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Government of Canada Introduces Insolvency and Wage Earner Protection Legislation

OTTAWA, June 03, 2005 -- The Honourable David L. Emerson, Minister of Industry, and the Honourable Joe Fontana, Minister of Labour and Housing, today announced that the Government of Canada has introduced a comprehensive insolvency reform package in Parliament to modernize the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (CCAA), as well as to create the legislative framework for the Wage Earner Protection Program (WEPP), announced May 5, 2005.

Extensive consultations with stakeholders showed a broad consensus that reforms were needed to ensure that Canada's insolvency system better responds to the needs of business, consumers and investors.

"This reform is about better protecting those adversely affected by bankruptcy and about facilitating restructuring as an alternative to bankruptcy to save jobs and keep businesses viable," said Minister Emerson. "Good insolvency law is critical to a fair and efficient marketplace."

The reform package includes changes to personal and corporate bankruptcy rules, as well as to restructuring provisions. Restructuring can preserve employment and can lead to better returns for creditors. The reform updates and improves current provisions in the system, for example, by exempting all RRSPs from seizure in bankruptcy and by reducing the period before student loans can be discharged. Other changes will also help curb the potential for abuse, particularly for individuals with large income tax debts.

The Bill provides significant improvements to the protection of employees, notably introducing the Wage Earner Protection Program Act. This will provide workers with guaranteed payment of wages. Payment will no longer depend upon the amount of assets in their employers' estates. It will also ensure that workers get paid their wages quickly, so that they will get their money when they need it most. It is anticipated that 97 percent of unpaid wage claims would be fully paid under the WEPP.

"The Wage Earner Protection Program will protect workers by providing a guaranteed payment of wages should their employer declare bankruptcy," said Minister Fontana. "Meeting the needs of workers is important to the health, well-being and financial success of all Canadians."

The legislative package is an example of smart regulation in bringing more efficiency and effectiveness to the insolvency process. It will provide greater predictability to the corporate restructuring process under the CCAA and still preserve its flexibility. It will also enhance fairness, which plays a central role in insolvency given the competing interests among creditors, and between debtors and creditors.

"Insolvency has a significant impact on our economy and affects the lives of many Canadians each year," said Minister Emerson. "Our system must be geared toward making our economy stronger and more competitive, as well as dealing with individuals in financial distress in a fair and equitable way."

Information on the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act is available online at http://strategis.ic.gc.ca/cilpd

Information on the Wage Earner Protection Program is available at http://www.hrsdc.gc.ca

For further information, please contact:

Christiane Fox
Office of the Honourable David L. Emerson
Minister of Industry
(613) 995-9001

Peter Graham
Director of Communications
Office of the Minister of Labour and Housing
(819) 953-5646

Media Relations
Industry Canada
(613) 943-2502

Media Relations
Human Resources and Skills Development
Canada
(819) 994-5559

Backgrounder

Government Announces Reform of the
Bankruptcy and Insolvency Act
and the Companies' Creditors Arrangement Act

The Importance of Insolvency Laws Insolvency laws have a significant impact on the economy. Insolvency rules offer some security for investors and lenders in both commercial and consumer borrowing transactions. This, in turn, influences credit market risks, which can affect the cost and availability of credit. In the commercial sphere, the reliability of the insolvency system plays a role in attracting domestic and foreign investment, as well as in promoting entrepreneurship and innovation.

One of the principal considerations in an era of increased globalization and competitiveness is how to make the insolvency process as efficient as possible, while maintaining fairness. In today's economy, the need for the quick redeployment of assets from insolvent businesses to new and profitable ventures is essential. By facilitating corporate restructuring and directing the redeployment of assets to productive use, the insolvency system contributes to our economic competitiveness and performance.

Insolvency laws that govern personal insolvency play an important socioeconomic role. They allow honest, but unfortunate, individuals who experience extremely difficult financial problems to discharge their debts and obtain a fresh start. The bankruptcy system, however, has to provide the right incentives so that it deters potential abuses.

Canada's Insolvency Laws
Canada's insolvency system relies on two main statutes: the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA), each with distinct elements and purposes. The BIA provides a legislative framework to address both personal and corporate insolvency situations. Where a personal or corporate bankruptcy occurs, the Act provides for the liquidation of the bankrupt's assets by a bankruptcy trustee and the distribution of the proceeds in a fair and orderly way among the creditors. Alternatively, the BIA provides a mechanism for insolvent consumer or business debtors to avoid bankruptcy by negotiating arrangements with their creditors to reorganize the debtor's financial affairs. This is referred to as a "proposal" under the Act.

