Prioritizing the workers

Quietly, with almost no public attention, a major change to Canada’s bankruptcy and insolvency legislation has come a step closer to reality.

This week, the House of Commons Finance Committee gave clause-by-clause approval to Bill C-228, a private member’s bill that will give company pension plans a super-priority in the case of bankruptcy and insolvency. It means that when a company goes bankrupt or applies for a plan of arrangement under the Companies’ Creditors Arrangement Act (CCAA), pension fund deficits will go to the front of the line, ahead of secured creditors when funds are distributed. In addition, some severance pay will also get a super-priority.

“It’s unprecedented,” said David Bish, a partner at Torys LLP and head of its corporate restructuring and advisory practice. “No other country puts these liabilities in that priority position. Nobody puts that in front of the line.”

Similar versions of the bill have been presented to Parliament since 2004, but always disappeared before passage, as most private bills do. But an unusual coalition of Conservatives, NDP and Bloc Québécois MPs has pressed ahead with C-228 and the minority Liberal government, realizing the bill is likely to pass in any case, has reluctantly agreed to sign on.

The legislation is designed to protect pensions for former employees of companies that end up in insolvency, like Nortel, Eaton’s and Sears. In those cases, there was not enough money left in the pension fund to pay off all their liabilities, and because pension plans are unsecured creditors, pensioners were left to take a painful cut in their retirement income.

Marilyn Gladu, the Ontario Conservative MP who sponsored the bill, said she was outraged when she discovered that a neighbour who had worked 30 years for Sears Canada found herself with only 70% of her pension when the retailer collapsed in 2017.

“In many cases, there’s money paid out to the lawyers in the bankruptcy case, executive bonuses, many things are paid out. But the workers who worked their whole lives are left hanging out to dry,” Gladu said. Overall, the Finance Department says that 50,000 Canadians have been forced to take “haircuts” on their company pensions over the past 15 years in cases involving ten separate companies.

The Bankruptcy Act already provides a series of priorities, including taxes owing; CPP and employment insurance contributions; up to $2,000 in salaries; and recently delivered goods; all of which come ahead of secured creditors and unsecured creditors. Bill C-228 means that pension fund deficits will also get super-priority ahead of the banks. It also requires an annual report on the pension fund solvency to be tabled in the Commons.

While everyone says they want to be fair to pensioners, some lawyers say the bill will lead to unintended consequences that may further weaken the teetering defined-benefit (DB) pension system, make it harder for stressed companies to get funding and raise interest costs. That’s because a pension fund solvency deficit can be huge and, above all, difficult to predict.

“Lenders are never good about risks they can’t quantify,” said Bish. “The  problem for lenders is that there is this enormous liability that ranks ahead of us (in case of bankruptcy) that we can’t determine at the time we make the loan.” And it can take years to figure out. Stelco, the steelmaker, filed under CCAA in 2014 and its pension funds are still being wound up.

“I can’t think of a better way to kill defined benefit plans than through a super-priority,” said Andrea Boctor, chair of pensions and benefits at Osler and an Osler partner, who appeared before the Commons Committee as a representative of the Association of Canadian Pension Management. When the Association canvassed members, 40% said they would wind up their DB plans if C-228 were passed, she said.

Already, DB plans in the private sector are in sharp decline. Twenty years ago, 21% of private sector workers had DB coverage, whereas in 2021, it was just 9%.

Boctor said that there is plenty of sympathy for pensioners caught in bankruptcy. Still, there are other ways to protect them, including the appointment of a special pension insolvency trustee who could manage and merge pension assets.

 “We are worried about throwing the baby with the bath water. The 9% (of private sector workers with DB plans) represent 1.2 million Canadians who, if their DB plans wind up, will not have a retirement pension of the calibre they’re expecting.” MPs are skeptical.

“I don’t believe it will happen,” Gladu said in an interview, noting that when a super-priority for workers’ salaries was legislated in 2005, banks made the same gloom and doom arguments and there were no adverse consequences.

Simon Archer, a partner at Goldblatt Partners and an expert on pensions who works closely with labour unions, also doubts that C-228 will kill pension plans. “I’m not convinced that putting in a super-priority will drive all DB plans out of existence,” Archer told CBA National. “The vast majority of DB plans are bargained for or have a union association,” so their future can only be decided through negotiation.

Archer says the banks only have themselves to blame if the legislation passes. “The banks were just sleeping and not watching,” he said, noting that it’s not an issue that the banks are anxious to be vocal about. “The politics of this are quite sensitive, so being seen to step on pensioners is not good politics. You’re not going to see the banks trash the pensioner bill.”

The bill received clause-by-clause approval after just a few hours of deliberation and some last-minute haggling that resulted in the Liberals coming on board. There will now be a four-year delay before the super-priority comes into effect, instead of the three that the NDP and Bloc wanted. (Others were asking for as much as ten years.) Post-retirement benefits like health care won’t be included in the super-priority, but some severance payments will be.

Gladu said there’s no reason to panic.“People have four years to get their house in order,” she said. “It’s not as if they’re going to go immediately bankrupt. The pensioners will get their money before secured creditors and preferred creditors and unsecured creditors. That’s just for people who worked their whole lives. These are essentially their deferred wages and they deserve to have it.”

Gladu expects the bill to get final approval from the Commons early in 2023 and then go to the Senate, where critics of the bill are likely to seek changes, but Gladu is confident it will pass into law sometime next year.

Bish said that if C-228 becomes law, creditors will adjust their lending and make sure they’re protected. The real losers could end up being struggling companies that will find it harder to get financing and unsecured creditors, who will be less likely to recover their losses.

“There will be consequences. It will impact lending decisions. It will impact companies’ ability to survive through rough patches. It’s going to have implications, and it’s not all positive for labour.”