*By Ryan Sissons (summer articled student)
Being terminated or losing your job is undoubtedly a challenging experience, and this difficulty is further exacerbated when the company is insolvent. Directing an insolvent company also gives rise to numerous concerns. Therefore, it is essential to understand that a company's bankruptcy or receivership does not automatically absolve it of its obligations to its employees.
Employee Wage Protections Under the Bankruptcy and Insolvency Act
Pursuant to section 81.3 of the Bankruptcy and Insolvency Act (BIA) for bankruptcies and section 81.4 for receiverships, employees are entitled to a super priority security claim for up to $2000 of unpaid wages, limited to commissions or compensation owed in the six months preceding the company's assignment into bankruptcy. Remarkably, this super priority claim takes precedence even over secured creditors. In other words, if the company possesses only secured assets and no other resources, the employees will be paid from these secured assets before the secured creditors receive any payment. However, claims that fall under sections 81.1, 81.2, and 67(3) of the BIA supersede the $2000 in unpaid wages.
Section 81.3(9) clarifies the application of this section as applicable to vacation pay accrued within the six months but excludes severance or termination pay from its scope. Directors are also excluded from this section.
All unpaid wages beyond the $2,000 limit and any debts owed for severance or termination will become unsecured claims against the company. As unsecured claims, they will be treated like regular claims, receiving payment in proportion to the company's overall debt owed.
One should also be aware of the Wage Earner Protection Program Act (S.C. 2005, c. 47, s. 1), which may provide support for employees that allows them to avoid pursuing their own claims. As discussed in Ted Leroy Trucking Ltd. v. Century Services Inc. (2010) the government will pay a limited amount to the employee and then subrogate the employee’s priority and non-priority claims.
Directors’ Liability
Section 119 of the Canada Business Corporations Act (CBCA) provides employees with a potential claim for wages against the company's director(s). The specific wording of this section states directors are liable for "...debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.”
While this clearly includes unpaid wages for work already performed, the phrasing has led to confusion regarding whether vacation, severance, and termination pay are covered by this section, as it specifically refers to "services performed."
In the case of Barrette v. Crabtree Estate, [1993] 1 S.C.R. 1027, it was established that termination and severance pay constitute debts owed to employees, but not for services performed. Rather, they are considered damages for breach of contract, which differs from debts for services performed. Consequently, if an employee is terminated before or due to the bankruptcy, the director cannot be held liable for severance or termination pay. This principle was restated more recently in Redcorp Ventures Ltd. (Re) 2010 BCSC 208.
There are some exceptions to this principle, as per the Quebec Court of Appeal in Schwartz v. Scott (1985). If there is an agreement stipulating payment upon termination or resignation, based on the individual's time spent at the company, then the directors may be liable. Additionally, provincial legislation may impose liabilities, as demonstrated in Meyers v. Walters Cycle Co. (1990), 85 Sask. R. 222.
A debate surrounds the inclusion of vacation pay under directors' liability. In the case of Vopni v. Groenewald, Justice McKeown ruled that vacation pay lies outside the scope of directors' liability when the director resigns before the bankruptcy, or the receiver terminates employment. However, the Manitoba Court of Appeal in Brown v. Shearer ruled that a director would be liable for vacation pay accrued during any period in which they were still a director within the six months preceding the bankruptcy. This means that if the director resigned two months before the company went into bankruptcy, they would only be liable for vacation pay accrued in the 4 months before they resigned.
Conclusion
In conclusion, it is evident that termination pay, and severance are not eligible for a super priority claim under the BIA and are likely exempt from directors' liability to employees under CBCA. Directors may still be held accountable for vacation pay, but only for the duration of their directorship.
These aspects are of utmost importance for employees who were formerly associated with a now bankrupt company and for directors of insolvent companies. Understanding these legal nuances is essential to navigate the complexities of unpaid wages during financially challenging times. As employees, it is crucial to be aware of your rights and protections, while directors must be mindful of their potential liabilities in such situations.
This post is not legal advice and is limited to explaining debts regarding wages when a company goes bankrupt. It does not address benefits, or other possible liabilities.
Legislation and Cases Cited
Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3), https://canlii.ca/t/7vcz.
Wage Earner Protection Program Act (S.C. 2005, c. 47, s. 1)
Ted Leroy Trucking Ltd. v. Century Services Inc., 2010 BCCA 223 (CanLII), https://canlii.ca/t/29lf5
Canada Business Corporations Act (R.S.C., 1985, c. C-44), https://canlii.ca/t/7vf1.
Barrette v. Crabtree Estate, 1993 1 SCR 1027, https://canlii.ca/t/1fs3h.
Redcorp Ventures Ltd. (Re), 2010 BCSC 208, https://canlii.ca/t/2855x.
Schwartz c. Scott, [1985] J.Q. no. 41,1985] CA 713, JE 85-1063, 32 BLR 1 p, 35 ACWS (2d) 406, EYB 1985-143664.
Meyers v. Walters Cycle Co., 1990 CanLII 7816 (SK CA), https://canlii.ca/t/g9l7j.
Vopni v. Groenewald, 1991 CanLII 8340 (ON SC), https://canlii.ca/t/g9j1p.
Brown v. Shearer, 1995 CanLII 6258 (MB CA), https://canlii.ca/t/1pfkf.