The CCAA provides a legislative framework for the reorganization of insolvent corporate debtors under the Court's supervision. It enables an insolvent company to seek a Court order staying its creditors from taking action against it while it negotiates an arrangement with them for the rescheduling or compromise of its debts. Corporations reorganizing under the CCAA must have more than $5 million in debt. While these reorganizations can proceed either under the BIA or the CCAA, the CCAA process is largely Court-driven, which allows judges a high degree of flexibility in determining how best to deal with the specific cases before them.

Insolvency Trends
Consumer bankruptcies have significantly increased over the past few decades, from 1500 in 1967 to some 84 500 cases in 2004. Many factors have contributed to this upward trend: changes in consumer lending practices; higher level of personal indebtedness; importance of non-economic factors; and a more tolerant attitude toward bankruptcy. However, since 1998, the average annual growth in consumer bankruptcies has decreased to approximately 2 percent per year compared to 12 percent in the preceding three decades. During the same period, consumer proposals have more than doubled and now represent 16 percent of all filings compared to less than 8 percent in 1998.

BIA Consumer Insolvencies
2004

	Filings	Liabilities (in $ millions)	Assets (in $ millions)
Bankruptcies	84,426	$4,754.3	$2,020.5
Proposals	15,551	$930.8	$752.0
Total Filings	99,977	$5,685.1	$2,722.5

Business bankruptcies under the BIA have been decreasing since 1996 when more than 14 200 businesses declared bankruptcy. In 2004, the number of business bankruptcies stood at 8128, and was divided between corporate bankruptcies (approximately 2000) and individual business bankruptcies (approximately 6000), while another 2835 cases proceeded through proposals. Business insolvencies under the BIA involve more than $1.5 billion in assets and $5.4 billion in liabilities each year.

BIA Business Insolvencies
2004

	Filings	Liabilities (in $ millions)	Assets (in $ millions)
Bankruptcies	8,128	$3,055.0	$792.6
Proposals	2,835	$2,316.5	$730.1
Total Filings	10,963	$5,371.5	$1,522.7

The use of the CCAA has greatly expanded over the past decade, now estimated to be more than 50 cases per year. Most large corporate insolvencies are handled via the CCAA. Recent example of proceedings under the CCA include Air Canada, AT&T Canada, Doman Industries, Ivaco, TeleGlobe, the Ottawa Senators and 360networks. Accordingly, in dollar terms, the economic significance of individual CCAA cases sometimes exceeds $1 billion in liabilities. There are, however, no detailed statistics pertaining to CCAA cases.

Review and Consultations
Reforms to Canada's insolvency system were made in 1992 and 1997. With the passage of the 1997 reforms, Parliament enacted a five-year statutory review clause for both the BIA and CCAA. As part of this review process, cross-country consultations were undertaken in 2001 and 2002 to identify issues and options to further reform the BIA and the CCAA. Comments and contributions were received from small and large businesses, academics, lawyers, judges, financial institutions, the credit industry, labour, and various federal and provincial government agencies. This process culminated in the Report on the Operation and Administration of the BIA and CCAA being submitted to Parliament in late 2002. In a parallel process, the Office of the Superintendent of Bankruptcy appointed a Personal Insolvency Task Force, with membership from various insolvency stakeholder groups, to study issues related to consumer bankruptcies. In 2003, the Senate Committee on Banking, Trade and Commerce conducted public hearings, received more than
40 submissions and prepared a comprehensive report, entitled Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. The report, published in November 2003, contained detailed recommendations for changes to Canada's insolvency system. Throughout these processes, stakeholders from a broad spectrum of interests (insolvency practitioners, representatives of financial institutions, the legal community, labour and business groups, consumer associations and members of the academic community) have been actively engaged and expressed strong support for a comprehensive insolvency reform. As a consequence of the five-year review, the government is proposing a number of reforms to the BIA and the CCAA.

Key Features
The present insolvency reform package has four main objectives. First, restructuring of viable, but financially troubled, companies will continue to be encouraged as an alternative to bankruptcy, as it saves jobs and produces better results for creditors. The use of the CCAA has greatly expanded in recent years, but there are concerns that the system is prone to uncertainty. The reforms will increase statutory guidance for the CCAA, providing increased predictability and consistency, while preserving flexibility.

Second, the reforms will better protect workers' claims for unpaid wages and vacation pay in insolvency situations. The amendments introduce the legislative framework for the Wage Earner Protection Program (WEPP), which will provide assurances to workers that they will receive compensation for their claims should their employer go bankrupt. Other changes are also proposed to the BIA and CCAA to improve the protection of workers' rights in bankruptcy and reorganization proceedings.

