OCA to Consider ESA Obligations In CCAA Proceedings

The Court of Appeal will be called upon to determine whether Employment Standards Act obligations, such as termination and severance pay, can be discharged by a Debtor-in-Possession in a CCAA proceeding.

In Windsor Machine, Justice Morawetz heard an application by the union representing the employees of a debtor company. The debtor company had terminated all its employees after being placed into CCAA protection.

The union asserted the statutory rights of the employees to severance and termination pay under the Employment Standards Act (ESA), and argued that the statutory right ought to be discharged out of the assets of the company, which had not yet needed to access its DIP loan. The union focused on the fact that the obligation to pay termination and severance pay accrued after the CCAA proceedings were commenced.

It also pointed to the initial order under the CCAA, which allowed for ordinary course of business payments. The initial order also provided that the ESA would continue to apply to the debtor company.

In contrast, the debtor’s largest secured creditor, a bank that provided DIP financing to the debtor-employer, argued that the statutory termination and severance claims were simply unsecured obligations and were therefore subordinate to all secured claims against the debtor.

The debtor company, who also appeared on the application before Justice Morawetz, similarly argued that the effect of granting the union’s request would be to grant special status to termination and severance claims over the claims of other unsecured creditors of the debtor company.

Decision Below

Justice Morawetz rejected the union’s application. He held that, contrary to the assertions of the union, the statutory obligation to make severance and termination payments was subject to the stay of proceedings which followed the CCAA filing.

Moreover, while the triggering of the obligation to make those payments occurred after the CCAA filing, the employment services for which the obligation related were provided prior to the CCAA filing. An employee would be entitled to compensation for services provided after the CCAA proceedings had commenced.

Justice Morawetz also placed particular emphasis on the fact that, under the Bankruptcy and Insolvency Act, the termination and severance payments would rank as unsecured obligations subordinate to those of the secured creditors of the debtor company.

Potential Significance

This case will provide the Ontario Court of Appeal with an important opportunity to clarify the rights of secured creditors, including those providing DIP financing to debtor companies during CCAA proceeding, in the face of statutory claims by employees which accrue after the CCAA proceeding.

Case Information

Windsor Machine & Stamping Limited (Re)

Hearing Date:  October 25, 2011

Bankruptcy and Insolvency Act Companies' Creditors Arrangement Act debtor DIP loan employment services Employment Standards Act Ontario Court of Appeal secured creditors severance pay termination termination pay

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