Lenders should be aware that a broad definition of “wages” owing to employees of a borrower/customer in bankruptcy or receivership can take priority over what a lender might otherwise believe is its “first ranking charge” against the borrower.

This result was reinforced in the recent British Columbia Court of Appeal decision in Ted Leroy Trucking Ltd. v. Century Services Inc. Since 2008 the federal Wage Earner Protection Program Act (“WEPPA”) has given employees a claim for unpaid wages in a bankruptcy or receivership, and the Bankruptcy and Insolvency Act (“BIA”) has given “super-priority” on the current assets of a borrower to a portion of those wage claims over almost all other claims and security interests, including an earlier first ranking charge of a secured creditor. In addition, if the Crown pays the employees’ wage claims it is subrogated to the claim of the employee under the BIA.

What constitutes a WEPPA wage claim is limited in time (essentially 6 months before the insolvency) and in the eligible amount per worker (the greater of $3000 and four times the maximum weekly insurable earnings under the Employment Insurance Act, which is currently approximately $3200). Also, the super-priority claim under the BIA is limited to $2000 for each worker. That may not seem like much, but it can add up when the insolvent borrower has a large number of employees. Also, what constitutes “wages” for the priority claim is more than what you might think would be included based on the plain meaning of that word. In the Ted Leroy case the court held that “wages” are not limited to the amounts paid directly by the employer to the employee for services rendered, but can include payments made to third parties on behalf of employees, such as union dues and health benefits. Therefore, even if the direct amount owing to employees for base wages is current, non-payment by the employer to third parties can still result in a super-priority wage claim for employees, or for the Crown if it pays the employees’ claims and subrogates to their position.

The lesson to lenders is that in a bankruptcy or receivership “wages”, like a number of other statutory lien and trust claims (such as for unpaid remittances under the Income Tax Act), can take priority over the otherwise “first ranking charge” that the lender thinks it has. As a result, lenders should take the possible priority claim for wages into account generally when making lending decisions, and should specifically include the amount of the potential priority claim for wages in making borrowing base calculations, and in applying other financial covenants. The potential for this type of super-priority claim also reinforces that lenders should “know your borrower”, and to the extent possible keep current on the status of payment by it of employees’ wages and other components of the compensation package, including payments due on the employees’ behalf to third parties. Knowledge is power, and lenders would do well to make knowledge a priority, to maintain the priority position they expect to have.

[Editor’s Note: We understand that an application for leave to appeal to the Supreme Court of Canada has been filed in the Ted Leroy case by Century Services Inc. on August 5, 2010.]