Weathering the Economic Storm in Canada: Restructuring and Employees’ Rights

By Leanne Fioravanti and Stephen Acker

In these tough financial times, a number of companies are trying to reorganize themselves in order to avoid insolvency or bankruptcy. In Canada, there are several laws that help facilitate this process: the Companies Creditors Arrangement Act (CCAA) and the Bankruptcy and Insolvency Act (BIA). For the most part, employees are often left high and dry during these restructurings, as these laws don’t offer them much protection.

Canadian processes
The CCAA is a federal law that allows financially troubled companies that owe in excess of $5 million the opportunity to restructure their affairs. The CCAA process is court-driven, giving judges a high degree of flexibility to decide how best to deal with the specific cases before them. A monitor is appointed to oversee the restructuring and to report to the court when necessary about the restructuring.

Companies that don’t reach the $5 million threshold can use a process under the BIA.  The BIA is another federal law that can be used to help businesses restructure themselves to avoid bankruptcy.

A recent high-profile Canadian example of a CCAA proceeding involves Nortel Networks Corp., a one-time technology powerhouse. In January 2009, Nortel applied for relief under the CCAA. As a result of its application, the court issued an initial order giving the company 30 days of protection from creditors so it could prepare a formal “plan of arrangement.”

Unlike the BIA and Chapter 11 of the U.S. Bankruptcy Code, the CCAA gives the court the power to extend the period of protection (also known as a “stay”). The court has already extended the stay for Nortel and can do so again for any period of time. As a result, the company will remain protected from its creditors unless Nortel and the court-appointed monitor agree otherwise or the court forces a winding-up of Nortel.

Impact on employees
During the CCAA stay period, a company will often continue operating, but it may commence restructuring activities at any time. Employees are often the most affected as many are let go, wages are frozen or decreased, and pensioners start worrying about their retirement.

In Nortel’s case, it’s anticipated that over 12,000 employees have lost or will lose benefits of some sort or another. Thousands have seen supplementary pensions and retiring allowances cut off.

Protection for employees
Since there is no formal protection for employees under the CCAA, employees must apply to the court for specific relief. That is what retired and former Nortel employees are doing. They argued in an Ontario Court last month that they should be represented in the court process. We are awaiting the court’s decision.

Beyond any court-ordered relief, employees might also be eligible for the Wage Earner Protection Program (WEPP). The WEPP is a new government of Canada program that provides timely payment of eligible wages for workers whose employer declared bankruptcy or became subject to receivership. Not everyone is automatically eligible and there is a maximum payment of up to approximately $3,000.

As for collective agreements, the CCAA contains no provision that specifically permits the termination of collective agreements – unlike Chapter 11 of the U.S. Bankruptcy Code. In Canada, the courts are undecided whether they have the jurisdiction to authorize the termination of collective agreements. So employers seeking to restructure under the CCAA will need to pay special attention to their collective agreements.

In addition, all Canadian provinces have employment standards legislation that provides minimum standards to employees. To protect employees, employers may be deemed to include “receivers” and “trustees.” As a result, employees are not totally left without relief.

Although the restructuring laws in Canada don’t directly protect employees, employers with operations in Canada that may be contemplating relief from creditors should nonetheless be mindful of collective agreements, government programs, and provincial legislation that might be applicable to their company and their employees. As in many other aspects of labor and employment law, Canadian laws and practice are generally more protective of employee rights than their U.S. equivalents.