In the midst of the ongoing restructurings of Nortel and AbitibiBowater, the New Democrats introduced Bill C-501 in the spring of 2010 to amend the Bankruptcy and Insolvency Act (the "BIA") and the Companies' Creditors Arrangement Act (the "CCAA") with the goal of better protecting employees' interests in the context of formal insolvency proceedings, including pension interests. However, Bill C-501 did not become law.
On October 18, 2011, the New Democrats reintroduced pension reform legislation in the form of Bill C-331, An Act to amend the Bankruptcy and Insolvency Act and the Companies Creditors' Arrangement Act (pension plans). Bill C-331 expands the super priority status of unpaid pension plan contributions under the BIA and the CCAA to include any amount required to liquidate any unfunded liability or solvency deficiency in respect of a defined benefit pension plan.
Unpaid Pension Plan Contributions
As discussed in our previous article (Collateral Matters, September 2010), prior to July 7, 2008, unpaid pension plan contributions were generally held to be unsecured claims in a bankruptcy or receivership, even if they were subject to a deemed trust under provincial pension benefits legislation and could be compromised in a proposal or plan of arrangement. Currently, pursuant to provisions that came into force on July 7, 2008 with respect to defined benefit plans, super priority status is afforded to deficiencies with respect to 'normal payments'. The language in Bill C-331 proposes to expand the charge to include, in addition to the normal cost within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985 (the "Regulations"), the sum of all special payments as determined in accordance with section 9 of the Regulations, and any amount required to liquidate any additional unfunded liability or solvency deficiency.
Depending on the number of employees, special payments, as well as unfunded liabilities and solvency deficiencies, can be large and, over time, become significant liabilities that, if Bill C-331 became law, would erode the security of secured lenders. In the context of a bankruptcy or receivership, these unpaid pension plan contributions would be secured by a claim on all of the assets of the bankrupt or employer in receivership, which would rank above every other claim or security against the debtor's assets, regardless of when it arose, with the exception of: (i) the special rights which currently exist for 30-day goods suppliers under section 81.1 of the BIA and for farmers and fishermen under section 81.2 of the BIA; (ii) deemed trust source deduction amounts (i.e. any unremitted employee income tax withholdings, Canada Pension Plan contributions and employment insurance premiums) under subsection 67(3) of the BIA; and (iii) the special priority afforded to unpaid wages. In the context of proposal proceedings under the BIA or restructuring proceedings under the CCAA, a proposal or plan would have to provide for these amounts and the court would have to be satisfied that the bankrupt or employer could and would pay them before the proposal or plan could be approved or sanctioned by the court.
These changes, like those proposed earlier by Bill C-501, are significant. Under the current regime, a lender quantifies the exposure of its security to unpaid pension plan contributions by reserving, from the amount provided to the borrower, an amount representing only the normal payments required to be paid to the pension fund as a priority claim which will rank ahead of its security. Under the new legislation, depending on the extent of any special payments, unfunded liabilities or solvency deficiencies, the potential exposure to a lender may be much greater at any particular time.
The changes proposed by Bill C-331 will force lenders to retain larger reserves in order to offset the potential erosion of their security. For example, lenders who provide operating facilities based on a borrower's working capital would likely take an additional reserve from a borrower's working capital borrowing base and reduce the borrower's borrowing capacity in an amount equal to the assessed value of these new super priority claims. In addition, it is likely that certain loans that lenders might consider under the current regime would not be feasible if Bill C-331 became law, because it would be more difficult for a lender to ever be fully satisfied that the amount of its reserves is sufficient to cover these new super priority claims in the event that a borrower commences formal insolvency proceedings.
At present, Bill C-331 has only received a first reading in the House of Commons. In order to proceed to Royal Assent it would have to advance to a second and third reading by the House of Commons, and then survive three readings by the Senate. It is clear that multiple hurdles remain to be overcome before Bill C-331 can be enacted.
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