Canada: Update on Bill S-216: An Act to Amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act in Order to Protect Beneficiaries of Long Term Disability Benefits Plans

Last Updated: October 17 2010

By Ian Aversa*

On March 25, 2010, Toronto Senator Art Eggleton tabled Bill S-216 which, if proclaimed in force, would amend the Bankruptcy and Insolvency Act (the "BIA") and the Companies' Creditors Arrangement Act (the "CCAA") to protect employees on long-term disability ("LTD") by granting super priority status to long term disability benefits and health related benefits that are to be paid to disability plan beneficiaries in the context of insolvency proceedings. The new legislation would apply to any employer who participated or participates in a self-insured LTD benefits plan or LTD insurance plan, whether or not such a plan is regulated by an Act of Parliament or by the legislature of a province.

Currently, in Canada, not much protection is afforded to LTD benefits or insurance plans that are underfunded at the time of an employer's insolvency. These funds are neither protected under Canadian pension legislation, nor do they fall under the definition of wages in the Wage Earner Protection Program Act. Rather, LTD plan liabilities are unsecured claims in a bankruptcy or receivership and can be compromised in a plan or proposal.

In the United Kingdom, by contrast, the Pension Protection Fund, enacted in 2004, provides compensation to members of eligible defined pension schemes, including underfunded disability plans, when an employer undergoing insolvency proceedings has insufficient assets to cover the cost itself. Similarly, in the United States, employees are protected through the Pension Benefit Guarantee Corporation, a corporation created by the Employee Retirement Income Security Act of 1974 that insures defined benefit plans, including disability plans.

In the context of a bankruptcy or a receivership, Bill S-216 provides that the trustee or the receiver must continue the disability plan, until the date on which the disability plan beneficiaries reach the age of 65, by the assignment to an authorized financial institution of the amounts already paid into the fund established for the purpose of the disability plan and the portion of the disability plan liabilities that is unpaid to the fund established for the purpose of the disability plan. Where these amounts are insufficient to continue a disability plan on the above terms and conditions, Bill S-216 requires the trustee or the receiver to deposit such amounts in a bank in order to create a sinking fund to pay benefits to the disability plan beneficiaries until the sinking fund is empty.

In the context of proposal proceedings under the BIA or restructuring proceedings under the CCAA, Bill S-216 provides that a proposal or plan would have to provide for these amounts and the court would have to be satisfied that the employer could and would pay them before the proposal or plan could be approved or sanctioned by the court.

Going Forward

The changes proposed by this Bill are significant. If Bill S-216 becomes law, lenders will undoubtedly retain larger reserves in order to offset the potential erosion of their security. During their due diligence process, lenders will be forced to attempt to quantify a borrower's potential disability liabilities. Not only will this task be expensive, but the results will be far from certain. This uncertainty would effectively reduce the availability of credit to Canadian employers and, in so doing, affect the competitiveness of Canadian companies on a global scale.

In what may be referred to as the "Nortel clause", Bill S-216 also provides that it will apply retroactively to a debtor in respect of whom proceedings under the BIA or the CCAA have commenced before it receives Royal Assent. Not only does this clause move away from the principle that amendments to current legislation are not retroactive, it also raises questions with regards to the feasibility of the clause's enforcement. It is difficult to believe that companies that are currently in formal insolvency proceedings would be forced to retroactively conform to the new provisions.

Bill S-216 must yet endure a lengthy process of debate and deliberation before it can be proclaimed law. The Bill, read for the first time on March 25, 2010 and for the second time on June 17, 2010, has been referred to the Banking Trade and Commerce Committee where it awaits its review. Upon being considered by the Banking Trade and Commerce Committee, Bill S-216 will undergo a third reading by the Senate, and must then survive three readings by the House of Commons before it may receive Royal Assent.

While Bill S-216 suggests progressive changes that would undoubtedly be beneficial to employees on long-term disability, issues of practicality and market viability must be considered before it can receive Royal Assent.

* Ian Aversa is an associate in the Financial Services Group. The author would like to thank Karen D. Levin, a student-at-law at Aird & Berlis LLP, for her assistance in preparing this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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