Parliamentary Research Branch
PROTECTING EMPLOYEE WAGES IN BANKRUPTCY
PROTECTING EMPLOYEE WAGES IN BANKRUPTCY
A business bankruptcy can affect a host of creditors from employees to suppliers of goods and services, secured creditors and lenders, and various levels of government. Like other creditors, employees who are owed wages share in the remaining assets of their bankrupt employer. In some cases, there will be sufficient assets to satisfy employee claims in full; in others, employees may be compensated for only a portion of their claims or receive nothing at all.
The issue of how to compensate employees for unpaid wages in an employer bankruptcy has been considered in the course of numerous proposals to amend Canadas bankruptcy laws over three decades. In the end, after debating wage protection funds, a super priority over other creditors and other possible approaches, little change has occurred unpaid wages continue to rank as preferred claims in a bankruptcy behind secured creditors but ahead of ordinary creditors.
This paper examines a number of approaches for protecting unpaid employees under Canadian bankruptcy law. It also outlines various legal and administrative arrangements developed in countries such as Australia, the United Kingdom and the United States to protect unpaid employees.
At the outset, it is important to note that the question of wage entitlement in bankruptcy is a complex issue. In theory, it would be difficult to find anyone opposed to the notion of compensating employees for the wages and benefits to which they are entitled when their employer goes bankrupt. Employees are often the most exposed creditors and the least able to absorb a wage loss. Unlike some other creditors, they are not able to assess the risk of an employer bankruptcy or bargain with employers for greater protection.
But, on a practical level, the issue is less straightforward and involves difficult policy choices. Affording greater protection to unpaid wages comes at a cost either: to other creditors, if employees are given priority over such creditors; or to employees, employers or taxpayers if a fund is created (depending on how the fund is financed) to satisfy employee claims. Enhanced wage earner protection may also adversely affect the ability of businesses to obtain credit, especially if wage claims are given priority over secured creditors.
These concerns can be compounded by the difficulty in ascertaining the dimensions of the unpaid wage problem. Although statistics on the number of business bankruptcies are readily available, it can be difficult to determine the value of unpaid wages and the extent to which these claims have been satisfied. It is also worth noting that the significance of the problem can change at various stages of the business cycle. Business bankruptcies tend to increase when the economy weakens, and decrease when the business cycle is in an upswing.
Under the Bankruptcy and Insolvency Act (BIA),(1) creditors are classified as follows: secured creditors, preferred creditors, ordinary creditors and deferred creditors. These classifications determine where creditors rank in relation to their claims against the bankrupt debtors assets.
Secured creditors rank first because a trustee in bankruptcy takes title to a debtors property subject to the rights of secured creditors in that property. For example, a mortgagee would have first claim on real estate for the unpaid value of a mortgage before any other unpaid creditors could make a claim against that asset.
After secured creditors come the claims of preferred creditors, ordinary creditors and deferred creditors, in that order. Preferred creditor claims must be satisfied before those of ordinary creditors, and claims of ordinary creditors must be dealt with before deferred creditors are entitled to share in the bankrupt debtors assets.
The BIA also ranks claims within the class of preferred creditors, with each sub-class of preferred creditor having priority over the subsequent sub-class. Section 136(1) of the BIA establishes the following order for preferred claims:
Thus, unpaid wages to a maximum of $2,000 and salespersons expenses up to $1,000 currently rank fourth among preferred creditors behind funeral expenses, bankruptcy trustee fees and the levy charged by the Superintendent of Bankruptcy.
The Bank Act(2) also establishes a form of priority for unpaid wage claims. Under section 427(7) of the Bank Act, claims for wages earned within three months prior to a bankruptcy have priority over a security interest taken by a bank under that section. But this section is relatively ineffective in protecting wage claims against bank claims because banks also take security under provincial personal property security legislation, thereby avoiding the wage priority.
Unpaid wages may also receive protection under provincial laws that establish a priority for wage claims over other creditors. And, in addition, provincial laws may give priority to unpaid wage claims through legal mechanisms such as statutory security interests and deemed trusts. These provincially established priorities, however, do not apply in a bankruptcy.(3)
The directors liability provisions of federal and provincial corporations laws also provide a measure of protection for unpaid wage claims. Under the Canada Business Corporations Act (CBCA), for example, directors are liable to employees for up to six months unpaid wages, subject to a due diligence defence. Section 119(1) of the CBCA provides that directors are jointly and severally liable to corporate employees for all debts to a maximum of six months wages for services performed by employees for the corporation. A director, however, will not be liable for wages unless:
In addition, liability for wages will only ensue if the director is sued while he or she holds office or within two years after ceasing to be a director.
