Employee Claims in Canadian Insolvency Proceedings. September 15, Linc A. Rogers, Blake, Cassels & Graydon, Chicago Office

Transcription

1 Employee Claims in Canadian Insolvency Proceedings September 15, 2006 Linc A. Rogers, Blake, Cassels & Graydon, Chicago Office

2 Background Canada s largest and most complicated restructuring proceedings commenced when Air Canada, the country s flagship carrier, filed for protection from its creditors under the Companies Creditors Arrangement Act 1 ( CCAA ) in April The CCAA is Canada s principal restructuring statute for large corporate debtors and is generally analogous in its effect to Chapter 11 of the US Bankruptcy Code. 2 In the affidavit filed by a senior executive of the debtor in support of its application for protection under the CCAA Air Canada stated, with no sense of irony, that these proceedings were not intended to be another chapter in the war between Air Canada s management and its labour unions. The affidavit continued, however, that Air Canada was functioning on a broken and unsustainable model and in order for the airline to survive significant concessions would be required by its various unions under their respective collective bargaining agreements. In particular, Air Canada noted that it was no longer feasible for it to make the contributions to its employee pension plans in the amounts and on the terms required by its various collective agreements and under governing law. Air Canada identified these obligations as key causes of its financial hardship. It was Air Canada s position that should it be unable to negotiate a compromise with its unions, it would have no choice but to seek the court s approval to reject the collective agreements in the course of the CCAA proceedings. The CCAA makes no provision for the unilateral rejection of collective agreements and federal labour and employment law to which Air Canada is subject expressly prohibits an employer from unilaterally terminating a collective agreement. Nonetheless, Air Canada asserted that the court could authorize the rejection of collective agreements by exercising its inherent jurisdiction that is, the power that is resident in all courts of superior jurisdiction that allows them to administer matters that come before them in a just and efficient manner, notwithstanding the fact that such power has not been conferred on the court by any legislative instrument. Not surprisingly, Air Canada s unions took exception to this proposition and perceived the CCAA proceedings and the court s discretionary power as threats to their collectively bargained rights. 3 The troubled relationship between management and labour in insolvency proceedings was also evident when Canada s largest steel manufacturer, Stelco Inc., filed for protection under the CCAA in January Stelco s largest union did not agree with the debtor s position that the CCAA filing was necessary in order to preserve the business on a long term basis. The union perceived Stelco s actions as a tactical move to force compromises by the union, in particular, with respect to obligations owing by the company to make contributions to employee pension plans. The union, in fact, contested Stelco s right to file under the CCAA on the basis that Stelco was not insolvent. Unlike Chapter 11 which expressly provides for prophylactic filings, the CCAA only permits insolvent debtors to restructure. Prior to the Stelco restructuring, the insolvency of the debtor was determined on a cash flow or balance sheet R.S.C. 1985, c.c-36. Reorganization of insolvent businesses are also possible under the Bankruptcy and Insolvency Act. However, restructurings under this statute are typically used in smaller and less complicated matters. Accordingly, this paper deals with CCAA restructurings only. As discussed below, Air Canada was able to successfully restructure and amend its collective agreements on a consensual basis with its unions, but, not without greatly increasing the level of acrimony that had developed between management and labour.

