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.

This entry was written by Steven Golick and Patrick Riesterer.

Overview of the WEPPA

The WEPPA established the Program to pay a maximum of $3000, or the higher amount referred to above, to eligible employees of employers who are bankrupt or subject to a receivership.

Eligible Wages are defined in subsection 2(1) of the WEPPA. Before June 5, 2011, Eligible Wages were defined as:

(a) wages other than severance pay and termination pay that were earned during the six month period ending on the date of the bankruptcy or the first day on which there was a receiver in relation to the former employer;

and

(b) severance pay and termination pay that relate to employment that ended during the period referred to in paragraph (a).

Thus, prior to the amendments, the WEPPA permitted an employee to receive Eligible Wages from the Program when the employer failed to pay wages, severance pay and termination pay and the employer was subject to a bankruptcy or a receivership. The Eligible Wages were those earned in the six months preceding the bankruptcy or receivership of the employer. The Government could recover $2,000 of this contribution as a priority creditor under sections 81.3 and 81.4 the BIA.

The Amendments

Bill C-13 amends the definition of “Eligible Wages” so that it reads as follows:

(a) wages other than severance pay and termination pay that were earned during the longer of the following periods:

(i) the six-month period ending on the first day on which there was a receiver in relation to the former employer, and

(ii) the period beginning on the day that is six months before the day on which a proposal under Division I of Part III of the Bankruptcy and Insolvency Act (Canada) (the "BIA") is filed by or in respect of the employer or the day on which proceedings under the Companies’ Creditors Arrangement Act are commenced and ending on the date of the bankruptcy or the first day on which there was a receiver in relation to the former employer; and

(b) severance pay and termination pay that relate to employment that ended during the period referred to in paragraph (a).

The period of Eligible Wages has therefore been increased in certain situations. The amendments attempt to address the situation of serial proceedings, in other words, where an employer first files for protection under either the proposal provisions of the BIA or Companies’ Creditors Arrangement Act (Canada) (the “CCAA”)(both being reorganization provisions, similar in concept to Chapter 11 in the U.S.). Where those attempts to restructure are unsuccessful, they can lead to a receivership, or a bankruptcy.

The amendment increases the period included in Eligible Wages to include the period commencing six months prior to a filing for protection under the proposal provisions of the BIA or the CCAA, and thus also the period during those proceedings up to the date of the bankruptcy or receivership. This is potentially a much longer period of time than the previous language which only protected the six months prior to a receivership or bankruptcy.

Although the amendment lengthens the period of time defined as Eligible Wages, it does not increase the total claim that may be made by each employee under the Program.       

A Misstep

There appears to be a technical glitch in the drafting of the amendment.

Under the former definition of “Eligible Wages” in the WEPPA, Eligible Wages were earned in the six months immediately before either a bankruptcy or the appointment of a receiver. Thus, employees could recover from the Program where the employer was either placed into bankruptcy or receivership.

However, under the amendments there is no longer protection under the Program for unpaid wages accruing in the six months preceding a bankruptcy unless there is either a CCAA or BIA proposal filing preceding the bankruptcy. The effect of the change is that employees will no longer be eligible for the Program where the employer becomes bankrupt without either the employer first filing under the CCAA or the proposal provisions of the BIA.

This omission was likely inadvertent. It can be expected that the Federal Government will amend the legislation to rectify this.    

This entry was authored by Steven Golick and Patrick Riesterer.  

This decision was important because it confirmed the scope of employee wage claims against a bankrupt employer that would benefit from a super-priority charge under the Bankruptcy and Insolvency Act (Canada).

The secured creditor sought leave to appeal to the Supreme Court of Canada. However, on December 9, 2010, the Supreme Court of Canada denied such leave.

As a result, lenders should continue to account for such indirect payments when structuring a loan transaction, including in the calculation of any borrowing base
 

Protection for “Wages” Under the WEPPA

The WEPPA and consequential amendments to the BIA were proclaimed in force in 2008. Under section 7 of the WEPPA, an employee can recover wages owing that were earned in the 6 months immediately before the date of bankruptcy or the first day on which there was a receiver in relation to the former employer.

"Wages" is defined in the WEPPA as follows:

2 (1) In this Act, "wages" includes salaries, commissions, compensation for services rendered, vacation pay, severance pay, termination pay and any other amounts prescribed by regulation.

The maximum amount recoverable is the greater of:

• $3,000, and
• an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act (Canada)

Section 81.3(4) of the BIA creates a super-priority for outstanding wages of up to $2,000. The government is entitled to subrogate to recover any monies it pays under WEPPA and on such a proceeding is entitled to the benefit of the BIA $2,000 super-priority.

The Lower Court Decision

The union representing employees at the bankrupt trucking company argued that all monetary liabilities arising from the compensation package in the applicable collective agreement ought to be included in the calculation of wages protected by WEPPA, irrespective of whether the amount is payable directly to the employee or to a third party on an employee’s behalf. The receiver of the company disagreed, asserting that the only certain wages directly payable to an employee are protected.

The Supreme Court of British Columbia found that "wages" do include payments directed to third parties on an employee’s behalf pursuant to an agreement, including a collective agreement. The Court stated, in part:

“To answer this question one must consider the definition of "wages" in s. 2(1) of the WEPPA. It is relatively expansive; it defines wages as including "compensation for services rendered". In my view any reasonable definition of "compensation for services rendered" must mean all compensation earned by the employee. It cannot be limited to only that portion of the compensation earned by the employee and due to be paid directly to him, as opposed to being paid to third parties at the direction of and for the benefit of the employee.”

The Appeal Decision

The Court of Appeal for British Columbia dismissed the appeal of a secured creditor. Many of the issues on the appeal focused on statutory interpretation. The Court of Appeal agreed with the interpretation of the lower court. The appellants also claimed that the lower court decision distorted the balance between workers and secured creditors. The Court of Appeal disagreed saying that the protection of wages under WEPPA is limited temporally and by amount, and that Parliament had considered this balance when passing the legislation.