Employee Super-Priority in Canadian Bankruptcies

The Canadian government recently passed the Wage Earner Protection Program Act (WEPPA) in conjunction with amendments to the Bankruptcy Insolvency Act (BIA). Together, the acts provide employees with wage and pension super-priority rights over secured creditors in bankruptcies.  

Wage Priorities

The WEPPA creates a wage arrears super-priority up to $2,000 per employee over current assets (accounts receivable and inventory) and applies to creditors secured through those assets. However, the wage super-priority does not apply to equipment, so lenders/lessors of these assets may not be affected. The WEPPA also creates a super-priority for unpaid pension contributions, and there is no maximum amount for this priority over secured creditors. A newly established bureaucratic agency will also administer a Wage Earner Protection Program. Under the program, wage arrears will be paid up to $3,000 per employee during the six-month period preceding the bankruptcy or receivership. After the program pays an employee's claim, it becomes entitled to super-priority status over secured creditors.

Protecting Collateral Positions

In light of these amendments, lenders/financiers should consider taking steps to protect their secured claims against potential wage or pension super-priority claims where Canadian collateral is a material part of the security for the loan. Those steps may include:

• Reducing the percentage of leverage or margining allowed under a facility.
• Requiring additional security to account for the risks presented by the WEPPA and BIA amendments (e.g., requiring additional security when taking a security interest in accounts receivable and/or inventory or creating reserves to protect against a super-priority claim).
• Reducing the overall amount of financing.
• Requiring a prospective lessee or borrower to undertake operational changes such as using a payroll service to limit wage claims in the event of a bankruptcy or receivership.
• Entering into inter-creditor arrangements with other secured lenders in order to ensure a fair burden-sharing of super-priority claims and to spread the super-priority risk among secured creditors.
• Increasing monitoring of their borrowers to ensure that they are not surprised by a significant super-priority claim.

If you have any questions about WEPPA or related measures, please contact William Schorling at (215) 665-5326 or Tom Galey at (412) 562-3927.