3 - 2 - basis. In Stelco, the debtor argued that because Stelco was facing a looming liquidity crisis, it should qualify for relief under the CCAA. The court eventually sided with Stelco and held that it was entitled to relief, for among other reasons, because it faced a looming liquidity crisis. 4 However, the posture of the union in contesting the filing was a further demonstration of the suspicion with which organized labour viewed Canada s insolvency regime. Legislators understood that the acrimony between management and organized labour in commercial restructurings had to be alleviated in order for the CCAA to achieve its desired ends. Insolvency reform had been under discussion for some time in Canada when the pro-labour New Democratic Party (the NDP ) (which sat in opposition at the time) put forth a bill proposing changes to Canada s insolvency regime. The NDP wanted to incorporate a number of additional protections for employees of insolvent businesses including granting priority status to a host of employee claims. Eventually, a compromise was reached between the NDP and the then Liberal minority government. The compromise took the form of Bill C-55: An Act to Establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act and to make consequential amendments to other acts ( Bill C-55 ) which was introduced to the Canadian Parliament on June 3, Bill C-55 passed through the legislative process and received Royal Assent the final step before a bill is proclaimed in force on November 3, Following the January 2006 Federal Election, the Liberal minority government was replaced by a Conservative minority government. As of the time of writing Bill C-55 has not yet been proclaimed in force, however, it is expected that only technical amendments will be incorporated and the heart of the Bill providing greater protections for employees of insolvent debtors will remain in tact. The aspects of Bill C-55 which relate to employment and labour matters are discussed below. Wage Earner Protection Program As its title suggests, Bill C-55 establishes the Wage Earner Protection Program (the WEPP ). The purpose of the WEPP is to establish a program to make payments to individuals in respect of wages owed to them by employers who are bankrupt or subject to receivership. A bankrupt company is one that has had a trustee in bankruptcy appointed over its assets in accordance with the liquidation provisions of the Bankruptcy and Insolvency Act ( BIA ). 5 The liquidation provisions of the BIA are generally analogous to Chapter 7 of the US Bankruptcy Code. In the insolvency context, a receiver, receiver and manager or interim receiver (collectively referred to herein as a receiver ) is a third party (usually an accounting firm) appointed over certain or all of the assets of the debtor and is charged with realizing on the assets for the benefit of creditors. A receiver may be appointed by an order of the court or privately appointed without application to court by a secured creditor in accordance with the secured creditor s rights under a security agreement. In the case of a court appointed receiver, the application for the appointment is typically brought by the debtor s senior secured creditor, however, once appointed the receiver is a court officer and has a duty to treat all constituents 4 5 Re Stelco Inc. [Interim Order], [2004] O.J. No (S.C.J.) leave to appeal ref d [2004] O.J. No (C.A.) BIA, R.S.C. 1985, c.b-3

4 - 3 - fairly (including employees). The receiver will typically either (i) shut down the business and liquidate the assets, or (ii) operate the business for a period of time to preserve enterprise value in hopes of selling it on a going concern basis. Under the WEPP, employees who are owed wages that have accrued for the period 6 months prior to the date of bankruptcy or the date on which a receiver was appointed will be entitled to make an application to the federal Minister of Labour and Housing in a prescribed form for payment of the outstanding wages. The maximum amount that may be paid to an eligible individual in respect of any particular bankruptcy or receivership is the greater of $3,000 and an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act, less any deductions applicable under federal or provincial law. The onus is placed on the trustee or receiver to determine the amount of wages owing and inform the employees of the existence of the program. Following payment, pursuant to proposed ss.81.3 and 81.4 of the Bankruptcy and Insolvency Act ( BIA ), the Minster will have a subrogated priority claim for a maximum of $2,000 over the current assets of the debtor. The term current assets is defined as unrestricted cash, or any other asset that, in the normal course of operations, is expected to be converted into cash or consumed in the production of income within one year or within the normal operating cycle when it is longer than a year. Phrases such as unrestricted cash and consumed in the production of income are somewhat imprecise and may require further refinement. The WEPP has been criticized because cash flow lenders that lend against these current assets may wish to take additional reserves to account for the possibility that the government might assert its priority claim of up to C$2,000 for each unpaid employee. These reserves will reduce the amount of capital available to all companies. As a matter of practice, employees of insolvent companies in Canada generally receive their full wages for work completed because the ranking secured creditor rarely asserts its priority to deprive the workers of salaries earned. Thus, critics maintain, in any event, this new protection was unnecessary as there was no real life problem in need of a remedy. Others have noted that since the amendment was consistent with existing commercial practice, this amendment did not raise any new issues for financiers, however, it was still able to provide additional comfort to organized labour and its political supporters. In other words, it was an easy give. Unpaid Pension Contributions Proposed ss.81.5 and 81.6 of the BIA create a priority in bankruptcies and receiverships, respectively, for unpaid pension contributions over all assets of the debtor. Most pension plans in Canada are regulated under provincial law, usually the laws of the province where the company is based. In a few industry sectors such as airlines and telecommunications, the pension plan is subject to federal law. In each case, the basic regulatory framework is similar. The amount that employers are required to contribute to the defined benefit pension plan is based on the most recent actuarial valuation of the plan s assets and liabilities. Additional supplementary special payments are required if the actuarial valuation shows a deficiency in the plan and the pension regulators order that such deficiency be paid into the plan over a specified time period. An employer can be in compliance with its

