Canada: Third Party Benefit Providers Get Super Priority Secured Claim For Unpaid Remittances Owed By Employer

Synopsis

In the latest decision of the British Columbia Supreme Court (the "Court") regarding the bankruptcy of Ted LeRoy Trucking Ltd. ("TLT"), the Court found that unpaid remittances owed by TLT to third party benefit providers constituted "wages" within the meaning of the Bankruptcy and Insolvency Act ("BIA). This entitled the benefit providers to super priority secured status in the bankruptcy of TLT.

The Facts

The Court considered the claims of certain benefit providers that had provided insurance, health services, dental services and indemnity benefits to employees of TLT (the "Benefit Providers"). TLT failed to make the required remittances to the Benefit Providers. The Benefit Providers filed proofs of claim with the trustee in bankruptcy (the "Trustee") of TLT, claiming that the payments owing to them for the remittances that TLT failed to make constituted "wages" within the meaning of the BIA.  Section 81.3 of the BIA creates a statutory super-priority secured claim for the benefit of employees who are owed wages, salaries, commissions or compensation by a bankrupt employer to a maximum of $2,000 per employee. In filing their proofs of claim, the Benefit Providers were claiming that the amounts TLT owed to them for the unpaid remittances fell within section 81.3. The Trustee accepted the Benefit Providers' proofs of claim.

The Department of Human Resources and Skills Development Canada ("HRSDC") also had a claim against TLT in respect of unpaid wages. This claim arose pursuant to the Wage Earner Protection Program Act (the "WEPPA"). The WEPPA provides that on the bankruptcy of an employer, a portion of employee wages, up to a maximum of $2,000, that are unpaid on bankruptcy can be claimed by the employee against the fund set up by the Federal Government. The program is run by the HRSDC. When HRSDC makes such a payment, it has a subrogated claim against the bankrupt employer which is a super priority secured claim pursuant to section 81.3 of the BIA. HRSDC was therefore the holder of a secured super priority claim for wages against TLT pursuant to the BIA.

HRSDC was the only remaining secured creditor of TLT prior to the Trustee accepting the Benefit Providers' claims. The effect of the Trustee's decision to accept the Benefit Providers' proofs of claim as wages under section 81.3 was that HRSDC had to share its recovery on a pari passu basis with the Benefit Providers.

The Decision

HRSDC applied to the Court to have the secured proofs of claim of the Benefit Providers expunged. It raised various grounds for attack on the claims of the Benefit Providers.
 

Under section 81.3, the super priority secured claim is in favour of a "clerk, servant, traveling salesperson, labourer or worker". HRSDC argued that none of the Benefit Providers fell within these categories.

The Court rejected HRSDC's argument, citing previous decisions in the TLT matter. In particular, a prior decision in the TLT matter had held contributions by TLT on behalf of its employees to the Benefit Providers were "wages" and had the super priority created under section 81.3. The British Columbia Court of Appeal had held that "wages" for the purposes of section 81.3 extends to money withheld or payments made by an employer to third parties pursuant to a contract of employment. In other words, wages can include money that is not payable directly to an employee. They are either considered as an assignment by the employee, a direction to pay by the employee to the employer, or part of the employer's compensation obligations and the employee's compensation entitlement. and thus for the benefit of the employee, not the third party benefit provider.
Another basis for attack by HRSDC on the Benefit Providers' proofs of claim was that the proofs of claim were not filed by the employees. The Court rejected the argument on the basis of section 126(2) of the BIA which provides:

(2) Proofs of claims for wages of workers and others employed by the bankrupt may be made in one proof by the bankrupt, by someone on the bankrupt's behalf, by a representative of a federal or provincial ministry responsible for labour matters, by a representative of a union representing workers and others employed by the bankrupt or by a court-appointed representative, and that proof is to be made by attaching to it a schedule setting out the names and addresses of the workers and others and the amounts severally due to them, but that proof does not disentitle any worker or other wage earner to file a separate proof on his or her own behalf. [emphasis added]

Thus, the Court held that proofs of claim need not be filed by employees, but can also be filed on behalf of employees. The Court recognized that the list of persons entitled to file proofs of claim on behalf of employees was rather short and did not include the Benefit Providers. However, the Court found that such a technical fault should not defeat an otherwise legitimate claim, and therefore the Court designated that Benefit Providers as "court-appointed representatives" so that they could fall squarely with the section (although it should be noted that there is no evidence that this relief was sought).

HRSDC also argued that there was no debt owing to employees, that the benefits were provided by the Benefit Providers, and thus nothing was owed to the employees. The court rejected this argument as well, and confirmed that the "debt" owing to the employees is the amount that the TLT failed to remit to the Benefit Providers.

The Benefit Providers were therefore held to be secured creditors of TLT pursuant to section 81.3 of the BIA and entitled to share recovery with HRSDC.

One can assume that third party benefit providers in similar circumstances will attempt to rely on this decision in future bankruptcies to claim super priority secured status under section 81.3 of the BIA for remittances that were not paid by the employer on behalf of, or for the benefit of, the employees of the bankrupt.

Steven Golick is a senior partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt. Patrick Riesterer practices commercial law with an emphasis on insolvency, restructuring, bankruptcy, secured transactions and enforcement of debtor and creditor rights.

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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