Employees of Bankrupt Employers

Is my company bankrupt?

Usually employees only ask this question if the company has stopped paying wages and/or has appointed a Trustee in Bankruptcy.  However, a company can be insolvent (a financial status of being unable to pay your debts) without being bankrupt (a legal status which requires that the company’s assets be sold to generate a pool of cash to pay creditors).

Further, even if a licensed Trustee is involved, that does not necessarily mean that the company is bankrupt.  For example, the Trustee could have been appointed to watch over a proposal the company makes to its creditors to climb out of its financial difficulties (discussed below).

My company went bankrupt.  Do I still have a job?

Generally, this means your job is gone.  A bankruptcy generally has the effect of terminating all contracts, including employment contracts.  At that point a Trustee takes over and works to sell the company’s assets to help creditors collect on their debts.  This often means that the business is closed and its operations stop.  Occasionally, Trustees need help to try to wind down the business, so it is possible that there will be a little bit of work available after the bankruptcy.

In some cases, the Trustee tries to sell the whole business as an ongoing, viable operation because it believes that it can get more money for creditors that way than if it just closed the business and sold off assets piece by piece.  In these cases, a Trustee may be interested in hiring on employees to assist with these efforts.  Further, if the business is sold as an ongoing operation, there may be a job for you with whoever buys it.

What happens in a bankruptcy?

The first step after a bankruptcy is for a Trustee in Bankruptcy is appointed.  The Trustee then takes control of the company’s assets and decides how best to sell them.  In doing so, the Trustee has to act in the best interests of all stakeholders.

At that point, employees have to hope that the amounts the Trustees can recover for a sale are enough to put some money in their pockets for any unpaid wages and severance entitlements.

However, even if there is some money, that does not necessarily mean that employees will receive anything.  This is because some creditors take priority in collecting what they are owed.  These are often secured creditors – creditors who have arranged for their loans to be secured by collateral.  In reality, in the bankruptcy system, employees typically take a backseat to other creditors (except for limited amounts, discussed below).

Most employees will not know whether the Trustee will be able to recover enough money to pay them.  However, the Trustee notifies virtually all of the company’s creditors of the bankruptcy and gives them an opportunity claim what they are owed.  They do this by asking everyone to file a Proof of Claim that sets out your relationship to the company and how much you are owed.  Employees are encouraged to complete these and promptly give them to the Trustee.

If the Trustee approves an employee’s Proof of Claim, the employee will be entitled to share in the proceeds generated from the sale of assets – assuming there is anything left after the secured/priority creditors have been paid.

Are Employees the last to be paid?

Unfortunately, most employees are unsecured creditors, meaning that most of what a company owes them can get paid after numerous other creditors have been paid. 

However, not all hope is lost.  Employees hold a special status in bankruptcies, and there are some protections in place for them.  For example, employees hold special priorities with respect to certain kinds of unpaid wages that were earned in the 6-month period before the bankruptcy occurred.  Think of this as moving up a few spaces in line for payment (but only for limited amounts).

Employees’ unpaid wages are also protected in part because of a government program called the Wage Earners’ Protection Program (WEPP) that helps to protect employees of many insolvent companies, usually up to a maximum of about $4,000.  The Trustee has an obligation to help you figure out if you are eligible for payment under WEPP.

While these protections exist, they are often not enough to fully protect an employee’s wages.  As a result, employees should be wary of continuing to work for a company who is missing payroll; for many employees, going even a month without wages (often less) will take them to the maximum they can recover for unpaid wages through this process.

What can I get through the bankruptcy process?

An employee can file a Proof of Claim for any kind of debt the company owed them at the time it went bankrupt – unpaid wages, unpaid expense reimbursement, severance costs, and so on.  However, the bankruptcy process does not treat them all equally.

Unpaid Wages

Unpaid Wages includes unpaid salaries, commissions, compensation for services rendered, vacation pay, gratuities accounted for by the employer, disbursements of a travelling salesperson properly incurred in and about the business of the former employer, production bonuses and shift premiums.