5 - 4 - required contributions under the relevant statutes but, as a result of poor investment returns and low interest rates, there may be a net deficiency in the plan, creating an unfunded liability. It is this net deficiency which totalled in the billions in the recent Air Canada and Stelco restructurings. To the extent that an employer has failed to make the appropriate regular contributions, the amount of those unpaid contributions shall have priority over all the assets of the company; however, it is not intended that the unfunded liability or the special payments will have a priority claim, as had been initially proposed by the NDP. Proposed s.6(5) of the CCAA provides, in essence, that in a restructuring court approval will not be given to the plan of arrangement or compromise unless it provides for the payment of the same amounts that would otherwise be paid under proposed ss.81.5 or 81.6 in the cases of bankruptcy and receivership. However, Bill C-55 proposes to confirm that the practice of asset liquidations under the CCAA is permissible. In the US, sales of this nature during the course of a restructuring proceeding are conducted pursuant to s.363 of the US Bankruptcy Code and are referred to as liquidating Chapter 11 s. The pension priority does not appear to apply in circumstances where a plan is not submitted to creditors and the assets are simply sold with court approval. It is difficult to understand why there should be a different priority scheme if this mode of realization is used, than there would be if a bankruptcy or receivership is used. Nonetheless, Bill C-55, in its current form, does not cover this contingency. Rejection of Collective Agreements Proposed s.33(1) of the CCAA confirms that collective agreements will remain in force during CCAA cases and will remove any lingering doubt about a debtor s ability to unilaterally reject a union contract. As mentioned above, the question as to whether a collective agreement could be terminated in CCAA proceedings became a controversial issue in the recent Air Canada restructuring. The issue was resolved when the presiding judge, Mr. Justice Farley, ordered mandatory mediation between management and labour which resulted in consensual revisions to the collective agreements. The proposed amendments, in effect, codify Justice Farley s approach by providing that unions can be forced to bargain but the collective agreement itself cannot be revised or terminated unilaterally. Pursuant to proposed s.33(5) of the CCAA if the collective agreement is revised, the union will be entitled to assert a damage claim for the value of the concession in the restructuring proceedings of the debtor company. Critics maintain that this amendment provides unions with undue leverage in restructurings and the debtor should be entitled to relief if it can demonstrate that a successful restructuring cannot be achieved without revising the debtor s collective agreements with its union and good faith negotiations have proven fruitless. This is consistent with the American approach under Chapter 11. For example, in the recent United Airlines restructuring, the US Bankruptcy Court authorized the unilateral termination of the airlines 4 employee pension plans provided for in the collective agreements between United and its unions. In the final analysis, though, Bill C-55 had no reasonable prospect of obtaining broad based political support without confirming the inviolability of collective agreements during CCAA restructurings.

6 - 5 - Successor Employer Liability Canada s labour laws provide that if an employer that is subject to a collective bargaining agreement sells a business, any party that acquires the business remains subject to the terms of the collective agreement and is subject to the obligations and liabilities of the employer under the agreement and the employment and labour legislation governing unionized workplaces. On its face the legislation is worded broadly enough to capture receivers as successor employers appointed by court order over an insolvent business. Accordingly, it had been common place in Ontario for court orders appointing receivers to incorporate language insulating the receiver against successor employer liabilities. On both the doctrinal and practical level, there is justification for so doing. When a receiver is appointed over the assets of a debtor it does not become the legal or beneficial owner of the business itself. Conceptually, the receiver simply replaces the controlling mind of the business management and/or the board of directors. Therefore, notwithstanding the wording of employment and labour legislation, there is a principled basis for concluding that it is the debtor, not the receiver, that should be liable for severance pay, termination pay (required pay to employees in the event of mass terminations), pension contributions and other obligations of the debtor to its employees under the collective agreement and statute 6. What follows from this line of reasoning is that to the extent that the required payments are not made, the employees are to have claims against the debtor, not the receiver. As a practical matter, the receiver will require a full indemnity from the secured creditor that sought its appointment and the secured creditor would ultimately be responsible for satisfying any liability for successor employer claims incurred by the receiver. Moreover, the appointing order will grant the receiver a priority charge against the assets of the debtor to secure an indemnity in the receiver s favour provided by the debtor itself. The debtor will indemnify the receiver for any liability it incurs that is not a result of its gross negligence or wilful misconduct. Hence, the net result of declaring a receiver a successor employer which must assume obligations under a collective agreement would be to elevate unsecured employee claims against the debtor to a priority status ranking ahead of secured creditor claims. Notwithstanding the principled and practical basis for a court ordered declaration that a receiver is not a successor employer, the authority of the court to provide this protection in its orders was challenged in a recent case involving the restructuring of a transportation/storage company, TCT Logistics Inc. ( TCT ). 7 In the TCT case, the Ontario Court of Appeal held that the lower court charged with oversight of the CCAA proceedings (the Bankruptcy Court ) had no jurisdiction to make the declaration it did, that the receiver was not a successor employer under the provincial law which governed TCT s unionized workplace. The Court of Appeal held that provincial legislation makes the determination of this issue the exclusive jurisdiction of an administrative body, the Ontario Labour Relations 6 7 See Re St. Mary s Paper Inc., (1994) 19 O.R. (3d) 163 (C.A.) where the Ontario Court of Appeal held that by making contributions to a pension plan the receiver became personally liable for all obligations under the pension plans. GMAC Commercial Credit Canada vs. TCT Logistics Inc., (2005) 71 O.R. (3d) 54 (C.A.).

