Federal retirement security protections now in force
With the intention of safeguarding the interest of pensioners and retirees, a number of changes to bankruptcy and insolvency law and federal corporate law that were promised in the 2019 federal budget, as discussed in the March 2019 News & Views, are now in force. These changes were adopted in Bill C-97 on June 21, 2019, and came into force either immediately or on November 1, 2019.
Protections for plan members and retirees in bankruptcy and insolvency law
Duty of good faith
Bill C-97 adds a “duty of good faith” to both the Bankruptcy and Insolvency Act (the BIA) and the Companies’ Creditors Arrangement Act (the CCAA), requiring any person involved in a proceeding under either legislation to act in good faith with respect to the proceeding. Courts are also given the power to make appropriate orders where an interested person has failed to act in good faith.
Prohibited compensation payments
The BIA has been amended to make directors of a corporation liable for termination pay, severance pay, incentives or other benefits paid to a director, officer or manager of the corporation within one year prior to the date of the bankruptcy. For directors to be liable, the payment must have: (a) rendered the corporation insolvent or been made at a time when the corporation was insolvent, (b) been conspicuously over the fair market value of the consideration received by the corporation and (c) been made outside the ordinary course of business. Directors will not be liable if they had reasonable grounds to believe that the corporation was not insolvent at the time of payment or would not have been rendered so by the payment, or that the payment was not conspicuously over the fair market value of the consideration received by the corporation or was made in the ordinary course of business.
Disclosure of economic interest
Bill C-97 amends the CCAA to permit any interested person to apply for a court-ordered disclosure of another person’s economic interest in respect of a debtor company. Additionally, interim financing under the CCAA shall not be ordered by the court unless the court is satisfied that the terms of the loan are limited to what is “reasonably necessary for the continued operations of the debtor company in the ordinary course of business.”
Federal corporate law amendments
The federal government has also introduced a number of new provisions to corporate law with a view towards enhancing retirement security measures among corporations registered under the federal Canada Business Corporations Act (the CBCA).
The CBCA has been amended to permit directors and officers of federally regulated corporations to consider the interests of employees, retirees and pensioners, when acting with a view to the company’s best interests. However, directors and officers are not required to do so.
Additional amendments to the CBCA will require prescribed corporations to disclose to shareholders certain information about the wellbeing of employees, retirees and pensioners. However, it remains to be seen what information will need to be provided and which corporations will be required to provide it. Certain prescribed corporations will also have to develop an approach to remuneration of directors and senior management and present it to shareholders. These requirements will come into force on proclamation.
The federal enhancements to retirement security in the bankruptcy and insolvency context follow a number of high-profile corporate insolvencies that resulted in significant impacts on the pension liabilities of the insolvent companies. These changes signal that courts may approach bankruptcies and reorganizations involving pension and benefit plans with increased scrutiny in the future. The bankruptcy and insolvency amendments will affect all bankruptcies and insolvencies in Canada.
The inclusion of the interests of employees, retirees and pensioners in the CBCA’s definition of corporate interests means that directors of federally regulated employers may consider expanding the scope of their considerations in respect of their pension and benefit plans.
While insolvencies can be difficult to foresee, strong corporate and pension governance practices can help ensure employers are meeting their legal duties and guard against potential liability.