Bankruptcy Reform in Canada - Yet Further Protection for Pension Plan and Employee Claims?

Posted by Michael Morgan on October 15, 2010

Amendments to the Bankruptcy and Insolvency Act (BIA) and related new legislation came into force in the summer of 2008 which were aimed at significantly enhancing and protecting, among other things, employee related claims against bankrupt or insolvent companies.  The amendments included a super priority charge over all assets for some, but not all, pension claims as well as a limited priority charge over certain assets for some wages owing to employees, subject to a cap for each employee.  The new system has not been without controversy and litigation has in fact ensued regarding, among other things, the interpretation of what amounts are to be included in the definition of “wages” which are sheltered by the new legislation (see, for example, this recent case from the BC Court of Appeal which determined that “wages” is broad enough to include payments to third party benefit providers such as health and welfare plans).

A movement is now underway to attempt to further enhance the protection afforded to pension and employee claims in an insolvency.  In March of this year, several bills were re-introduced in Parliament all of which seek to build upon the priority given to pension funds and employees just over two years ago.  One such bill seeks to give super priority status to “special payments” ordered by a pension regulator to fund a solvency deficit where any such payments became due but were not paid prior to commencement of a proceeding under the BIA or the Companies Creditors Arrangement Act.  Further, another bill seeks to provide a super priority charge to employees for severance or termination pay due as a result of termination of employment where an employer is in bankruptcy or Receivership.  Finally, there is also a provision in the bills which have been introduced which would provide for the continuation of various long term disability and health benefits where an employer seeks to either restructure, becomes bankrupt, or is in Receivership.

Various interested parties or associations have opined on the viability or suitability of the proposed changes as currently drafted.  Two such associations, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and the Canadian Council of Chief Executives, appear to be very concerned about the changes and have voiced their concerns in position papers on the topic.  There is currently no timetable for when the bills may be passed into law either as is or as amended based on the concerns and comments of various stakeholders.  We will keep our eye on relevant developments and will strive to provide updates on the process as and when received.

Pension Plan Administrators Rejoice - with a Note of Caution

Posted by Craig Ferris on October 12, 2010

Over the last 20 years, the Courts in Canada have struggled with Pension Plan Administrators and Sponsors’ legal obligations as well as the legal rights of Plan Members in Defined Benefit Pension Plans.  Luckily, in the last few years, some clarity has begun to emerge from the Supreme Court of Canada regarding these issues and this has been good news for Pension Plan Administrators and Sponsors.

In Buschau v. Rogers Communications Inc., 2006 SCC 281 and Nolan v. Kerry (Canada) Inc., 2009 SCC 39, the Supreme Court of Canada decided cases in a manner that clearly favoured Plan Administrators and Sponsors.  In Buschau, the Court ruled that members did not have the right to unilaterally terminate a Pension Plan in order to access the surplus funds available after paying out all of the defined benefits (this is known as an “actuarial surplus”).  In Nolan, the Court ruled that the Plan Administrator had the right to pay pension plan expenses from the pension plan as opposed to paying those expenses themselves.  In addition, the Court ruled that the “holiday” from making pension plan contributions taken by the Plan Sponsor was legal.  Both decisions clearly favoured the rights of Plan Administrators and Sponsors to manage the pension plan and limited the Member’s right to protection of their specific defined benefit but not to a portion of the actuarial surplus.

On October 7, 2010, the Supreme Court of Canada continued this trend in Burke v. Hudson’s Bay Co., 2010 SCC 34.    In the 1990s, the Hudson’s Bay Co. had sold its northern store division and transferred approximately 1200 employees.  As part of the sale, it transferred pension plan assets necessary to pay the defined benefits of the 1200 employees but not a share of the actuarial surplus.  It has also being paying plan administration expenses out of the pension plan fund.  The Supreme Court of Canada ruled that (1) there was no obligation to transfer a portion of actuarial surplus with the transfer of the 1200 employees as the employees had no right to the surplus; and (2) the payment of administration expenses from the pension plan fund was legal.  As with Buschau and Nolan, Burke will be greeted with relief from the pension plan industry as it is consistent with industry practice.

A note of caution does, however, need to be heard.  In Burke, the Supreme Court of Canada went to great lengths to review the pension plan documentation and to state that their decision was based, in part, on that documentation.  Accordingly, while Burke is welcomed, it cannot be said to be a complete answer to all similar claims.