Directors are entitled to rely on subsection 123(4) of the CBCA to exonerate themselves from liability for unpaid wages if they have acted with reasonable diligence, including reliance in good faith on the corporations financial statements or the report of a professional such as an appraiser or lawyer.(4)
Employment standards laws may also impose liability on corporate directors for unpaid wages. The Canada Labour Code provides that directors are jointly and severally liable for wages as well as termination and severance pay, to a maximum amount not exceeding the value of six months wages.(5) Provincial employment standards laws may create similar liabilities.
Proposals to amend the Bankruptcy Act to introduce a greater measure of protection for unpaid wages in employer bankruptcies were first introduced in the 1970s. Bill C-60, introduced in 1975, had proposed super priority status for unpaid wage claims up to $2,000. This would have placed claims for unpaid wages ahead of all other creditors, including secured creditors. Secured creditors, of course, objected to the proposal as a potentially serious dilution of their protected status. After studying the bill, the Standing Senate Committee on Banking, Trade and Commerce concluded that super priority status for wages would be detrimental to a borrowers ability to obtain financing, especially in labour-intensive industries. Instead, the Committee recommended the creation of a government wage protection fund, made up of contributions from employers and employees, out of which outstanding wages to a maximum of $2,000 could be paid immediately after an employer bankruptcy. Bill C-60 was never enacted.
In 1980, the then Minister of Consumer and Corporate Affairs appointed a small task force of bankruptcy experts to investigate the problem of unpaid wages. The Landry Committee reported in 1981 that it was unable to determine the magnitude of the problem in view of the scarcity and incompleteness of reliable data on the number and value of unpaid wage earner claims; however, the evidence they were able to collect did verify the existence of a problem. The Committees recommended course of action was a wage earner protection scheme. Believing that a permanent legislative solution could not be devised until the size of the problem had been determined and until federal and provincial policies had been coordinated, the Committee proposed an interim solution for a three-year period during which unpaid wages would be paid from the Consolidated Revenue Fund up to a maximum of $1,000.
The Landry Committees recommendations were not accepted. In 1984, a bankruptcy bill (Bill C-17) maintained largely the same scheme preferred creditor status for protecting wage earners as had been included in a number of previous attempts to amend the then Bankruptcy Act. Amendments to Bill C-17 introduced at Committee stage, however, gave unpaid wage claims to a maximum of $4,000 super priority status over all other creditors. Bill C-17 suffered the same fate as its predecessor bankruptcy bills and was not enacted.(7)
In March 1985, an Advisory Committee on Bankruptcy and Insolvency (the Colter Committee) was appointed to examine the bankruptcy system, assess possible reforms, and recommend amendments. Reporting in 1986, the Colter Committee made a number of recommendations regarding wage earner protection.
The Colter Committee called for the creation of a wage earner protection fund financed by contributions from employers and employees to pay wage arrears on an employers bankruptcy or receivership. Under the Committees proposal, employees would be entitled to be paid:
The Committee recommended that the Unemployment Insurance Section of the Department of Employment and Immigration administer the fund. Any amounts paid out by the fund would be subrogated as preferred status claims under the Bankruptcy Act, ranking immediately after the costs of administration.
Bankruptcy reform proposals announced by the then Department of Consumer and Corporate Affairs in June 1988 differed from the recommendations of the Colter Committee in two important respects. First, the wage protection program was to be financed entirely by the federal government rather than by employer and employee contributions. Second, the Superintendent of Bankruptcy rather than the Unemployment Insurance Section of Employment and Immigration would administer the fund. The Department, however, accepted the Colter Reports recommendation on monetary limits. The fund was to guarantee 90% of unpaid wages and vacation pay earned in the six months prior to bankruptcy to a maximum of $2,000, and up to $1,000 for arrears of expenses incurred on behalf of an employer.
