No doubt by now, every creditor knows of the new protections given to employees in the face of a company’s insolvency as a result of the enactment of the Wage Earner Protection Program Act (“WEPPA”) and related amendments to the Bankruptcy and Insolvency Act (“BIA”) on July 7, 2008. The thrust of the new WEPPA regime is of significance to all creditors, and in particular to secured creditors, because it provides for a first ranking claim of $2,000 per employee over the current assets of an employer who is bankrupt or subject to a receivership. This $2,000 per employee super-priority claim has the potential to have a significant impact on secured creditors’ recoveries.
The wage earner protection regime can essentially be boiled down to a two step process:
- Workers whose employer is bankrupt or subject to a receivership submit their claims for eligible wages to Service Canada for payment (“Service Canada Claim”). The current maximum payable is approximately $3,250; and
- The federal government assumes the interests of the wage earners against estate of employer who is bankrupt or subject to a receivership (“Estate Claim”). This becomes a super-priority claim ahead of all other creditors. The priority charge has a limit of $2,000 per employee and is over the current assets of employer only.
The "current asset" definition has not yet been declared in force, but the proposed definition for current assets is "cash, cash equivalents --- including negotiable instruments and demand deposits --- inventory, accounts receivable, or the proceeds from any dealing with those assets".
The Service Canada Claim is funded by the Government of Canada from Consolidated Revenue. The Government can then recoup some of the monies expended through the Estate Claim. Due to the super-priority charge granted to the Estate Claim over the current assets of the employer, the scope of this claim is of importance to other creditors, including secured creditors of the employer. To date, there is limited case law with respect to these provisions and it can be expected that the charge will be subject to further judicial consideration with respect to the charge’s priority and scope.
There has been some confusion over this new regime since the amounts that can be claimed under the Service Canada Claim and the Estate Claim do not match up. Further confusion was created when the definition of wages under WEPPA was expanded in March 2009 to include severance pay and termination pay, retroactive to January 27, 2009. However, the amendments were not carried through to the BIA, so the Estate Claim does not extend to severance or termination.
The key aspects between the Service Canada Claim and the Estate Claim are as follows.
Click here to view table.
The implementation of WEPPA and the corresponding super-priority claim has definitely created a new burden for secured and other creditors. As a result, lenders and secured creditors have to be more proactive in monitoring their debtors. This can include requiring the use of third party payroll services and conducting spot audits with respect to payroll remittances. Such steps can go a long way to protecting vulnerable wage earners and increasing the creditor’s recovery.