Third, the reforms will make the bankruptcy system fairer and reduce abuse. Bankruptcy law is about sharing the burden. Indeed, fairness is key to managing competing interests amongst creditors, and between debtors and creditors. Inequities in the treatment of personal bankruptcies will be addressed and the scope for abuse will be curbed, while respecting the fundamental objective of providing a fresh start to the honest, but unfortunate, debtor.

Fourth, the reforms will improve the administration of the system. Several provisions in both the BIA and CCAA will be clarified and modernized, resulting in a more efficient and streamlined insolvency system.

Commercial Issues
Unpaid Wages: Claims for unpaid wages and vacation pay in bankruptcy situations will be given a higher priority, above secured creditors. Workers' claims will now have a charge over the current assets (i.e. cash, inventories and accounts receivables) of the bankrupt employer, up to a maximum of $2000. The protection will also be made applicable to receivership and restructuring under both the BIA and CCAA. This new measure is designed to work in tandem with the WEPP.

Wage Earner Protection Program: The WEPP will be established under the responsibility of the Minister of Labour and Housing to compensate individuals for amounts earned, but not paid, during the six months preceding the bankruptcy or receivership of their employers under the BIA. The WEPP will help protect workers by providing a guaranteed payment of wages owed up to $3000 should their employer declare bankruptcy. These payments will be subject to income tax and take into consideration other appropriate contributions. The WEPP recognizes that the present insolvency system lacks an effective mechanism to provide prompt and certain payment of unpaid wages and vacation pay in bankruptcy or receivership situations. No longer will workers' claims depend solely upon the asset value of their bankrupt employers' estates. Where a worker's claim is paid by the WEPP, the worker is required to assign their rights under the BIA to the Crown for amounts paid out under the program.

Pension Protection: Regular pension plan contributions by employees and their employers that are unremitted at the time of bankruptcy or receivership will have priority status, ranking above secured creditors. Moreover, in both the BIA and CCAA, no restructuring proposal or plan can be approved by the Court unless it provides for the payment of outstanding unremitted pension plan contributions and ongoing employer pension plan contributions explicitly protected in the BIA and CCAA, without detracting from protection under pension legislation.

Labour Contracts: The amendments specify that a debtor company can seek a Court order authorizing it to serve a "notice to bargain" on the bargaining agent representing its employees, which would trigger a renegotiation of the collective agreement under the applicable labour legislation. In these circumstances, the company has to satisfy the Court that such an order is necessary for a restructuring of the company, that it has made legitimate efforts to renegotiate the collective agreement with the union, and that the failure to do so would lead to irreparable harm to the employer. The debtor company must provide the union with at least five business days notice before it goes to the Court to seek the order. The existing collective agreement will remain in force unless it is changed by agreement between the parties. Where a collective agreement is revised, the bargaining agent may make a claim, as an unsecured creditor, for an amount equal to the value of the concession.

Treatment of Other Contracts: Contracts with a debtor company may be terminated by the debtor. This applies to all contracts except an eligible financial contract, a commercial lease or a collective agreement. Both the BIA and CCAA would allow for a contract to be disclaimed with notice to the co-party to the contract. The co-party can object and ask the Court to determine whether the disclaimer is appropriate in the circumstances. Where a contract is disclaimed, the co-party has a claim for damages as an unsecured creditor. While the courts generally allow for the disclaimer of contracts, these new rules add consistency and predictability to the process. They also provide some recourse for the
co-party for the value of the disclaimed contract. The amendments also provide for the assignment, under the Court's supervision, of certain contracts to a third party.

Interim Financing: The reforms expressly provide that the Court may authorize interim financing to the debtor company during the restructuring process with a priority ranking ahead of existing secure lenders. In exercising its discretion, the Court has to consider certain factors before authorizing interim financing (e.g. trustworthiness and competency of management; whether the debtor has the confidence of major creditors; the expected length of the restructuring period; the interim financing impact on the prospects of a successful reorganization; the nature and value of the insolvent person's assets; and whether any creditors will be materially prejudiced during the proceedings as a result of the continued operations of the insolvent person). Troubled companies often require interim financing to continue operations. Although interim financing is regularly granted, there are no provisions governing how the financing is authorized, resulting in some uncertainties. These amendments will provide the necessary legislative guidance to ensure predictability.

Regulatory Measures: The Court would have the authority to enforce a stay of proceedings on regulators if the regulators are acting as creditors trying to collect a debt that has accrued prior to filing for bankruptcy protection by the debtor. In addition, the debtor could apply to the Court, with notice to the affected regulator, to obtain a stay against any action of the regulatory body if it is appropriate and is necessary for a viable proposal. This amendment balances the requirement to have debtor companies in reorganization proceedings comply with all applicable laws and regulations, as their solvent competitors would be expected to do, without unduly limiting the prospects of legitimate reorganization attempts.