The next bankruptcy bill, Bill C-22, as introduced at First Reading in June 1991, would have established a wage earner protection fund pursuant to a new statute, the Wage Claim Payment Act (WCP Act). But unlike the reform proposals announced in 1988, Bill C-22s proposed scheme was to be financed by contributions from employers. From this fund, employees could claim 90% of their unpaid wages and vacation pay earned within six months prior to their employers bankruptcy, up to a maximum of $2,000 and 90% of salespersons' expenses unpaid during the same period, up to a maximum of $1,000. Pension contributions, severance pay and termination pay would not have been included. The Superintendent of Bankruptcy would have administered the program, and benefits would have been paid out of the Consolidated Revenue Fund.
The fund was to be financed by a payroll tax on employers equal to 0.024% of an employees weekly insurable earnings under the then Unemployment Insurance Act. The tax was to be imposed as of 1 January 1992 and collected jointly with the unemployment insurance program.
The concept of a wage protection fund was generally well received, but the method of financing the fund was not. Business along with institutions such as municipalities, hospitals and school boards, whose employees would likely never benefit from the fund, opposed a payroll tax. In its pre-study report on Bill C-22, the House of Commons Standing Committee on Consumer and Corporate Affairs and Government Operations rejected the concept of a wage protection fund and recommended that workers claims for unpaid wages up to a maximum of $3,000 be given priority over the claims of all other creditors, in the event of an employers bankruptcy, liquidation or receivership and that a fund be established to cover any shortfall.
During clause-by-clause consideration of the bill in late 1991, the Government proposed that the WCP Act be amended to defer the imposition of the tax for a period of one year and to allow the Governor in Council to adjust the percentage of the payroll tax to cover the payment of benefits under the program.
After procedural concerns in the Standing Committee, the Government reconsidered its position on the WCP Act and, in May 1992, the Minister of Consumer and Corporate Affairs announced that it would be withdrawn.
Amendments to the existing preferred creditor provisions were passed and came into force on 30 November 1992. Thus, the current provisions of the Bankruptcy and Insolvency Act maintain preferred creditor status for unpaid wage claims and salespersons expenses where an employer is bankrupt to a maximum of $2,000 for wages and $1,000 for salespersons expenses. Where an insolvent employer makes a proposal to reorganize his or her business, unpaid wages and salespersons expenses to these maximum amounts are paid immediately after court approval of the proposal.
When Bill C-22 received Royal Assent on 23 June 1992, the Minister of Consumer and Corporate Affairs announced that the matter of wage claims would be reconsidered by a special Joint Committee of the House of Commons and the Senate, which would report by the summer of 1993. This Committee was never established.
Further amendments to the Bankruptcy and Insolvency Act in 1997 (Bill C-5) made no changes to the overall amount or status of wage claims. The bill, however, allowed a representative of a federal or provincial ministry of labour or a union to file a proof of claim on behalf of all employees.
Over the years, numerous private Members bills aimed at enhancing the protection afforded to employee wage claims have been tabled in the House of Commons. The most recent of these is Bill C-423, tabled by Mr. Pat Martin (Winnipeg Centre) on 29 January 2002. Bill C-423 would replace preferred creditor status for wage claims with super priority status that would rank unpaid wages and other benefits up to $10,000 earned six months before an employers bankruptcy and salespersons expenses up to $4,000 for that same period ahead of all other creditors, including secured creditors.(8)
There are several approaches to protecting unpaid wages and employee entitlements in the case of an employers bankruptcy. This paper examines four options:
The concept of granting a super priority for unpaid wages has a number of variations. A full super priority places unpaid wages and/or other employee entitlements ahead of all other claims, including the claims of secured creditors, in the distribution of a bankrupt employers assets.
Proponents of full super priority have long maintained that there is no public policy reason why employees should rank behind secured creditors. They note that employees are often the most vulnerable creditors. Unable to protect themselves when their employer is in a precarious financial situation, employees do not have the ability or the opportunity to assess the financial risks of being involved with their employer or the same capacity as secured creditors to absorb a loss.
Critics of the full super priority approach point out that it does not necessarily guarantee that employees will recover the wages owed to them. The amount received depends on the value of the available assets. If the assets are insufficient to meet the outstanding wage claims, employees will have to settle for less than the full amount of their claim. Opponents further maintain that a super priority can have an adverse effect on the ability of businesses, particularly labour-intensive industries, to obtain credit. Bank lending policies would most likely become more restrictive and the cost of credit would rise if lenders were to lose their priority status. It has also been suggested that full super priority could make the administration of bankruptcies more costly because trustees would be required to do more work and incur additional expenses.
