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If a company files for protection under CCAA
is an employee who’s been with that company for 30 years entitled to severance ?

If a company has filed for protection under the CCAA, the entitlement to termination pay does not disappear. Rather, the priority in the timing of payment is affected and often significantly delayed.

To explain briefly, the company (the "debtor") has filed under the CCAA in order to buy time to come up with a plan of restructuring which will involve compromise with its creditors in order to avoid going into bankruptcy. The purpose is to keep the debtor operating in order to increase the amount that may be paid to creditors and to preserve the jobs of employees wherever possible.

Upon filing for CCAA, the debtor will go to court to obtain an Initial Order, which will set out the rules under which it can continue to operate the business, and will restrict the actions that can be taken by its creditors (such as sending the debt owing to collections). Pursuant to the Initial Order, usually all payments to creditors owing as of the date of the filing under the CCAA are stayed (paused) pending a vote on the proposed "plan of arrangement or compromise" (the" Plan"). A minimum of 2/3 of the creditors have to vote on the proposed Plan. If it passes, they will be paid in accordance with the plan. If not, the stay will usually be lifted and the creditors pre-CCAA rights will be reinstated at which time they can pursue the repayment of the debts owed by the debtor.

Under the Plan, the secured creditors will almost always be paid first. Secured creditors are have registered charge over an asset (like a registered mortgage over the property of the debtor) or special rights under the lien acts relevant to the debtor.

Unfortunately, employee's with claims for severance or termination pay are considered unsecured creditors (meaning they do not hold assets as collateral for their debt) so those debts are paid at a later point than those of secured creditors.

When claims are filed (or terminations take place) before the CCAA application, they will be considered "pre-filing claims" and will be subject to compromise pursuant to the Plan. In these circumstances, the employee will have to file a proof of claim in order for his or her claim to remain valid through the CCAA. There are strict deadlines for filing a proof of claim which the employee must be aware of and meet.

An employment contract has been found to be an "executory" contract by the courts, meaning that one or both parties has ongoing obligations to perform (i.e. the requirement of providing statutory or contractual termination pay) and the non-performance (i.e. non-payment of termination entitlements) will constitute a material breach of the employment contract. In order for a claim to survive a CCAA application, there must be an actual breach of contract (failure to pay notice or pay in lieu thereof, or other statutory entitlements). A claim does not exist until the debtor actually terminates an employee without reasonable notice - the possibility of a breach is not sufficient.

The courts have held that terminated employees will not be placed in a better position for payment than other creditors. The courts have to consider all of the creditors and evaluate all of their rights in their attempt to balance the interests of the creditors with equity.

There are a number of cases where the court has denied an employee's request for an extension to filing a proof of claim if the deadline is missed so it is critical to meet that deadline.

Essentially, the employee retains his or her rights to severance and termination pursuant to the ESA and the employment contract, however, they will not be given preference/priority for payment, and will not be paid ahead of secured creditors. It is critical that the proof of claim be filed in order to preserve the employee's right as an unsecured creditor. Beyond this, the employee has very little control over the Plan, and when they will receive their payment (if the company continues to exist and has funds to make said payment). However, they continue to be entitled to payment of notice and severance pay, assuming the proof of claim is filed in time.
The Lawyers at Samfiru Tumarkin LLP
Direct Tel (Toll Free): 1-855-821-5900     Email: webquestions@stlawyers.ca     Web: www.stlawyers.ca
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