Will new changes to federal insolvency laws protect retirees?
Pensions have been imperilled by corporate insolvency before, but three new amendments to federal laws may create stronger protections for employees and retirees.
Changes to the Canada Business Corporations Act went into immediate effect after receiving royal assent in June, and amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act take effect today. Further reforms are under consideration.
The changes are a result of government consultations in the wake of Sears Canada Inc.’s 2017 bankruptcy. Sears and other high-profile bankruptcies at Nortel Networks Corp. and Algoma Steel Inc. prompted a flurry of headlines, putting real pressure on provincial and federal governments to act, said Kathryn Bush, a partner in Blake Cassels & Graydon LLP’s pension, benefits and executive compensation practice, in a webinar hosted by the Association of Canadian Pension Management this week.
Read: Budget proposals for retirement security get mixed reviews from ACPM
The changes to the CBCA expand how directors consider the “best interests of the corporation,” which can now include the interests of employees, retirees and pensioners. Some case law had previously suggested that directors’ analyses should include a wider range of stakeholders, but it wasn’t previously encoded in the act.
“This is important because it means directors can be required to defend their decisions if they’re not made in the interest of employees, retirees and pensioners,” said Bush. “Rather than simply saying those were not matters they were permitted to consider, they will have to indicate they considered those issues.”
The changes also require directors of prescribed corporations to make information available to shareholders at annual meetings about the well-being of employees, pensioners and retirees. However, Bush noted, more clarity is required on how this change will look in practice. “We’re still waiting for the regulations, which will set out which corporations will be prescribed and what information will be required.”
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The BIA amendments require parties in an insolvency proceeding to act in good faith and allow the court to make inquiries about certain payments made to people, such as directors or officers of a corporation, in the year before the insolvency. Where the court does examine payments, those to whom they were made could potentially be liable.
The CCAA changes limit the relief, to 10 days, that the court can provide to a debtor company making an application under the act. It also allows the court to order the disclosure of the company’s economic interest and, like the BIA, requires all parties to act in good faith.
Bush said the industry is watching several other proposals with interest.
The government is currently mulling over restrictions on dividend payments, share redemptions and executive compensation packages under the CBCA if a company has a large pension deficit. It’s also considered increased corporate reporting and disclosure requirements.
Read: Sears Canada pensioners going after 2013 dividend paid to shareholders
Another proposal would make changes to the BIA and CCAA to increase the so-called look-back period, allowing a bankruptcy court to set aside dividend payments or share redemptions made by an insolvent corporation within five years of the bankruptcy, far longer than the current one year. It’s also considering giving courts the power to set aside executive bonuses and compensation increases when a company with unfunded pension liabilities enters insolvency proceedings, within a fixed period, and put the recovered funds towards pension obligations.
“It’s quite a change from what the rules currently permit a court to do,” noted Bush.
Changes to the CCAA to increase the participation of pensioners and employee groups at the beginning of insolvency proceedings, requiring creditors to disclose their real economic interests to improve transparency and imposing an “express duty of good faith” on all parties are also under consideration.
What’s considered by far the most contentious, said Bush, is a proposal to change the order of priorities at the time of insolvency by moving unfunded pension liabilities and employee claims for the termination of employee benefits to the front of the claims line, ahead of secured creditors.
Read: Feds to amend insolvency legislation to protect pensions
“This super priority has been considered before and it’s very controversial, so it’s not clear what will proceed in that regard, if anything,” she said.
In terms of pension proposals, Bush said the establishment of solvency reserve accounts — accounts into which employers make solvency special payments until their pension deficits are eliminated, at which point they can recover portions of their payments — is on the table. These accounts currently exist in Alberta, British Columbia and Quebec.
Federal consultations also considered the possibility of allowing retirees, at the time a federally regulated defined benefit plan is terminated, to transfer their reduced pension amount in lump sum to a personally managed locked-in savings plan, rather than their employer purchasing an annuity for them.
“The concern is obviously that the annuitization happens at a point in time,” said Bush. “Interest rates may not be favourable and annuity purchase terms may not be favourable.”
However, she added, “there are risks with respect to those self-managed accounts also, in the sense the individual is going to have to manage their own investment and longevity risk.”
In addition, she noted the federal finance minister has the authority to provide employers with special funding relief to help improve their pension plans’ long-term sustainability, with potential to expand those powers.
Read: Ontario’s proposed DB funding rules lack solvency reserve accounts: PIAC