Weppa Changes On The Way

This article was originally published in Volume 19, Issue 1 of Rebuilding Success, the official magazine of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). It has been reproduced with permission. In an article written for Rebuilding Success, MNP LTD’s Sheldon Title, CIRP, LIT, CPA, CA and John Haralovich, CIRP, LIT, CPA, CA, CMA, CFE, recently discussed federal changes to the Wage Earners Protection Program Act (WEPPA) and what increased payments and eligibility adjustments mean for Canadian debtors and employers. WEPPA Changes on the Way By Richard D. (Rick) Pallen, Jean-Daniel Breton, Sheldon Title and John Haralovich On October 29, 2018, Bill C-86, Budget Implementation Act, 2018, No. 2 was tabled, which includes some important amendments to the Wage Earner Protection Program Act (WEPPA). If it is passed in its current form and receives Royal Assent, the significant changes that would then become effective are: Increase the maximum payment under the program (WEPP) from four to seven times the maximum weekly insurable earnings under the Employment Insurance Act (EIA), or a maximum benefit of about $6,960 in 2018.1[1] Once effective, this increased coverage will apply retroactively to bankruptcies and receiverships occurring on or after February 27, 2018. This change is very positive from the employee’s perspective as it provides a greater benefit to displaced employees at a time when resources may be necessary to reduce the stress related to finding alternative employment. We note that since no change is proposed regarding the limits referred to in sections 81.3 and 81.4 of the Bankruptcy and Insolvency Act (BIA), this change should not affect secured creditors. Eligibility for payments: Employees who work after the date of bankruptcy or receivership will no longer risk losing coverage for severance and / or termination pay. The legislation will be modified to include both severance and / or termination in respect of an employment that ends before the bankruptcy or receivership during the period of eligibility, and an employment that ends after the bankruptcy or receivership up to the trustee’s discharge or the date on which the receiver completes its duties. This change removes uncertainty for employees that were concerned about losing an entitlement to severance or termination pay and should help insolvency professionals that need to retain employees to wind down the affairs of the insolvent employer. The date of filing a Notice of Intention to Make a Proposal (NOI) will be recognized when determining wage eligibility dates, thereby fixing a previous misalignment between a proceeding taken under the Companies’ Creditors Arrangement Act (CCAA) and a proceeding under Part III of the BIA. The change should also correct a misalignment between the periods used for the computation of eligibility under the WEPPA and the period referred to in section 81.3 of the BIA. Before the change, the eligible wages were calculated based on a period commencing six months before a proposal under the BIA or an initial order under the CCAA and ending with the bankruptcy or receivership, in the case of a failed restructuring proceeding. Based on this calculation, an employee terminated six months before a NOI would not have received the same treatment under the WEPP as an employee terminated six months before an initial order was made under the CCAA, all other things being equal, if the restructuring proceedings failed. As well, in the case of the NOI, the employee’s eligible wages would have been calculated based on a period of six months before the proposal (or bankruptcy, if there was no proposal filed), while the claim under section 81.3 BIA would have been calculated based on the date of the initial bankruptcy event, or in most cases the date of the NOI. The change that recognizes the NOI as a reference date for the period of eligibility of wages corrects substantially all of these misalignments. Where A WEPP payment has been made to an employee, the subrogated claim of the Crown must be repaid before any payment is made to that employee in connection with eligible wages. This would include a distribution by the trustee (or a receiver) on account of the ordinary unsecured claim of the employee. The provisions addressing this change contemplate that any person (including a trustee or receiver) that intends to pay an amount to an employee in respect of eligible wages will have to ascertain whether the Crown is subrogated, presumably by contacting the Minister of Labour, and if so must forward to the Crown the amounts otherwise payable to the employee. This represents an additional obligation for the trustee, as it is usually the responsibility of the creditor who acquired a claim to notify the trustee of that fact, although in this case it is the trustee’s responsibility to ascertain if the Crown has been subrogated in the rights of the employee. This should not be a significant issue however, if the information flow that is presently in effect between the WEPP and insolvency professionals continues. It is worthy to note as well that the government considers that once a claim has been paid to an employee, the Crown is subrogated to all of the rights that the employee may have against the employer or the directors, up to the amount of the WEPP payment, although the text of the provision that addresses the subrogation suggests that the subrogation may not be as wide as the Crown purports it to be. Eligibility will be further expanded, after more (yet unwritten) amendments to regulations, to include:Coverage for employees in connection with BIA Proposals and CCAA proceedings; andCoverage for Canadian employees affected by foreign proceedings recognized by a Canadian court under the BIA. Eligibility for the above situations will be subject to a court determination that the proceedings meet (presently undrafted) criteria to form part of new regulations. We understand the coverage for employees in connection with restructuring proceedings under the BIA and CCAA are intended to be limited the liquidating restructuring proceedings. We have represented in the past that there really should not be a difference in treatment under the WEPP for an employee that lost his / her employment because of the bankruptcy of his / her employer, or an employee that lost his / her employment because it was necessary to curtail the work force in the context of a restructuring proceeding to ensure that the enterprise becomes viable. Furthermore, the availability of a WEPP benefit only in situations where a business is terminated may: (i) provide a disincentive for employees to vote in favour of a proposal or a plan that provides for a continuity of operations; and / or (ii) lead employees to vote against a proposal which provides a lesser return than the enhanced WEPP (as discussed hereinabove) they would otherwise receive. The government appears unwilling at this time to extend the coverage of all employees displaced as a result of an insolvency process but seems prepared to extend the coverage to capture those liquidating proposals or liquidating plans that are essentially the same as a bankruptcy or a receivership but that remain managed as restructuring for reasons of efficiency. We cannot yet assess how these provisions will apply, but we can foresee some difficulties in determining where the bar should be set in differentiating between a restructuring and a liquidation. For example, it will be interesting to compare what would be the treatment of employees in a situation where one portion of the business is not viable and is liquidated at one end of the spectrum, versus a situation where all of the assets are sold to a new entity which will operate essentially the same business, at the other end of the spectrum. The influence of our southern neighbours has increased the instances where the restructuring is structured as sale of all assets and undertakings of the insolvent business to a newly formed entity, with a subsequent distribution of the proceeds amongst creditors. Such a transaction would have all of the hallmarks of a liquidation, while at the same time being a restructuring and continuation of the business. As members of the Joint Liaison Committee on WEPPA, we applaud the increased coverage available to employees, the expansion of coverage to other insolvencies and the corrections to program eligibility (particularly to avoid penalizing employees who assist the Trustee or Receiver). We remain concerned however that the WEPP has yet to develop a process for the reimbursement of the reasonable professional costs of WEPP compliance that the legislation imposes on insolvency administrations and that some of the amendments within Bill C-86 may not achieve the desired result. Sheldon Title, CIRP, LIT, CPA, CA is a Licensed Insolvency Trustee and Senior Vice-President with MNP LTD. To learn more about how MNP can help you navigate WEPPA during a Bankruptcy or corporate restructuring, contact Sheldon at 416.263.6945 or [email protected] John Haralovich, CIRP, LIT, CPA, CA, CMA, CFE is a Licensed Insolvency Trustee and Senior Vice-President with MNP. To learn more about how MNP can help you navigate WEPPA during a Bankruptcy or corporate restructuring, contact Sheldon at 613.691.4262 or [email protected]