Critics also question why employees deserve special protection when unsecured trade creditors, most often small business owners, can be put in an equally tenuous position by a customers bankruptcy.
Unlike full super priority, a modified super priority grants priority over some but not all of a bankrupt employers assets. One suggested approach is to give unpaid wages first priority over an employers current assets such as cash, short-term investments, inventory and accounts receivable.(9) This form of modified super priority would provide less protection than full super priority but would not affect the priority status of lenders with security on fixed assets.
Industry Canadas Corporate Law Policy Directorate has assessed this modified form of super priority against fairness and efficiency criteria. The Directorate points out that although this approach would provide more protection than the current preferred creditor regime, it would also place a greater burden on working capital lenders that might lead to credit restrictions as well as reduced economic activity in certain business sectors. A study assessing the economic impacts of a super priority scheme for unpaid wage earners concluded the following:
In addition to concerns about the impact on credit, delays in paying workers due to the time involved in realizing the employers assets could make this form of super priority less attractive to workers than other options such as a wage guarantee program.(11)
In terms of efficiency, the Corporate Law Policy Directorate points out that
Yet another form of modified super priority would give employee wage claims priority over all employer assets except those subject to purchase money security interests (PMSIs). A PMSI gives a seller or a third-party lender who finances the purchase of a particular asset a security interest in sold property.(13)
Again, assessing this modified form of super priority against fairness and efficiency criteria, Industry Canadas Corporate Law Policy Directorate observes that a priority which excludes assets covered by purchase money security interests would provide better protection than a current assets priority system, particularly where employers have little in the way of current assets. But, like other forms of super priority, it could also lead to possible credit restrictions and loss of employment and would be less certain and prompt in terms of payment.(14)
As for efficiency, the Directorate suggests that
Wage guarantee schemes ensure that employees will receive unpaid wages and, in some cases, other entitlements on an employers bankruptcy. These schemes can take a number of forms, but the most common involve funding by government either from general tax revenues or by employers and/or employees through a payroll tax. Recognizing that employee wages and entitlements can often amount to significant sums of money, these schemes generally do not provide full payment of all entitlements but rather seek to guarantee a reasonable level of protection. Determining what is reasonable, however, can be problematic when competing interests must be balanced.
To date, despite numerous reports recommending the creation of a wage guarantee scheme to protect unpaid employees, efforts to establish a wage guarantee program under federal bankruptcy legislation have failed. However, such programs have existed and continue to operate at the provincial level. Ontario(16) and Manitoba had established government-funded wage guarantee schemes, but these were terminated in the 1990s. New Brunswicks Employment Standards Act,(17) however, continues to provide employees with a mechanism to claim unpaid wages, vacation pay, public holiday pay and pay in lieu of notice from public funds. Employees apply to the Minister of Training, Employment and Development who, if satisfied that money is owed to employees after reasonable collection efforts have been undertaken, can pay employees from funds appropriated to satisfy the claims. Upon payment, the Minister is subrogated to the rights of the employees, can require the employer in question to reimburse the government, and may register a certificate for the amount owing as a court judgement against the employer.
Wage guarantee schemes operate in a number of countries. To illustrate the varying nature of such schemes, this section examines Australias recently developed wage protection program as well as the United Kingdoms wage guarantee regime.
