CCAA Protection and Bankruptcy

When a company cannot pay its bills, it can declare itself (or be declared) bankrupt. The assets of a bankrupt company are sold off and the proceeds used to pay creditors. This process (including the process within which the various creditors fight over who gets what share of the corporate remains) is governed by the federal Bankruptcy and Insolvency Act. 

The impact of a bankruptcy on employees of the bankrupt company can go beyond the loss of their jobs. There may be unpaid wages or benefits. Recent (2005) changes to the Bankruptcy Act have given higher priority (ahead of secured creditors) for claims of unpaid wages and vacation pay (up to a maximum $2,000 per individual, which may fall short of full recovery), and unremitted pension contributions.

For workers in the federal jurisdiction, a wage earner protection fund will pay up to $3,000 in unpaid wages (replacing any bankruptcy claims). In addition, in both the Ontario and federal jurisdictions, corporate directors can be held personally liable under employment standards legislation for up to six months of unpaid wages and certain other amounts.

A bankruptcy can affect earned pension benefits, particularly if the pension plan is not fully-funded at the date of wind-up. Funding to pay off the pension deficit is a low priority (beyond regular, but unremitted, contributions) in bankruptcy proceedings, and the wind-up of an underfunded pension plan may mean that earned benefits have to be reduced. For workers in the Ontario jurisdiction only, the Pension Benefit Guarantee Fund (with limits) may provide relief, and stop or limit benefit reductions. If there is a surplus in the plan on wind-up, it may be possible through negotiations for affected workers to share in the surplus.

A company with financial problems may also seek protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA), which allows it to keep operating while it tries to reorganize and cut deals with creditors to reduce its debts. A company operating under CCAA protection cannot renounce its collective agreements, but it can try to negotiate changes – under the threat of bankruptcy and a full shutdown of the business. CCAA does not relieve a company of its pension funding obligations.