On July 23, 2008, the Canadian Government proclaimed into force amendments to the Bankruptcy and Insolvency Act (Canada) (the "BIA") that provide super-priority security to claims, subject to specified limits, for unpaid wages ("Unpaid Wage Claims") and unpaid pension plan contributions ("Unpaid Pension Contribution Claims") in a bankruptcy or receivership proceeding, effective as of July 7, 2008.

As a result, Unpaid Wage Claims and Unpaid Pension Plan Claims now rank ahead of the claims of "ordinary" secured creditors in certain instances in any bankruptcy or receivership proceeding commenced after July 7, 2008.

Unpaid Wage Claims

In a bankruptcy or receivership proceeding, an employee now has a secured claim for wages, salaries, commissions or compensation (which is defined to include vacation pay but exclude termination and severance pay) owed to him or her during the six (6) months immediately before the date of bankruptcy or receivership, to a maximum of $2,000 per employee. (A travelling sales person is entitled to $1,000 for disbursements in certain circumstances.)

The amount of an employee’s Unpaid Wage Claim is secured on all of the current assets of the employer on the date of bankruptcy or receivership. The term "current assets" is defined in the BIA as "cash, cash equivalents – including negotiable instruments and demand deposits – inventory or accounts receivable, or the proceeds from any dealings with those assets". An Unpaid Wage Claim ranks above every other claim, right, charge or security against the employer’s current assets, regardless of when the claim, right, charge or security arose. The only exceptions to this priority status is that Unpaid Wage Claims rank behind the special priority rights granted to unpaid suppliers under section 81.1 of the BIA, farmers and fishers under section 81.2 of the BIA, and the source deductions deemed to be held in trust by an employer under the Income Tax Act (Canada), the Canada Pension Plan, and the Employment Insurance Act (Canada).

An officer or director of the employer is not entitled to an Unpaid Wage Claim. Additionally, any person who was not dealing "at arm’s length" with the employer is not entitled to an Unpaid Wage Claim unless the person is able to convince the trustee in bankruptcy or receiver that the person and the employer would have entered into a similar relationship even if they had been dealing with each other at arm’s length.

Unpaid Pension Contribution Claims

In a bankruptcy or receivership proceeding of an employer who participated in a pension plan for the benefit of its employees, the following unpaid amounts to the pension plan are secured by security on all of the assets of the employer: (a) amounts that were deducted from the employee's remuneration for payment to the pension fund; (ii) amounts that were required to be paid by the employer to the pension fund under a defined contribution provision; and (iii) "normal cost" amounts that were required to be paid by the employer to the pension fund.

Unpaid Pension Contribution Claims rank above every other claim, right, charge or security against all of the employer’s assets, regardless of when the claim, right, charge or security arose. The only exceptions to this priority status is that Unpaid Pension Contribution Claims rank behind the special priority rights granted to unpaid suppliers under section 81.1 of the BIA, farmers and fishers under section 81.2 of the BIA, source deductions deemed to be held in trust by an employer under the Income Tax Act (Canada), the Canada Pension Plan, and the Employment Insurance Act (Canada); and Unpaid Wage Claims.

Conclusion

With respect to the effect that super-priorities for Unpaid Wage Claims and Unpaid Pension Contribution Claims will have on secured lending, it is likely that lenders who provide financing relating to a borrower's working capital will take these amounts into account as reserves in the calculation of the borrowing base of the borrower, thereby reducing the amounts available to the borrower.