In 1999 and early 2000, two high-profile corporate insolvencies Oakdale Collieries Pty Ltd. and National Textiles left employees with millions of dollars in unpaid employee entitlements. The Oakdale Collieries situation was settled by the passage of specific legislation, after which the Commonwealth government issued a discussion paper in which it outlined two options for protecting employee wages and entitlements in the event of a corporate insolvency. The National Textiles employees received payment from the Employee Entitlements Support Scheme, a program based on one of the options described in the discussion paper entitled The Protection of Employee Entitlements in the Event of Employer Insolvency.(18) Issued in August 1999 by the Hon Peter Reith, Minister of Employment, Workplace Relations and Small Business, the paper set out two options for protecting employee entitlements:
The proposed limits on entitlements available under either the insurance or basic payments scheme would be equivalent to 29 weeks of pay, and would be composed of up to:
The maximum rate of payment for each week of entitlements would be based on a weekly pay rate corresponding to an annual salary of $40,000; the total amount an employee could receive would be capped at $20,000.(19)
Under the basic payments scheme, the government would guarantee employees a portion of their lost wages and entitlements in the event of an employers insolvency. The Commonwealth and State/Territory governments would each contribute 50% of the funding for the scheme with the State/Territory portion coming from a payroll tax from which small business would be excluded. State/Territory participation in the scheme would be optional, however. If a State or Territory did not join, the Commonwealth governments portion of the scheme would still operate in that jurisdiction but the maximum level of compensation available to employees would be 50% of the benefits otherwise available.(20)
The annual cost of the scheme to all levels of government was estimated at $100 million.(21)
The second option a compulsory insurance scheme would involve the introduction of a national program covering all private-sector employees. Businesses with more than 20 employees would be required to take out compulsory insurance to protect their employees entitlements. The Commonwealth and State/Territory governments would jointly fund direct payments to protect the entitlements of employees of small businesses (those with fewer than 20 employees).(22)
The compulsory insurance scheme was the most highly criticized of the two options. Critics argued that the insurance premiums would represent a significant additional cost for business, and some questioned whether the Commonwealth government had the constitutional authority to enact legislation in this area.(23)
In 2000, the Commonwealth government adopted the national basic payments option and established the Employee Entitlements Support Scheme (EESS) under an administrative arrangement within the Department of Employment, Workplace Relations and Small Business.(24) At the outset, no State or Territory supported the EESS, but two eventually agreed to participate.(25)
In the wake of the collapse of Ansett Airlines in September 2001, the Commonwealth government conducted another review of employee entitlements in bankruptcy and announced a four-pronged strategy that would involve measures to address the Ansett situation specifically as well as employee entitlements generally.
The strategy includes:
1. Creating a new government-funded employee entitlements scheme, to meet the anticipated costs of Ansett staff terminations;
2. Imposing an airline ticket surcharge of $10.00 to cover the costs of the Ansett terminations;
3. Giving wage earners priority over the secured creditors of a bankrupt business;
4. Replacing the EESS with a General Employee Entitlements Redundancy Scheme.(26)
The General Employee Entitlements Redundancy Scheme (GEERS) replaced the EESS in relation to insolvencies occurring on or after 12 September 2001. The GEERS pays:
The practice of reducing entitlements under EESS by 50% (due to non-participation of States/Territories) has been terminated under GEERS. The previous payout cap of $20,000 has been removed and the $40,000 annual salary threshold for determining weekly payments has been replaced by a threshold of $75,200.
The United Kingdom has two parallel tracks for protecting employee entitlements in the event of an employer insolvency. First, employees are preferred creditors in relation to certain entitlements under the Insolvency Act 1986. As preferred creditors, employee claims for wages and annual leave have a priority over debts secured by a floating charge, but rank below debts secured by a fixed charge and certain other debts such as expenses arising from liquidation or receivership. Preferred creditor status applies to employees remuneration during the four months prior to the employers bankruptcy to a maximum amount (£800) and accrued annual leave due on termination of employment.
Second, a redundancy(29) payments regime provides for the payment of outstanding employee entitlements from the National Insurance Fund as provided under the Employment Rights Act 1996.(30) These insolvency provisions, which ensure that employees can recover amounts owed to them within a reasonable time, implement the UKs obligations under European Community Directive 80/987/EEC.(31)
If an employer becomes insolvent, employees can apply to the Fund for the payment of outstanding entitlements upon termination. Entitlements claimed through the redundancy payments regime include up to eight weeks unpaid wages, statutory payments for time off work including leave on medical or maternity grounds, any protective award,(32) up to six weeks unused annual leave, up to 12 weeks pay in lieu of notice, compensation awards for unfair dismissal, and redundancy payments up to 30 weeks. For 2002, the maximum weekly payment is set at £250 per employee.(33)
The government assumes all the rights and remedies of the employee with respect to payments made from the Fund and stands in the employees place as a preferred creditor in relation to a debt that has preferred status under the Insolvency Act 1986.
The National Insurance Fund is mainly funded by employers and employees through National Insurance Contributions. Treasury Grants from general taxation are made when needed.
