Employer Going into Bankruptcy or Receivership?
In the middle of last December, the Canadian federal government pushed through the Wage Earner Protection Program Act. This legislation was originally an NDP private member’s bill that was picked up by the then-governing Liberals. Perhaps sensing a backlash from business or else the lack of urgency at the time, the Liberal government took no steps to make the bill into law through Royal Assent. Somewhat surprisingly, after three years of collecting dust, the current Conservative government did obtain Royal Assent for the bill in December.
The legislation deals with the situation where an employer goes bankrupt or into receivership and there are unpaid wages owing to the employees. Previously, the employees could make a claim in the bankruptcy, but they would only obtain a preference over other creditors for up to $2,000 owing for wages earned in the six months prior to bankruptcy. For any excess amount, the employees were usually unsecured creditors and shared in what little was left over after the priorities and monies were paid out to secured creditors. In the case of a receivership, the situation was just as complicated.
The new legislation provides for a compensation fund to be established. Employees who meet the eligibility criteria will now be paid their wages in full and this could be paid either from the business (if a receivership is imposed and the company is continuing as a going-concern) or from the business assets (if there is a bankruptcy). More importantly, if there is a shortfall for whatever reason, the compensation fund can come into play and pay out the unpaid wages. Sounds good so far, right? It is – if you are an employee.
The situation is not so nice if you are an employer. This is because if the government’s fund makes the payment, the government can, in turn, look to the business or its assets for repayment. However, and more importantly, in the case of a company, the government can look to compensation from directors of the company.
Now, there is nothing new about directors being on the hook for past wages. Section 131 of the Ontario Business Corporations Act provides for such liability. A similar provision is found in Section 81 of the Ontario Employment Standards Act. However, the difference lies in the method of enforcement. Under Section 131 of the Business Corporations Act an employee would have to sue the director. The Employment Standards Act was a little bit more easy in that it permits a complaint to the Ministry which then could go after the director. However, under the proposed system for the compensation fund the process will be even easier. The employees will be paid from the business or by the government. The government, for example, will be much more willing to ensure that it is repaid. The result? Directors of corporations can expect to see a rise in the number of claims brought against them for unpaid wages – especially once this legislation is declared to be in force and also if the economy slows down as is predicted.
As if all of the other liabilities for directors were not enough. And my clients wonder why I am always hesitant to be a director of their companies 
CALC