Canada: Proposed Amendments To Insolvency Legislation Granting Super-Priority To Pension Plan Deficits And Employee Benefits

This fall, the NDP and the Bloc Québécois ("Bloc") have both introduced private member's bills seeking to amend the Bankruptcy and Insolvency Act ("BIA") and the Companies' Creditors Arrangement Act ("CCAA"). Both bills aim to provide greater protection to employees' pension and group insurance plans and their severance and termination pay when their employer becomes subject to BIA or CCAA proceedings.

Currently, if a company becomes bankrupt or is placed into receivership, sections 81.5 and 81.6 of the BIA create a charge to secure certain unpaid pension contributions. This charge generally ranks in priority to other claims except with respect to items such as unpaid wages, the right of unpaid suppliers to recover goods and in cases of bankruptcy, source deductions related to income tax, the Canada Pension Plan and employment insurance.

Both the NDP's bill (Bill C-384) and that put forward by the Bloc (Bill C-372) seek to expand the scope of this charge to also cover pension plan deficits. Effectively, it would mean that any underfunded pension liabilities or pension solvency deficiencies of companies in bankruptcy or receivership must be satisfied before payments to other secured and unsecured creditors can be made. In the case of a restructuring, the proposed amendments would require a company's restructuring plan, whether under the BIA or the CCAA, to provide for the payment of a pension plan's unfunded liability or solvency deficiency as a condition to the plan being approved by the court.

Both bills also address group insurance benefits, but in different ways. The NDP's bill prohibits companies currently undergoing a restructuring under the BIA or the CCAA from modifying, cancelling, or suspending contributions to group life and health insurance plans for current or former employees. In contrast, the Bloc's bill requires a company's proposed CCAA restructuring plan to indemnify employees if group life and health insurance is terminated as a condition for court approval.

Both bills propose that, in cases of employer bankruptcy, termination or severance pay would be ranked ahead of all secured and unsecured claimants. The Bloc's bill also seeks to extend this super-priority to group insurance benefits if they are terminated.

At the time of writing, both the Bloc and NDP's bills are at first reading. Though private member's bills are unlikely to pass, the introduction of two substantially similar bills does signify concerns amongst some constituents as to the treatment of pension plans and employee benefits during companies' BIA and CCAA proceedings. Yet, some may question as to whether affording a super-priority to pension plan deficits and employee benefits, as contemplated by the proposed bills, may make it more difficult for companies offering these programs to their workforces and/or retirees to obtain normal course financing for ongoing operations or expansion.

The priority of pension deficit claims has been the subject of decisions in recent high-profile restructuring and bankruptcy cases (see e.g. Sun Indalex Finance, LLC v. United Steelworkers, ITB Marine Group Ltd. v. Northern Transportation Company Limited, and Arrangement relatif à Bloom Lake, and it appears from these proposed bills that employee pension and benefit matters will continue to be the subject of ongoing discussion and interest.

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