Perhaps the most significant advantage of wage guarantee schemes is the high degree of protection they provide to employees on an employer bankruptcy; payment is certain, and generally more timely than payments under the bankruptcy distribution process.
The most notable concerns, however, relate to:
Weighing these advantages against these concerns involves a complex balancing of interests that can be difficult to achieve.
A common approach under provincial legislation to protecting employees when employers fail to pay wages and other employee entitlements is to create a statutory security interest in the debtor employers assets for the amounts owed. These security interests take priority over most other types of security, rights or interests in the employers property.
The Saskatchewan Labour Standards Act, for example, provides as follows:
In addition to granting deemed security interests for employee wages and other entitlements, provincial laws often deem such wages and entitlements to be held in trust by the employer for the employee.
In Manitoba, for example, The Employment Standards Code makes the following provision:
Deemed security interests and deemed trusts established under provincial law apply when an employer is not bankrupt, but do not operate in a bankruptcy. When an employer is bankrupt, the provisions of the Bankruptcy and Insolvency Act take precedence and employees wage claims are relegated to preferred creditor status. Professor Ronald Cuming described the relationship between provincial and federal law in this area in a paper prepared for Industry Canadas Corporate Law Policy Directorate:
One option for providing increased protection to employees wage claims would be to amend the BIA to recognize provincial statutory security interests and deemed trusts.
In assessing this option, Industry Canadas Corporate Law Policy Directorate notes that recognizing deemed trusts under the BIA would provide protection comparable to partial super priority models, but this protection would vary among the provinces because provincial legislation is not uniform.(37)
The Directorate observes that this option could have the effect of restricting credit and raising borrowing costs, but it would also remove the incentive for secured creditors to force a bankruptcy in order to defeat provincially created priorities.(38)
As mentioned earlier, the current provisions of the Bankruptcy and Insolvency Act confer preferred creditor status on unpaid wage claims and salespersons expenses to a maximum of $2,000 for wages and $1,000 for salespersons expenses in an employer bankruptcy.
Indeed, the bankruptcy laws of a number of countries provide preferred creditor status for unpaid employee claims, although the amount and type of employee entitlements to which preferred creditor status applies vary from country to country. In New Zealand, for example, employees can claim preferred creditor status for four months outstanding wages and holiday pay to a limit of $NZ1,500 or otherwise established by regulation. Arrears above this limit rank as ordinary claims.(39)
In the United States, employees claims for unpaid wages, salaries or commissions including vacation, severance and sick leave pay earned within 90 days before an employers bankruptcy up to a maximum of $4,300 are given preferred status and rank third on the list of preferred creditors. The same ranking applies to sales commissions not exceeding $4,300 earned 12 months prior to bankruptcy.(40) As well, U.S. bankruptcy law recognizes state-created statutory security interests relating to unpaid wages.(41)
Overall, preferred creditor status for unpaid wage claims would appear to offer limited protection to employees. This narrow protection has long been acknowledged by Canadian policy-makers and legislators in numerous, albeit unsuccessful, efforts to enhance employee wage protection.
There are a number of approaches to protecting employee wages and entitlements when employers go bankrupt. Many of these approaches have been explored over the past three decades in the course of various attempts to amend federal bankruptcy law in Canada.
Wage guarantee schemes offer employees the greatest certainty in terms of the amount paid and timeliness of payment. At the same time, however, it is important to recognize that such schemes typically cap the amount an employee can recover in order to manage program costs. In the end, such schemes must strike a balance among the following elements: ensuring payment, paying a fair and reasonable amount, and controlling costs.
Perhaps the greatest obstacles to implementing a wage guarantee scheme are the costs involved and the determination of who will pay those costs. Someone has to fund the program, whether it is taxpayers, employers, employees or some combination of these, and a wage guarantee program can be expensive, particularly in an economic downturn. In an era of considerable public distaste for funding new programs through existing tax dollars or levying additional taxes, and when business and workers alike frown upon incurring additional costs, there may be little public appetite for legislating a wage protection scheme.
Another concern is the potential for abuse by employers who might avoid paying employees because they know a wage guarantee scheme is in place.