Other Amounts

There are some protections for amounts that the company was supposed to contribute to a pension (both the employer’s portion and any amount that had been deducted from wages for the employee’s portion).  There are also limited protections for amounts owing for workers’ compensation and deductions for taxes and employment insurance premiums that the company withheld but never remitted to the government. 

Termination Pay, Severance Pay and Wrongful Dismissal Damages

The entitlement to these amounts depends in large part on when the employee was fired.  If the employee was fired before the bankruptcy, they may be able to recover certain amounts.  If the employee was fired after/as a result of the bankruptcy, they likely cannot.

For employees fired before the bankruptcy, WEPP provides some assistance.  In particular, WEPP protects any termination pay and severance pay for employees who were fired in the 6-month period before the bankruptcy.  However, an employee’s total entitlement under WEPP is only about $4,000, so they can’t recover $4,000 in unpaid wages before termination plus another $4,000 in unpaid termination pay.

For employees fired before the bankruptcy, they would also likely have a valid claim against the company for termination pay, severance pay and common law wrongful dismissal damages.  These amounts can be pursued by filling a Proof of Claim with the Trustee. 

Human Rights Damages

Anyone employee who has been harassed or discriminated against before the bankruptcy could file a proof of claim for amounts relating to harassment. This would be scrutinized by the Trustee in the same way as any other creditor’s claim, with the exception that the Trustee may lack the experience to value such a claim. In these cases, the employee may have to take their case in front of a bankruptcy judge. 

Can I do anything other than follow the bankruptcy process?

Usually, the answer is no.  For example, direct negotiations with the company will no longer be possible after bankruptcy. 

Similarly, litigation against the company is generally not allowed following bankruptcy.  That means an employee cannot typically start new litigation and cannot even continue litigation in most cases.  It may be possible to get the court’s permission to start or continue litigation, but getting this permission is rare. 

For the most part, if an employee has concerns about the fairness of the bankruptcy process or what they are expecting to recover in it, the procedures in the Bankruptcy and Insolvency Act (the “BIA”) spell out the only options to address these concerns.

Some Considerations before filing a Proof of Claim

Employees should pay attention to their potential for recovery.  If the company owes $100 to creditors and only has $90, it may be that the employee would be able to recover 90% of their wrongful dismissal claim.  In most bankruptcies, this would be a pretty good outcome.  It would also be rare. Remember:

1.  As the ratio of assets to debts drops, so too does the amount that the employee can recover. In many cases, the company has virtually no assets, meaning that the employee likely won’t get much beyond their WEPP amounts;

2.  There is a whole system for determining what order the creditors get paid in. Depending on the priority each creditor is entitled to, it is possible that all $90 in the example above goes to secured creditors (like mortgagees or lenders with extensive security interests), leaving little or nothing for employees;

3.  The proof of claim can be disputed by the Trustee, who has a duty to act in the interests of all creditors and cannot favor an employee creditor over any other creditor (like suppliers, landlords, and others). Thus, if the employee files a proof of claim for an excessive amount, it is possible that the claim will be rejected by the Trustee. In those cases, the employee may have to prove the claim in front of a bankruptcy judge. It is also possible that the employee and the Trustee negotiate a resolution.

My company is in receivership.  How is that different from a bankruptcy?

In many cases, an employee will not notice a difference between a bankruptcy and a receivership.  Indeed, sometimes the company goes through both a bankruptcy and a receivership at the same time.  Both have a process for filing proofs of claim and both have a process for figuring out the order in which creditors get paid.  Both typically happen because the company is insolvent.  However, a bankruptcy and a receivership are conceptually and legally different processes, and differences between them sometimes arise. 

For example, a receiver can sometimes be appointed when the company is not yet insolvent.  In those cases, there is still a chance (a slim one) that the employee will recover in full.

As another example, in some cases the receiver is appointed to control only one or a few of the company’s assets.  If that happens, there is a chance that the remaining assets that are not in receivership will allow an employee to recover in full.

Further, there are often court orders that dictate how the receivership process is going to play out, whereas the bankruptcy process is largely established in the BIA.  There is therefore more flexibility to the receivership process.