7 - 6 - Board ( OLRB ). However, the Court of Appeal also held that the Bankruptcy Court could decline to grant leave, from the sweeping stay of proceedings imposed at the time the receiver is appointed, to a union to seek a declaration from the OLRB that the receiver is a successor employer. The Court of Appeal reasoned that the Bankruptcy Court could exercise its discretion in this manner in order to prevent disruption to the realization process. The Court of Appeal, in effect, granted a right but temporarily restricted access to a remedy. On further appeal to the Supreme Court of Canada, however, the Court of Appeal s holding on this latter point was reversed and the Supreme Court held that the standard for the granting of leave articulated by the Court of Appeal was too high. 8 The Supreme Court held that the union would only have to demonstrate that they had a prima facie case that was not frivolous or vexatious before leave should be granted. The Supreme Court noted that if Parliament wished to protect receivers from successor employer liability it needed to do so expressly and through clear statutory language. Bill C-55 does, in fact, attempt to address this issue. However, it is the prevailing view of most observers that the amendment to s.14.06(1.2) of the BIA, which limits the liabilities of receivers generally, does not go far enough to ensure that receivers will not become subject to successor employer liability. The amended section reads (amendments underlined): (1.2) Non-liability in respect of certain matters Despite anything in any federal or provincial law, if a trustee [or receiver] carries on in that position the business of the debtor or continues the employment of the debtor s employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount if the claim is in relation to a debt or liability, present or future, to which the debtor is subject on the day on which the trustee [or receiver] is appointed. The inherent problem with the section is that the limitation of liability is tied to debts or liabilities in existence on the day on which the trustee [or receiver] is appointed. If the receiver operates the business for a period of time and later finds it necessary to terminate certain employees, this will give rise to severance and/or termination pay obligations to the employees. Arguably, those obligations are created at the time the employees are terminated which could be well after the appointment date it is not a debt in existence on the day the receiver was appointed that was simply due at a future date. If the receiver is found to be a successor employer it would likely be personally liable to make any required severance or termination payments. Where the debtor has significant obligations under a collective agreement to make contributions to a pension plan, there is a material risk that those obligations could be inherited by the receiver. In such circumstances, the problem becomes all the more acute. As of the date of writing, various advisory bodies have raised concerns about the inadequacy of the Bill C-55 amendments and the legislative drafters have been made aware of the need for greater clarity to protect receivers from successor employer obligations. 8 TCT 2006 SCC 35.

8 - 7 - Conclusion Employees are not like other voluntary unsecured creditors. They are not in a position to make informed assessments of their credit risk and take steps to mitigate that risk. They have a special relationship with the debtor and are largely responsible for the creation of value for other stakeholders. It is entirely appropriate for the legislator to take steps to protect and preserve the rights and interests of this unique constituency whose cooperation and participation is a necessary prerequisite for any successful restructuring. However, an overindulgence to organized labour, or any particular group of stakeholders, can have the detrimental and paradoxical effect of frustrating restructurings designed to protect and preserve jobs. Secured lenders must be assured that they will have sufficient protection in the restructuring process if they are expected to provide needed capital. The liability of the restructuring professionals, who make the restructuring process work, must also be limited in the appropriate circumstances. If not reasonably interpreted and carefully implemented, reforms designed to engender trust and participation of organized labour in the insolvency process could have the perverse effect of encouraging liquidations and the loss of jobs paradoxically sacrificing the ends, for the sake of the means.