CCAA Process and Oversight: Companies filing under the CCAA will be required to publish notice of the CCAA proceeding in a newspaper shortly after the process has been initiated. The notice must include information concerning the application as well as contact information for the creditors. In addition, notice of any hearing must be given to each known creditor if their rights as creditors would reasonably be expected to be affected. Furthermore, the monitor must prepare a list of all known creditors of the company, who have a claim against the company in excess of $1000, and make the list publicly available. In addition, a central registry of applications made under the CCAA will be created at the Office of the Superintendent of Bankruptcy. As well, the Superintendent will have oversight powers with respect to monitors appointed to CCAA cases similar to that which currently exists for bankruptcy trustees under the BIA.

Governance: The judge in a restructuring proceeding is given explicit authority to deal with governance issues to foster the possibility of a successful reorganization. This includes the power to remove and replace directors; the ability to grant a priority charge to indemnify directors and officers against obligations or liabilities that may be incurred; and the authority to provide for the payment of costs for assisting the effective participation of interested parties at the proceeding. Claims relating to the purchase of equity interests in the company do not qualify for voting on the proposal or arrangement.

Trustees, Receivers and Monitors: The amendments clarify that trustees and receivers are not personally liable for liabilities outstanding prior to their appointment. Currently, trustees and receivers are sometimes unwilling to act in insolvency files where they may be exposed to liability for outstanding obligations of the debtor. The amendments remove this disincentive and will improve the administration of both the BIA and the CCAA. As well, under the CCAA, monitors will be required to be licensed as a bankruptcy trustee. Auditors will generally not be permitted to act as monitors and the duties of the monitor will be better defined. The amendments also clarify the role and responsibilities of interim receivers, and provide that they can operate across Canada. This avoids the requirement to appoint a separate receiver in each province where a debtor may have assets.

UNCITRAL Model Law: The amendments include new provisions to facilitate cooperation with foreign jurisdictions in international insolvency cases based upon the United Nations Commission on International Trade Law (UNCITRAL) Model Law. The Model Law attempts to promote international cooperation in transborder insolvency in three major ways: by authorizing the courts to coordinate and cooperate with each other; by restricting the scope of local bankruptcy proceedings when foreign proceedings have commenced; and by granting local relief to representatives of foreign proceedings. Canada has been active in the development of the provisions contained in the Model Law. Adopting the Model Law will encourage consistent administration of international insolvencies, and provide an effective mechanism to deal with globalization of economic activity and the increase in insolvencies with international dimensions. The
UNCITRAL Model Law was recently adopted by the United States.

Consumer Issues
High Income Tax Debt: Bankrupt individuals with more than $200 000 in personal income tax debts representing 75 percent or more of their total unsecured liabilities will not be eligible for an automatic discharge. These individuals will have to seek a Court order to be discharged of their debts. They will have to convince the Court that the relief they are seeking is justified on the basis of their efforts to repay their debts, their financial situation when the debt was incurred and their future financial prospects. The Court will be able to fix conditions on the discharge. Specifically, the Court may refuse to discharge these individuals from bankruptcy, suspend their discharge for a period of time, or require the bankrupt to comply with any requirement as the Court may direct. This is meant to be an anti-abuse measure targeting high-income individuals who may strategically use bankruptcy to avoid paying large income tax debts.

Exemption for RRSPs: A wider range of retirement savings products will be exempt from seizure in bankruptcy. Under the current rules, registered pension plans (i.e. employer-sponsored plans) are exempt from seizure on a bankruptcy as are many RRSPs offered through insurance companies. It is proposed that all registered retirement savings plans and registered retirement income funds, as defined in the Income Tax Act, will be exempt from seizure subject to conditions to be prescribed by regulations. These conditions are necessary to ensure fairness and to curb potential for abuse so that bankrupts cannot hide assets from creditors (e.g. RRSP contributions made in the last 12 months prior to bankruptcy will not be exempt from seizure; the seizure exemption only applies if the individual locks in their RRSPs and the total amount exempt will be subject to a maximum cap.

Mandatory Surplus Income Payments: Bankrupts will be required to make surplus income payments to the estate in accordance with directives issued by the Superintendent of Bankruptcy. Trustees will no longer have the discretion to recommend that a bankrupt should pay less of their surplus income than the amount determined according to the Superintendent's directive. First-time bankrupts with surplus income will be required to make payments for nine months. If, at that end of the nine-month period, the surplus remains, the bankrupt will be required to make additional payments for a further 12 months and for a further time as the Court may order. Second-time bankrupts with surplus income will be required to make payments for 24 months. If the surplus income remains after 24 months, the bankrupt will be required to make surplus income payments for a further 12 months and for such further time as the Court may order. The changes are intended to require bankrupts who have the financial ability to make reasonable contributions to their creditors to do so prior to obtaining their discharge.

