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New bill protects workers during insolvency process

|Written By By Beth Marlin

While many labour-side lawyers welcomed the Nov. 25 passage of Bill C-55, others wish the legislation that promises a Wage Earner Protection Program and to protect other union rights during the insolvency process hadn't been quite so rushed.

The new law protecting workers' wages during the insolvency process was rushed through for political purposes, says Andrew Kent.
The new law protecting workers' wages during the insolvency process was rushed through for political purposes, says Andrew Kent.

That's because the bill to amend Canada's Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act was so riddled with technical glitches that the Senate committee charged with reviewing the reform package approved it only on condition that it wouldn't be proclaimed before June 30. This would allow for the law's drafters at Industry Canada to smooth out the rough edges.
It remains to be seen how the newly elected minority government will approach the necessary changes.
"The bill was rushed for political circumstances. There were lots of technical errors. It needs to be fixed up," says Andrew Kent, McMillan Binch Mendelsohn's newly named chief executive officer, who was actively involved in the legislative reform process and represented the informal independent converts committee during Stelco Inc.'s two-year restructuring process.
At one point, says Kent, Industry Canada sent out an amendment removing an obscure section of the act, then later conceded, "It was a mistake. We didn't mean to do it. It was a drafting error."
In the article, "Flawed Canadian Insolvency Law Reform Enacted?" published in McMillan Binch Mendelsohn's most recent Restructuring Bulletin, Kent and colleague Adam Maerov write that the postponed proclamation is "a result of the stated disappointment of the Senate committee charged with reviewing the reform package.
"Unless amended, the legislation could have negative implications for Canadian employment and business," they write, adding they will personally be lobbying the government to ensure the necessary changes are made.
Once tweaked and unleashed into the public realm, the bill will significantly increase a union's power during the insolvency process. For instance, Canadian courts will no longer be able to set aside or otherwise intervene with respect to collective bargaining agreements, but will only be able to require the unions and employers to attempt to negotiate.
Bill C-55 also requires companies to officially serve notice on unions upon applying for CCAA status, something that was previously not required.
The Wage Earner Protection Program Act — estimated to assist as many as 15,000 workers a year at a cost of up to $50 million — would guarantee wage payments of up to $3,000 per employee during the six months before an employer declares bankruptcy or enters receivership.
Wages are defined to include salary and vacation pay, but not severance or termination pay, and are capped at a maximum of the greater of $3,000 and four times insurable earnings under the Employment Insurance Act. Workers would receive their owed wages within six to eight weeks of application.
Workers employed three months or less, officers, directors, owners, and managers are not eligible to receive payment under the program.
The WEPP will be funded out of the Consolidated Revenue Fund. Prior to the election of the Tory minority government, there were rumblings about the introduction of a federal payroll tax to fund the program and its administration, though that seems unlikely now.
However, the most vital aspect of the legislation is the provision that moves employees up from near the bottom of the creditor list, where they could collect back wages only after payment of suppliers; certain Crown claims; the claims of secured creditors; the funeral expenses of a deceased debtor; and the legal and administrative costs of the bankruptcy.
Under the previous regime, only about 20 per cent of unpaid workers received any payment — on average, 13 cents on the dollar — with payment coming about three years later. The new legislation, which would give an employee's wages priority over claims of secured creditors, up to a maximum of $2,000, is expected to recover up to 50 cents on the employee's dollar.
"Bill C-55 creates a super-priority for employee stakeholders," explains Ken Rosenberg of Paliare Roland Rosenberg Rothstein LLP, counsel for the United Steelworkers of America during the Stelco restructuring.
Stelco's two-year restructuring process, which some creditors' lawyers complained provided undue sway to employee and pension-holder rights, is said to have provided at least some of the impetus for the legislative changes.
Under the new legislation, unpaid wage claims will be granted "limited super priority" over a bankrupt employer's current assets, making more assets available to pay unpaid wage claims. Under the Wage Earner Protection Program, government will assume wage earners' claims against the bankrupt employer's estate, and thus be able to recover a portion of its costs by making claims against the employer's estate.
Any individual who does not qualify for payment from the Wage Earner Protection Program will be able to pursue his or her wage claim directly through the bankruptcy process by making claims under the limited super priority and the existing preferred creditor status up to $2,000.
While lawyers are divided on whether Canadian bankruptcy law should allow the courts the flexibility to amend or terminate collective agreements, as is the case in the United States, Rosenberg believes Bill C-55 is correct to limit the courts to the power to force the parties to negotiate, but not to change a collective agreement.
"My personal view is they should protect what is considered a right," says Rosenberg. "People fought very hard over the past 50 years for the right to collectively bargain freely."
Deborah Grieve, chairwoman of the Canadian Bar Association's national bankruptcy and insolvency section, agrees.
"The Wage Earner Protection Prog-ram is an idea whose time has come," she has said. "Workers need to be protected when situations occur that are beyond their control."

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