Bill C-228: Pension Protection Legislation Advances Further
On November 3, 2022, new legislation aimed at providing additional priority to pensions in insolvency proceedings moved one step closer to becoming law.
Bill C-228 − “An Act to amend the Bankruptcy and Insolvency Act [“BIA”], the Companies’ Creditors Arrangement Act [“CCAA”] and the Pension Benefit Standards Act [“PBSA”], 1985” or, in short, the “Pension Protection Act” − passed its second reading in the House of Commons on June 22, 2022. It was then sent to the House of Commons Standing Committee on Finance for consideration. On November 3, 2022, the Standing Committee presented its report on Bill C-228 to the House of Commons in which it proposed various amendments. The current version of Bill C-228 can be found here.
In discussing the Bill at the Standing Committee, the committee members referred to large insolvencies, including Eatons, Sears, Nortel, Indalex and Grant Forest, and the importance of ensuring that pensions are protected in such proceedings.
To provide some context to companies, lenders and others grappling with the potential impact of this Bill, we briefly set out below a description of the current pension protections under the BIA and CCAA, the expanded pension protections proposed in Bill C-228, the potential implications of the expanded protections, the termination and severance priority that has been added to the Bill, and the next steps for Bill C-228.
Current Pension Protections under the BIA and CCAA
Currently, the BIA and CCAA provide super-priority protections to the following in respect of prescribed pension plans:
- amounts deducted from an employee’s remuneration for payment to the pension fund; and
- unpaid “normal costs”, defined contributions and amounts payable to the administrator of a pooled registered pension plan, in each case to the extent such amounts were required to be paid by an employer to the fund established for the purpose of the pension plan (or that would have been so required if the prescribed plan was regulated by an Act of Parliament).
The existing legislation protects such amounts through:
- provisions mandating that no CCAA plan of arrangement (CCAA s.6(6)(a)) or BIA proposal (BIA s.60(1.5)) can be approved by the Court in relation to an employer with a prescribed pension plan unless the plan or proposal provides for such amounts to be paid and the Court is satisfied that the employer can and will make such payments (the “Plan/Proposal Requirements”); and
- provisions granting security for such amounts over all assets of the debtor in a bankruptcy (BIA s.81.5) or receivership (BIA s.81.6), which rank above every other claim, right, charge or security against the bankrupt’s assets, except rights under sections 81.1 and 81.2 (30 day goods and farmer, fisher, aquaculture priorities), amounts referred to in subsection 67(3) that have been deemed to be held in trust (in respect of bankruptcies), and securities under sections 81.3 and 81.4 (bankruptcy and receivership priorities over current assets for unpaid wages to the extent of $2000 less amounts paid) (the “Legislated Security Provisions”). It is noteworthy that such Legislated Security Provisions are over all assets of the debtor, thus including current assets, equipment, real property, intellectual property and other intangible assets.
Bill C-228 Expanded Protections
Bill C-228 proposes to amend the Plan/Proposal Requirements and Legislated Security Provisions in the BIA and CCAA to expand the pension amounts that are protected to also include:
- an amount equal to the sum of all special payments, determined in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 (the “PBSA Regulations”), that were required to be paid by the employer to the fund established for the purpose of the pension plan to liquidate an unfunded liability or a solvency deficiency; and
- any amount required to liquidate any other unfunded liability or solvency deficiency of the fund.
This marks a significant expansion in the priority for affected defined benefit plans as it would include not only “normal costs” (the costs of benefits that accrue during a plan year on the basis of a going concern valuation, excluding “special payments”) but also any arrears in the applicable periodic payments required to amortize a deficit (“special payments”) and the actuarial deficit itself, including both the costs to liquidate:
- an unfunded liability i.e. the extent to which an actuarial assessment of the plan shows that the plan is insufficiently funded to pay benefits that are or will become due if the plan continues indefinitely; and
- a solvency deficiency i.e. the extent to which an actuarial assessment of the plan reveals that the plan’s current assets are insufficient to meet the obligations that would be due if the employer ceased operations and wound up the plan.
The Bill applies to all prescribed pension plans for the benefit of the insolvent debtor’s employees where the company is an employer subject to the BIA or CCAA.