Automatic Discharge of Second-Time Bankrupts: Second-time bankrupts will be eligible for an automatic discharge after 24 months from the date of bankruptcy. This measure will only apply to those who have completed mandatory counselling and who have made payments of their surplus income to the creditors. Under the current system, debtors who are bankrupt for the second time are not eligible for an automatic discharge. They must appear before the Court to seek a discharge, even when no opposition has been filed. In some areas, lengthy delays for hearing dates are not uncommon and have caused some bankrupts to wait an unduly long time for a discharge hearing.

Student Loans: Student loan debt will be eligible for discharge in bankruptcy if seven years have passed since the former student has terminated his/her studies. Currently, student loan debt can only be discharged after 10 years from the termination of studies. In addition, in cases of undue hardship, a bankrupt may apply to the Court to obtain the discharge of the student loans after five years. For the Court to discharge on hardship grounds, it must be satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties. This amendment complements a variety of programs and services that are available to former students under the Canada Student Loans Program to help them manage their student loan debt when they experience financial difficulty.

Prohibition on Ipso Facto Clauses in Bankruptcy: The amendments place limits on the exercise of "ipso facto" contract clauses in bankruptcy. An ipso facto clause is a contractual term that generally allows a creditor to terminate a contract or a supply of service if an individual enters into proceedings under an insolvency statute. For consumers, the primary concern over ipso facto clauses relates to basic services, such as telephone, gas, electricity and leases. This prohibition exists now in the case of consumer proposals and will be extended to bankruptcy situations.

Professional Conduct
The professional conduct and discipline provisions applicable to trustees in the BIA will be clarified, notably by prescribing a code of ethics, reinforcing investigatory powers of the Superintendent of Bankruptcy and the application of conservatory measures. Trustees acting as monitors under the CCAA will also be made subject to the supervision of the Superintendent of Bankruptcy.

Technical Changes
Several technical amendments will be made to modernize the law and clarify interpretation of the courts in order to ensure its effective application.

____________________________

Insolvency Reform and the Wage Earner Protection Program:
A Proposal to Protect Wage Earners

The reform of bankruptcy and insolvency laws also includes new measures to improve the protection of workers whose employers are bankrupt.

Under current insolvency laws, unpaid workers are left vulnerable when their employers go bankrupt. Unpaid wage claims get paid from the proceeds of the bankrupt employer's estate only after unpaid suppliers of goods; certain Crown claims; the claims of secured creditors; the funeral expenses of a deceased debtor; and the legal and administrative costs of the bankruptcy. As a result, most unpaid workers receive nothing as there are not enough assets to satisfy their claims -- even in part. And those who do receive payment receive only part of their claim. It is estimated that only 13 cents on the dollar is recovered under the present system, in total. In addition, payment of wage claims is made only at the conclusion of bankruptcy proceedings -- a process that can take up to three years.

The comprehensive reform of insolvency legislation will put forward two measures to improve the protection of workers.

First, a Wage Earner Protection Program (WEPP) is being introduced to provide for the payment of unpaid wages and earned vacation pay to employees whose employers become bankrupt or go into receivership under the Bankruptcy and Insolvency Act (BIA). The WEPP will:

provide certain payment of up to $3,000 to workers for unpaid wages and earned but unused vacation pay, so that payment of wages will no longer depend on the amount of assets of the bankrupt employer. (The payment
will be subject to income tax and take into account other appropriate contributions.) It is estimated that this will satisfy 97% of unpaid wage claims in full;
provide prompt payment of wages, so that workers receive payment of their wage claims when they need it most;
be administered by the federal Minister of Labour and Housing,;
be delivered in a seamless manner, by building upon the existing relationships between trustees and receivers, and the Employment Insurance system. Trustees and receivers would inform workers of the program and provide the documents necessary for unpaid workers to apply for payment;
cost an estimated $32 million per year, reaching a maximum of $50 million per year;
be funded from general federal revenues; and
recoup the payment made from the Program (as fully as possible), by taking the place of the worker when assets are distributed through bankruptcy process.

Second, a "limited super priority" will be enacted in the BIA for unpaid wage claims, which will give those claims first priority over bankrupt employers' "current assets" (including cash on hand, accounts receivable and inventory.) The limited super priority will make more assets available to pay unpaid wage claims. It is intended to complement the WEPP. Under the WEPP, government will assume wage earners' claims against the bankrupt employer's estate, and thus be able to recover a portion of its costs by making claims against the employer's estate. It is estimated that the government will recover up to 50 cents on the dollar with the new limited super priority. Any individual who does not qualify for payment from the WEPP will be able to pursue his or her wage claim directly through the bankruptcy process by making claims under the limited super priority and the existing preferred creditor status up to the $2000 cap.