My company is making a proposal.  How is that different from a bankruptcy?

If your company is making a proposal, it means that it has admitted that it is insolvent, but it is not yet ready to throw in the towel and give up on the business.  This could happen for any number of reasons – for example, where the business is structurally sound but suffered some one-time event that had a major financial impact (for example, a temporary downturn because of COVID-19, a reassessment by CRA, a lost lawsuit, the exit of a major investor, the loss of a major asset due to fire, etc).

In a proposal under the BIA, the company looks at all of its outstanding debts as of a particular date and offers a deal to its creditors based on its ability to pay.  The company can be very creative in structuring a proposal but must come up with something that will be accepted by its creditors and approved by the court.  If a proposal is rejected by enough creditors or does not receive court approval, the company will become bankrupt.  Depending on the amount of leverage an employee has, they may be able to press the company for better terms than those set out in the proposal.

Since a company going through a formal proposal is insolvent (a financial status) but not bankrupt (a legal status), employees are not automatically fired when the company starts the proposal process.  While the company may choose to terminate your employment to make it more lean going forward or make it more attractive for prospective buyers, employees stand a greater chance of keeping their jobs.  Any claims for ‘pre-filing’ amounts (ie. amounts the company owed as of the date they started the proposal process) are dealt with through the proposal. 

Any claims for unpaid wages, termination pay, wrongful dismissal damages, etc from after the date the company started the proposal process can be pursued through the usual routes (such as negotiations, lawsuits, and Ministry of Labour complaints) and may be unaffected by the company’s proposal.

My company is in CCAA.  How is that different from a bankruptcy?

A proceeding under the CCAA is actually somewhat similar to a proposal under the BIA – the company admits it is insolvent, but is not yet ready to throw in the towel.  There are several differences between the CCAA – primarily that the CCAA is for larger companies and offers the company far more flexibility than the proposal process in the BIA.  The company usually makes a proposal (called a “plan” under the CCAA) and seeks creditor and court approval of that plan.

Who else can I sue if my company is insolvent?

Directors – Under the Business Corporations Act in Ontario, directors can be liable for 6 months of employees’ unpaid wages and 12 months’ unpaid vacation pay.  This would usually include unpaid holiday pay and expenses.  However, directors are not liable for termination and severance pay.  Further, there are several hoops that the employee must jump through to collect from a director.  The director may also be able to argue that they used reasonable diligence to make sure the wages were paid, so that they cannot be responsible if they weren’t ultimately paid. 

Under the Employment Standards Act, 2000, employees have similar entitlements, albeit with fewer hoops for the employee to jump through.  Further, at least in theory, the director faces an actual penalty – a fine of up to $50,000 – for failure to comply with an ESA order to pay. 

Note that if the company makes a proposal under the BIA or a plan under the CCAA, those proposals / plans can often include a requirement that creditors give up their rights to sue directors personally. Of course, this would have to be approved by creditors and the court.

Purchasers – In many cases, the employee will be able to land a job with the purchaser of the bankrupt / insolvent company’s business (or its assets).  In many cases that purchaser would be considered a “successor” employer for the purposes of the ESA and the common law, giving the employee an ability to pursue the purchaser for certain amounts. 

Trustee – Almost never.  They are given all sorts of legislated and court-ordered protections.

Related Companies – If one company is insolvent but its related companies (like a parent company) are not, and there is a strong connection between the employee’s work and that other entity, it may be that the other entity can be responsible for some or all of the amounts owing to the employee. 

Whitten & Lublin Employment & Labour lawyers have represented thousands of people who have faced family status discrirmination, in and out of the courtroom, and we have a well-deserved reputation of knowing what it takes to get the job done right. This is why we are rated one of the GTA’s most recommended labour and employment lawyers and we have the testimonials from our past clients to prove it.

Don’t leave your constructive dismissal case to chance. Consult with a lawyer with exceptional experience at Whitten & Lublin Employment & Labour Lawyers. To book a consultation please contact us online or by phone at (647) 946-1277 today!  

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