Bill C-228 includes transitional provisions to the effect that these changes would not apply to existing prescribed pension plans until 4 years after the Bill comes into force.
The Bill also proposes to amend the PBSA to require reporting from the Superintendent of Financial Institutions to the Minister of Finance at the end of each fiscal year on, among other things, corrective measures taken or directed to deal with any pension plans that are not meeting the funding requirements. The Bill provides that the report shall be tabled in each House of Parliament and transmitted to provincial ministers responsible for finance and provincial securities commissions. These requirements appear designed to increase transparency regarding potential funding issues faced by pension plans each year.
The expanded scope of the pension priorities proposed in Bill C-228 will be of particular interest to companies with prescribed defined benefit pension plans and their lenders, to the extent such companies are “employers” that are subject to the BIA or CCAA. 
As various parties submitted to the Standing Committee, it is possible that employers may discontinue defined benefit plans in favour of defined contribution plans or that access to credit may be more difficult or costly for employers with affected defined benefit plans. These results may arise since lenders may find it is difficult to monitor, predict and manage unfunded liabilities that fluctuate but would nonetheless have priority over their secured position.
Such concerns formed part of the rationale for including a four-year time period before the relevant Bill C-228 provisions apply after coming into force. The theory appears to be that the four-year period will enable applicable companies to address their unfunded liabilities and solvency deficiencies or, if they cannot do so, then they may indeed face other implications.
Certainly, while Bill C-228 marches closer to becoming law, it will be important for companies and lenders to carefully consider whether the provisions apply to them, or their clients, and how to best manage the risks created by the proposed amendments if and when they are enacted. For lenders, this may include a review of their portfolio to identify borrowers with defined benefit plans that may be affected by this Bill and to, at minimum, commence a discussion with them regarding the best path forward to manage the increased risk to lenders that would be created by this Bill.
Termination and Severance Provision
While Bill C-228 has been on the radar for its impact on pension priorities, the current draft of Bill C-228 also includes an addition to the priority distribution scheme in s.136 of the BIA to provide priority to termination and severance pay.
This provision was not in the original Bill but was added by the Standing Committee. The amendment would provide priority for termination and severance amounts as a new s.136(d.001) of the BIA. This priority is added to certain other claims benefitting from a priority over unsecured claims (e.g. costs of administration, the bankruptcy levy, 3-month arrears of rent and 3-month accelerated rent, etc.). As with all other priority payments set out in section 136 of the BIA, this priority is subject to the rights of secured creditors. It will be interesting to see if this provision is the subject of further discussion when the Bill returns for the third reading in the House of Commons.
Next Steps for Bill C-228
Now that the report of the Standing Committee on Finance has been provided to the House of Commons, the next steps for Bill C-228 are: a third reading in the House of Commons, a similar review in the Senate (first and second readings in the Senate; review by a Senate Committee, which will study the bill and file a report to the Senate; and third reading in the Senate); and, Royal Assent. With support from the Conservatives, Bloc Quebecois and NDP, it appears the Bill may have sufficient support to be enacted and it is possible that the remaining approval process could be completed before the end of the year, although the process may continue into the middle of 2023.
McCarthy Tétrault’s Bankruptcy and Restructuring, Pensions and Financial Services teams are coordinating together and following these legislative developments closely. They are available to provide guidance to companies and lenders who are considering the implications for their businesses and clients if this Bill becomes law.
 A pension plan regulated by an Act of Parliament or of the legislature of a province is “prescribed" for the purposes of subsection 60(1.5) and sections 81.5 and 81.6 of the BIA according to s.59.1 of the Bankruptcy and Insolvency General Rules (C.R.C., c. 368), and for the purposes of subsection 6(6) of the CCAA according to s.3 of the Companies’ Creditors Arrangement Regulations (SOR/2009-219).
 See BIA ss. 60(1.5), 81.5 and 81.6 and CCAA s.6(6)(a)
 Of note, while there has been some discussion in relation to Bill C-228 suggesting that the intention of the Bill was to provide protection for federally regulated pension plans only, the language of the Bill would extend the priority to all prescribed pension plans in which the company is an employer subject to the BIA or CCAA.
 Note that, in respect of each provincial public sector pension plan, an individual legislative review and assessment should be undertaken to determine the impact, if any, on such public sector pension plans of these proposed amendments.