_____________________________

Questions and Answers
An Act to Create the Wage Earner Protection Program Act and to Amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act

Q1. Why do insolvency reform now?

An efficient, well-functioning insolvency system is vital to the economy.
Past reforms in the 1990s left many issues unresolved and new issues have emerged with the marketplace changing rapidly.
It is important that marketplace framework laws, such as insolvency laws, be kept up to date and respond to the needs of the market.

Q2. Who is demanding changes to the insolvency system?

Extensive consultations were conducted and indicated a broad consensus for reform to modernize Canada's insolvency laws.
The proposals reflect the input received from a broad spectrum of stakeholders: insolvency practitioners, representatives of the financial and business communities, labour groups, consumers associations and members of the academic community.
The Senate Committee on Banking, Trade and Commerce also conducted public hearings in 2003 and made a number of recommendations for changes to the law.

Q3. What are the key elements of the reform?

The reform has four main objectives:

I. It will encourage restructuring of viable businesses as an alternative to bankruptcy. In this regard, the Companies' Creditors Arrangement Act (CCAA) will be significantly modified to provide increased predictability while preserving its flexibility.
II. It will improve the protection for workers in bankruptcy. The Bill creates the legislative framework for the Wage Earner Protection Program (WEPP), which will ensure that workers get compensation for their unpaid wages.
III. The Bill is designed to make the insolvency system fairer and to reduce potential for abuse. For instance, the Bill introduces an exemption for RRSPs and lowers the period of discharge for student loans while it tightens the rules for debtors with surplus income and those with high-income tax debts.
IV. The Bill contains a number of technical amendments to improve the administration of the insolvency system.

Q4. Do the proposals follow the recommendations of the Senate Committee?

The work of the Committee was very helpful and provided a solid basis to develop many of the proposals.

Q5. How does the Bill relate to the Private Member Bill C-281?

This Bill proposes a comprehensive reform to Canada's insolvency system.
Bill C-281 only deals with workers claims and would provide for an unlimited super priority for all employee-related claims, including pensions. Because of the potentially very large amounts involved, Bill C-281, if adopted, would adversely affect credit availability and competitiveness, and would have negative impact over time on employment and the continuation of defined benefit pension plans.
The proposed Bill will enhance the protection of employees while minimizing the adverse impact on credit.

Q6. How does the Bill improve the protection for workers in bankruptcy?

The Bill provides the legislative basis for the creation of the WEPP, which will guarantee payments to employees for any unpaid wages and vacation earned, but not paid, up to a maximum of $3000, at the time their employer enters bankruptcy or receivership under the BIA.
With the WEPP, payments of workers' claims will no longer depend on the asset value of the bankrupt employer (less than 20 percent receive payments now) and the payments will be done in a more timely manner.
The BIA is also amended to provide for a super priority (above secured creditors) for unpaid wages applicable to current assets (i.e. cash, accounts receivables and inventories), up to a maximum of $2000.

Q7. Why is there a super priority if there is the WEPP? Can the two measures be combined?

These two measures are intended to work together, but are not cumulative. An employee who has an unpaid wage claim will get paid up to a maximum of $3000 through the WEPP. The government will take the place of the employee in the bankruptcy proceeding to recover amounts payable to the employee. This will ensure an element of cost recovery for the government in making payments under the WEPP.

Q8. Are pension plans and pensioners granted better protection in bankruptcy?

There is very limited scope to deal with pension issues within an insolvency context, especially the issue of unfunded liabilities, which is more appropriately dealt with under the relevant pension regulatory system.
The Bill will, however, contain a new explicit provision to ensure that arrears in regular pension contributions that have not been remitted to the pension plan by the employers constitute a priority charge over all assets (ahead of secured creditors).

Q9. How are the changes going to facilitate restructuring as an alternative to bankruptcy?

Amendments to the CCAA and BIA will provide more guidance to the restructuring process to achieve the necessary degree of predictability and consistency in the application of the law, which is essential to investors, creditors, employees and other interested parties in developing a successful restructuring plan.
In general terms, the Bill introduces rules governing the treatment of interim financing, the termination and assignment of contracts, the possibility of renegotiating collective agreements, as well as procedural improvements to facilitate participation of interested parties during the restructuring.

Q10. Are the changes to the CCAA prompted by what happened in the recent major restructuring cases (e.g. Air Canada or Stelco)?

The CCAA has not been substantially modified since its enactment in the 1930s. Its use has significantly increased over the past decade and concerns have been raised that it lacks predictability.
The changes to the CCAA are designed to provide more statutory guidance to assist the Court in its supervision of the restructuring while still preserving a degree of flexibility in order to take into account the complexities and particularities of major restructuring cases.

