Property Security Act (PPSA).

For more information regarding Section 87 of the ESA visit:

https://www2.gov.bc.ca/gov/content/employment-business/employment-standards-advice/employment-standards/forms-resources/igm/esa-part-11-section-87

  1. Wage Earner Protection Program Act (Canada) (WEPPA)

The federal Wage Earner Protection Program (WEPP) provides for the payment of outstanding eligible wages to individuals whose employer is bankrupt or subject to a receivership under the Bankruptcy and Insolvency Act. The WEPP is administered by Service Canada. For specific requirements on eligibility for the program visit: https://www.canada.ca/en/employment-social-development/services/wage-earner-protection/employee/eligibility.html

Under the WEPP, employees may be eligible for unpaid wages that were earned during certain periods of time. First, an employee may receive wages that were earned in the six-month period before bankruptcy or receivership. Second, if the employer has attempted a business restructuring, an employee may receive unpaid wages that were earned in the six months before the first restructuring event and ends on the date of bankruptcy or receivership.

WEPPA states that “wages” include salaries, commissions, compensation for services rendered, vacation pay, termination pay, severance pay and any other amounts prescribed by regulation. In Ted Leroy Trucking Limited, 2009 BCSC 41, the debtor argued that WEPPA was  restricted to earnings paid directly to employees, and did not cover other forms of compensation paid by the employer on behalf of the employee. The Court disagreed, finding that even though benefits are not specifically listed in the definition, certain benefits like contributions on behalf of employees to the company’s long-term disability plan, union dues and other contributions to other funds were wages within the meaning of WEPPA. For bankruptcies and receiverships the WEPP payment covers eligible wages up to an amount equal to seven times the maximum daily insurable earnings of the Employment Insurance Act. The total maximum amount a former employee can receive under the program for 2020 is $6798.57.

For more information on the WEPP program, visit: https://www.canada.ca/en/employment-social-development/services/wage-earner-protection/employee/eligibility.html

Follow this link to view WEPPA: https://laws.justice.gc.ca/eng/acts/W-0.8/page-1.html#h-464279

  1. Director’s Liability for Unpaid Wages

Under section 96(1) of the ESA, a director or officer of the company can be liable personally for up to two months’ unpaid wages for each employee. For this purpose wages includes but is not limited to: salaries, commissions, bonuses, and contributions to benefit funds. The director or officer must have held that position at the time the wages of an employee were earned or should have been paid.

Notwithstanding that, a director or officer cannot be personally liable for individual termination pay, or money payable as a result of group terminations, if the corporation is in receivership, bankruptcy, or undergoing a CCAA restructuring process.

  1. Other Noteworthy ESA Sections

Section 65(1)(d)

Section 65(1)(d) states that the requirement to give reasonable give notice of termination or pay in lieu of notice under the ESA does not apply if the employment contract is impossible to perform due to unforeseeable events or circumstances, other than receivership, an action under s. 427 of the Bank Act, or a proceeding under an Insolvency Act.

Applying s. 65(1)(d) of the ESA, it is certainly arguable that for some employers, the global pandemic has made employment contracts impossible to perform due to unforeseeable circumstances and therefore the notice requirements in s. 63 and s. 64 do not apply; however, in the event of receivership or bankruptcy, s.65(1)(d) does not apply and employer’s would still be liable for providing reasonable notice or pay in lieu of notice pursuant to the ESA.

Section 97

If all or part of a business is disposed of or the business continues to operate under a receiver or receiver-manager, the employment of an employee of the business is deemed to be continuous and uninterrupted by the disposition or receivership.

  1. Contract Claims

“Wages” under the ESA does not include common law damages for failure to provide reasonable notice of termination. Therefore, the termination pay that the lien attaches to is the amount prescribed by s.63 or s. 64 of the ESA.

A former employee can commence an action in court for wrongful dismissal, claiming damages for their employer’s breach of contract and failure to provide reasonable notice of termination.  However, after the trustee files the bankruptcy application, the trustee takes ownership of the legal obligations, and all legal actions against the bankrupt will stop. A claim for damages for wrongful dismissal would fall in line with the relevant priority rules but would not have the same priority preference as a lien for unpaid wages under the ESA.

Visit the following link for more information on filing for bankruptcy pursuant to the BIAhttps://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br01975.html

* DISCLAIMER: THIS ARTICLE PROVIDES GENERAL INFORMATION AND IS NOT LEGAL ADVICE.