The current preferred creditor ranking for unpaid wages under the Bankruptcy and Insolvency Act offers limited protection for unpaid wages but does not burden taxpayers with program costs. Except for changes in the dollar value of unpaid wages eligible for preferred status, this ranking has been the norm for decades. As evidenced by the many proposals for change that have been put forward over the past 30 years, the level of protection afforded by preferred creditor status has long been considered worthy of improvement.
Proposals to alter the BIAs statutory distribution scheme to place unpaid wage claims ahead of the claims of other creditors have been part of past bankruptcy law reform proposals. From the employees perspective, full super priority (or some modified form of super priority over certain assets) would appear to offer the best level of protection after a wage guarantee scheme. However, granting a super priority to unpaid wages and other employee entitlements would affect the priority position of secured creditors and likely increase the cost and/or reduce the availability of credit. Indeed, past attempts to introduce a super priority were strongly opposed by credit grantors and businesses alike for these very reasons and, as was recently suggested, there would appear to be no evidence that this opposition has weakened.(42)
(1) R.S.C. 1985, c. B-3, as amended.
(2) Statutes of Canada, 1991, c. 46, as amended.
(5) R.S.C. 1985, c. L-2, as amended, s. 251.18.
(7) Statutory Priorities in Business Insolvencies (2001), p. 10.
(8) Bill C-423, An Act to amend the Bankruptcy and Insolvency Act, First Reading, 29 January 2002.
(9) Statutory Priorities in Business Insolvencies (2001), p. 14.
(10) Kevin Davis and Jacob Ziegel, Assessing the Economic Impacts of a New Priority Scheme for Unpaid Wage Earners and Suppliers of Goods and Services, Prepared for Industry Canada, Corporate Law Policy Directorate, 30 April 1998 (published 3 August 2001), p. 58.
(11) Statutory Priorities in Business Insolvencies (2001), p. 14.
(12) Ibid., pp. 14-15.
(13) Ibid., p. 15.
(16) In 1991, Ontario adopted the Employment Standards Amendment Act (Employee Wage Protection Program), 1991 to assist workers in recovering unpaid wages when their employer was bankrupt, insolvent or when the employer did not pay because of other circumstances. Under the Program, unpaid workers could file a complaint with the Employment Standards Branch and, once the validity of the claim was determined, an order to pay limited to a maximum of $5,000 would be issued against the defaulting employer. If the employer failed to pay and did not appeal the order, the claimant was entitled to be reimbursed from the Employee Wage Protection Program. The Employment Standards Branch would then become subrogated to the rights of the employee to recover the unpaid wages and attempt to recover the money paid out from the employer.
(18) Australia, Minister of Employment, Workplace Relations and Small Business, Ministerial Discussion Paper, The Protection of Employee Entitlements in the Event of Employer Insolvency, August 1999 (Ministerial Discussion Paper).
(19) Ibid., p. 7.
(20) Ibid., p. 9.
(22) Ibid., p. 9.
(24) The operational arrangements for the Employee Entitlements Support Scheme are set out on the website of the Department of Employment, Workplace Relations and Small Business.
(26) Ibid., p. 8.
(27) Australia, Department of Employment and Workplace Relations, General Employee Entitlements and Redundancy Scheme Operational Arrangements.
(28) The material in this section is taken largely from Attachment B to the Australian Ministerial Discussion Paper (1999), pp. 15-17.
(29) A redundancy generally means the termination of an employees employment because the job is no longer available.
(30) Employment Rights Act 1996, Statutes 1996, Chapter 18, ss. 182-190.
(31) Under the 1980 European Directive, Member States must provide protection for employees where their employer goes bankrupt by guaranteeing wages and other amounts that employees would have been entitled to if their employer had not become bankrupt.
(32) A protective award is an award made by an industrial tribunal where an employer has failed to inform or consult an employee representative about a collective redundancy.
(35) Continuing Consolidation of the Statutes of Manitoba, Chapter E110, s. 100.
(36) Ronald C.C. Cuming, Enhanced Enforcement of Wage Claims under Canadian Bankruptcy and Receivership Law, Prepared for Industry Canada, Corporate Law Policy Directorate, April 1998 (published 3 August 2000).
(37) Statutory Priorities in Business Insolvencies (2001), p. 16.
(39) Australia, Ministerial Discussion Paper (1999), p. 25.
(40) Ibid., p. 26 and 11 USC 507.
(41) Statutory Priorities in Business Insolvencies (2001), p. 12.