Q11. Will the law provide for the reopening of collective agreements?

Yes. The legislation will provide a mechanism that would permit the judge overseeing a reorganization process to authorize the company to seek to renegotiate the collective agreement under the relevant labour legislation. However, the judge cannot impose a new collective agreement.
The existing collective agreement remains in force unless an agreement is reached between the company and its employees.
If there is no agreement to change the collective agreement, it will be up to the creditors to accept or reject the reorganization plan with the existing collective agreement.
If there is agreement to change the collective agreement, any concession made will be considered an unsecured claim in the restructuring process.
The provision of explicit rules in this regard will do away with a major source of uncertainty in a restructuring process, for both the employees and employers.

Q12. Are the proposals in keeping with what is being done in the United States, under Chapter 11?

No. Canadian Corporate restructuring procedures under the CCAA are generally considered by insolvency experts to be faster and cheaper than under U.S. Chapter 11. While many of the new provisions added to the CCAA deal with issues that are also included in the U.S. law, it is generally done in a less prescriptive manner so as to preserve greater flexibility for the Court to exercise discretion on a case-by-case basis.

Q13. Does the Bill propose changes to better protect RRSPs in bankruptcy?

Yes. One of the key objectives of the reform is to correct some inequities in the treatment of personal bankruptcy. Accordingly, a new exemption from seizure will be provided for all RRSPs, in order to eliminate the differential treatment that currently exists depending on the type of RRSP and the individual's province of residence in Canada.

Q14. Does the Bill propose changes to the treatment of student loans?

Yes. Student loans will be eligible for automatic discharge after seven years instead of 10 years. In cases of hardship, the discharge will be able to be granted after five years instead of 10 years.
The reduction in the period of discharge is intended to coincide with the exhaustion of the debt relief measures under the Canada Student Loans Program.

Q15. Does the Bill make it harder for people to declare bankruptcy when they have significant income?

Fairness dictates that people who have the financial capability make efforts to reimburse their creditors.
The Bill provides that individuals with surplus income (i.e. the bankrupt's income is above the low-income cut-off threshold) will be required to pay a portion of their surplus income to their creditors for an additional period of 12 months from the date they are eligible to be discharged from their debts. This will affect approximately 20 percent of the current bankrupts.

Q16. Are there specific measures to prevent individuals from eliminating their tax debts by filing for bankruptcy?

Any individual who has more than $200 000 in income tax debt that represents more than 75 percent of his/her total debts, will no longer be entitled to automatic discharge. He/she will need to apply to the Court for discharge and the Court will be empowered to impose conditions on the discharge (e.g. require a partial payment over a specific length of time).
More than 700 individuals who filed for bankruptcy last year had income tax debts above $200 000. Typically, these individuals are self-employed professionals who earn significant income or have good prospects of earning significant income in the near term.

Q17. Does the government expect that the number of personal bankruptcies will be reduced by the proposed reform?

The number of insolvencies is tied to many factors, including the economic and personal circumstances, employment and interest rates, and level of indebtedness.
There is no optimal number of bankruptcies in any given year. The key is to ensure that the insolvency system is equitable in sharing the burden of bankruptcy, respects the fundamental objective of a fresh start and is responsive to market needs.

Q18. Is the reform going to make it more difficult for individuals to file for bankruptcy?

No. Access to the bankruptcy system will essentially remain the same as it is now. A number of technical amendments will be made to clarify the law and streamline the administration of the system to improve its effectiveness.

Q19. When are these changes expected to take effect?

All the proposed changes to the legislation will be applicable to bankruptcy filed after the entry into force of the Act.
The government will decide the entry into force once Parliament approves the Bill and the Regulations have been developed.

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An Act to Create the Wage Earner Protection Program Act

Questions and Answers

Q1. Why is there a need for a Wage Earner Protection Program

An estimated 10,000 to 15,000 workers annually have unpaid wage claims, when employers go bankrupt.

The current bankruptcy system does not provide adequate protection.

There aren't enough assets to pay wage claims -- workers' wages and vacation pay get paid only after unpaid suppliers of goods have repossessed their goods, certain Crown claims, the claims of secured creditors (i.e. the banks), funeral expenses of deceased debtors, and the legal and administrative costs of the bankruptcy.
Most workers (79%) get no payment of their wage claims and only 13 cents on the dollar is recovered, in total.
And workers receive payment for their wage claims only after lengthy delays due to the bankruptcy process.

So workers are left in a situation in which they suddenly have no income -- they did not receive pay for their work, and they have lost their jobs.

