Employee Protection in Bankruptcy

• Author: Connie Reeve
• Pages: 275-296



EmployeeProtectionin

Bankruptcy

Connie Reeve*

A. INTRODUCTION

Employeesofan insolventcompanymay bethe mostvul nerableofall

creditorgroupsA lthoughemployeesarethe constituency thatmaybe

mostresponsibleforgeneratingvalueforother stakeholderstheyoen

donothavetheresourcestomonitorthecompanysnancialst atusand

takethe stepsnecessarytoprotect theiri nterestsin theeventof anin-

solvencyAccordinglyemployeesareunique amongcreditorgroupsi n

thatt heyare not consensual creditors Theya renot ina position to

makeacreditriskassessmentbeforegoingtoworkeachdayInrecogni-

tionoftheiruniquepositionintheinsolvencyprocesstherehavebeena

numberoflegislativeaemptstoprovidespecialprotectionforemploy-

eesinCanadia ninsolvencyproceedingsa ndanyclaimstheymayhave

againsttheiremployer

This paper provides an overview of the priority aorded to em-

ployeeclaimsininsolvencyproceedingsunderthecurrentlegalregime

aswellasthehistoryofeortstoprotectemployeesfromnanciallosses

arising from the insolvencyof their employerIt will also discuss the

 ConnieReeveisapar tneratBlakeCasselsGraydonLLPandamemberoft he

LabourandEmploymentGroupinBlake sTorontooceConniewouldliketoac-

knowledgewiththa nkstheassista nceofKatieArmitagestudentatlawatBlakes

inthepreparationoft hispaperandthecontr ibutionsofcolleagueLincRoger s

whoaddedhisinsightf ulcommentsfromthep erspectiveofanins olvencylaw

practitioner

CR

debatethatha saccompaniedtheseeortsAs willbeseen thisdebate

hasledtoapoliticalcompromisethatwilllikelyresultinapriorityclaim

forcertai nunpaidwages butnotfors everancetermination andother

claimsthatmayar isefromthetermi nationoftheemploymentrelation-

shipThepaperalsodiscussest heliabilityofdirectorsforfailuretopay

wagesa ndhow eect iveimposing t his liability ha s been in ensuri ng

compliancewithadirectorsstatutoryobligations



Theterms bankruptcy andinsolvency areoenused interchange-

ablybylaypersonsorprofessionalst hatdonotregularlypracticeint he

areaThusfrequentlyanycompanythatisinnancia ldistressorinsol-

ventisreferredtoasbankruptandthereisnodistinct ionmadebetween

aba nkrupt company acompany in receivership orone undergoing a

restructur ingwhileundercourtprotect ionfromitscreditorsHowever

astherights andobligationsofan insolventcompanymayvarywidely

depending on its legal status it is of critical importa nce tor ecognize

thatinsolvencyand bankruptcy arenotsynonyms Insolvencyisa

nancialconditionwherebyadebtorsliabilitiesexceeditsassetsoritis

unabletopayitsobligationsgenerally astheybecomedueBankr uptcy

isalegalstatus

Whenacompanybecomes bankrupteithervoluntarilyori nvolun-

tarilyits assetsvest inatrusteein bankruptcywhich isthen charged

withsellingallofthedebtorsrealizableassetsanddistributingthepro-

ceeds ofrealizationto thedebtorsproven creditorsThe proceeds are

distributedbythetrusteeinban kruptcyinaccordancewiththepriority

schemesetoutintheBankruptcyandInsolvencyActandotherapplicable

lawas discussed in more detail below The trustee in bankruptcya

representativeofunsec uredcreditorsisappointedsubjec ttotherights

ofthedebtorssecuredcreditors

Aright commonlyexerci sedby asecuredcreditor followinga de-

faultbythedebtorunderitssecurityagreementistheappointmentofa

receiverorreceiverand manageroverthe assetsand undertakings of

thedebtor Areceiver typicallya licensed trustee in abankr uptcyac-

counting rmmaybe privatelyappointed bya secured creditorpro-

videdthesecurityagreementprovidesitwiththisrightorbythecourt

 BankruptcyActRSCcBrenamedtheBan kruptcyandInsolvencyActbySC

cBIA