This program will address this unfairness by providing guaranteed payment within a reasonable time period (six to eight weeks after application). Workers will receive the amount they would have received from their employer if there had been no bankruptcy.

Q2. What will the WEPP provide and how will it work?

The Wage Earner Protection Program (WEPP) will protect up to $3,000 of workers' unpaid wage and vacation pay due to a bankruptcy or receivership under the Bankruptcy and Insolvency Act.

It is estimated that 97% of all unpaid wage claims would be satisfied in full, within the $3,000 cap.
Payment will no longer depend on the assets available in the employer's estate.
The WEPP will provide prompt payment of unpaid wages -- so that, in that period of financial crisis workers will get the pay they would otherwise have received.

Government, instead of workers, will assume the risk of receiving only partial payment of owed wages after the lengthy period needed to distribute the assets from the bankruptcy.

In making a wage claim under the WEPP, workers will be required to sign over their claim against the employer to the government so that the government can recover its costs -- as fully as possible -- as a creditor to the employer.

Q3. What is the WEPP likely to cost?

The cost of the Wage Earner Protection Program is estimated to be around $32 million per year, and will be funded from general revenues.

In a year of a dramatic increase in bankruptcies, the cost of the program could reach $50 million

The Government expects to recover up to half of what it pays from the WEPP as a creditor to the employer.

Q4. How does the WEPP target the most vulnerable workers?

The majority of bankruptcies occur in sectors that employ large numbers of workers who are low paid, part-time or in a temporary contract, and who do not have the protection of a union.

Over 60% of bankruptcies occur in the retail, food and accommodation, personal services and small manufacturing sectors.
Seventy percent of bankruptcies occur among businesses with fewer than 10 employees -- which also tend to offer "precarious" conditions of employment.

The cap of $3,000 ensures that "basic" levels of earnings are covered. The $3,000 cap means that the amount eligible under the WEPP would be equivalent to one month average industrial wage for full-time workers, or four weeks' maximum insurable earnings under EI.

The $3,000 cap is sufficient to cover virtually all wage claims due to bankruptcy.

The current average claim is about $1,500.
97% of current wage claims are under $3,000.

Q5. What is super priority, and how is it connected to the Wage Earner Protection Program (WEPP)?

The Wage Earner Protection Program (WEPP) and the limited super priority are meant to work together, but they do not provide cumulative benefits.

When a worker applies for payment from the WEPP, he or she will sign over the claim against the bankrupt employer's estate up to the amount of payment that he or she receives from the WEPP.

The government will then take the place of the worker and make a claim against the bankrupt employer's estate to recoup the payment made from the WEPP as fully as possible, when assets are distributed through bankruptcy process.

Any individual who does not qualify for payment from the WEPP will be able to pursue his or her wage claim directly through the bankruptcy process by making claims under the limited super priority and the existing preferred creditor status.

Under the new "limited super priority", an unpaid worker will receive first priority, up to a $2,000 limit, over the "current" assets of the bankrupt employer -- which includes cash on hand, accounts receivable and inventory.
Furthermore, the unpaid worker will also be able to make claims for any amounts under the $2,000 cap that were not paid out through current assets through the existing preferred creditor status.
This means that there will be more assets available to satisfy unpaid wage claims than under the current system.
With the new limited super priority, combined with the existing preferred creditor status, it is estimated that up to 50 cents on the dollar will be realized for unpaid wage claims in the bankruptcy process (as opposed to 13 cents on the dollar in total, which is recovered under the present system).

The new limited super priority will ensure that:

the WEPP is cost recoverable to the fullest extent possible;
any worker who is not eligible for the WEPP will be able to recover their unpaid wages more fully; and
there is a better balance by placing higher priority on payment of workers' wages without disrupting lending markets or reducing access to credit for new and small businesses.

Q6. Why should taxpayers pay for the WEPP?

In bankruptcies, everyone takes a loss because there are not enough assets to go around. Workers are the most vulnerable parties when their employers go bankrupt -- they can't afford to lose their pay, and they will not have other earnings (like EI benefits or a new job) for some time.

It is the role of government to protect vulnerable people who experience severe losses through no fault of their own, and to provide protection for those who are in a time of great need.

Q7. Do other industrialized countries provide wage protection programs for their citizens?

YES.

Among G7 countries, the UK, Italy, Japan, France and Germany all provide government programs to protect workers whose employers go bankrupt.

Only Canada and the US do not provide such a program.

Q8. Will the WEPP cover severance and termination pay?

NO.

Levels of termination and severance pay vary by jurisdiction. Thus, covering termination and severance pay could lead to inter-provincial inequalities in pay-out levels.

Workers can claim severance and termination through the bankruptcy process and using director liability provisions in labour and corporate laws (where such laws provide).

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Date published: 2005-06-03

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