Super Priority Wage and Pension Claims under s. 81.3 – s. 81.6 of the Bankruptcy and Insolvency Act (BIA) and the Superintendent’s Levy

Issue

The Office of the Superintendent of Bankruptcy (OSB) has been asked for its position on whether the levy under s. 147 of the Bankruptcy and Insolvency Act (BIA) is payable in respect of super priority wage and pension claims under sections 81.3 through 81.6 of the Act.

Bankruptcy

Claims under ss. 81.3(1), for unpaid wages, and ss. 81.5(1), for unremitted pension contributions, are creditor's claims. Where a trustee, in the course of administration of a bankruptcy, pays these wage or pension claims, the OSB takes the position that these payments are "on account of the creditor's claims" within the meaning of s. 147 of the BIA and, as such, the levy applies.

Receivership

The levy referred to in s. 147 of the BIA applies to payments made by a trustee. Payments in respect of wage and pension claims under ss. 81.4(1) and ss. 81.6(1), however, are made by a receiver. Since such payments are not made through administration of a bankrupt's estate, the OSB takes the position that s. 147 does not apply; therefore, no levy is payable.

Discussion

With respect to bankruptcies, ss. 81.3(1) and ss. 81.5(1) of the BIA, which came into force on July 7, 2008, create a super priority status for certain wage and pension claims. Wage claims are secured by the bankrupt's current assets on the date of the bankruptcy and pension claims are secured by all assets of the bankrupt.

With respect to receiverships, ss. 81.4(1) and ss. 81.6(1) of the BIA, which also came into force on July 7, 2008, create a super priority status for certain wage and pension claims. Wage claims are secured by the debtor's current assets that are in the possession or under the control of the receiver, and pension claims are secured by all assets of the debtor.

Subsection 147(1) of the BIA provides that the levy applies to all payments made by the trustee "on account of the creditor's claims." Relevant portions of subsection 147(1) state the following:

". . . there shall be payable to the Superintendent . . . a levy on all payments . . . made by the trustee by way of dividend or otherwise on account of the creditor's claims . . ."

Section 147 applies to payments made by trustees, not to payments made by receivers; therefore, the levy has no application to the new receivership provisions.

Claims under ss. 81.3(1) and ss. 81.5(1), however, are paid by the trustee through administration of the bankrupt's estate and, as such, the levy applies to these payments. These secured claims are created by statute and come into existence upon occurrence of the bankruptcy. Unlike other secured claims, which have enforcement mechanisms that may be used regardless of whether the debtor is or is not bankrupt (e.g., foreclosure, judicial sale, power of sale), the BIA provides no independent enforcement mechanisms to claimants for these new secured claims. Instead, pursuant to ss. 81.3(8) and ss. 81.5(8), claimants are required to deliver a proof of claim to the trustee to prove their claims. The trustee will then pay these claims through the normal distribution of assets associated with administration of the estate, thereby attracting the levy.

Exceptions

Arguments have been made that Directive No. 10R, Redemption of Security and Section 147 Levy of the BIA, provides circumstances in which the levy will not apply to payment by a trustee of a wage claim secured under s. 81.3. Paragraph 7 of the Directive provides that the levy is not payable where (a) the trustee is not acting as trustee, but rather as agent for the secured creditor; or (b) the trustee is paying the secured claim by way of a "redemption" within the meaning of ss. 128(3).

Trustee as agent for the secured creditor

The OSB's position is that the levy would not be payable with respect to a wage claim secured under ss. 81.3(1) were it to be realized by the secured creditor or its agent. However, this would only occur if, regardless of the absence of enforcement mechanisms in the provision, the secured claim could be satisfied in a manner other than through administration of the estate by the trustee. The OSB takes no position on this issue.

Payment of the claim by way of a redemption

Where a secured creditor does not enforce its security, but instead permits its claim to be paid through administration of the estate, the levy is payableFootnote 1. Given the structure of s. 81.3, it is anticipated that wage claimants will typically choose to rely on the bankruptcy process for payment of their claims. This will be evidenced by wage claimants proving their claims in accordance with ss. 81.3(8) by completing paragraph 4(E) of Form 31, Proof of Claim, and then waiting for payment through the dividend distribution process. This is analogous to the situation addressed by Justice Schuler in Seeley (Trustee of) v. Canadian Imperial Bank of CommerceFootnote 2: "The bank chose not to follow the [redemption] procedure set out in s. 128 but instead to file a proof of claim in the bankruptcy. Having chosen the latter procedure, and benefited from the bankruptcy process, it should be in the same position as any other creditor who benefits from that processFootnote 3" and pay the levy.

The argument has been raised, however, that rather than paying the wage claim under s. 81.3 as a dividend to a secured creditor through administration of the estate, which would attract the levy, the wage claim can be satisfied through a "redemption" under s. 128 of the BIA, thereby avoiding the levy. It is the OSB's position that the redemption exception to payment of the levy would rarely be available as trustees may only redeem security if to do so would be advantageous to the estate. As discussed below, it is anticipated that redeeming ss. 81.3(1) security will rarely produce an advantage.

In Seeley, Justice Schuler described redemption as the realization of a right to have the title of property restored free and clear of a secured claimFootnote 4. The redemption process is set out under s. 128. Whether a redemption has occurred is a question of factFootnote 5. A trustee may only redeem the security with the expectation that to do so will benefit the general body of creditors. As Justice Topolniski noted in two separate cases:

"For a valid redemption the Trustee must be valuing the security in the hope that there will be some advantage for the general body of creditors. When there is no such expectation, but the Trustee is only paying an agreed sum to the secured creditor in satisfaction of its claim, there is no redemption."Footnote 6

["Arnold"]

". . . benefiting a secured creditor cannot be the impetus for a trustee selling encumbered assets. The trustee must perceive some advantage for the general body of creditors.

"It is the responsibility of the trustee to make a sound business decision either to redeem the security because it is good for the general body of creditors or to walk away because it is not. The trustee must consider what the net result of the redemption likely will be in making such a decision. If, in the end, redemption is unlikely to benefit the general body of creditors, it is a hollow exercise. The trustee's decision in that case should be easy."Footnote 7

["Cutting Edge"]

In Seeley, it was noted that in Cutting Edge the advantage the trustee sought by redeeming was to avoid the secured creditor foreclosing on an asset, in the hopes of obtaining greater recovery for the estate, and, as such, a redemption had occurred and no levy was payableFootnote 8. In Seeley, however, there was no threat of foreclosure and, as such, the trustee was merely paying the claim; therefore, the levy was payable:

28. The difference, in my view, is that in the [Seeley] scenario the secured creditors are not taking action to realize on their security and therefore there is no need for the trustee to redeem the debt to preserve the security for the bankrupt's estate; the trustee simply pays out the debt in the normal course of the bankruptcy. In the [Cutting Edge] scenario, the trustee has to take steps to redeem because otherwise the security will be dealt with by the enforcement proceedings taken by the secured creditors outside the bankruptcy.

29. This case is more like Aberant Arnold than Cutting Edge. Since the Bank did not take foreclosure proceedings, the Trustee did not have to redeem the mortgage but could simply deal with it as with any other claim to be paid out in the bankruptcy process.

30. For the foregoing reasons, I conclude that the circumstances of this case do not amount to a redemption but instead a payment of the Bank's claim. The s. 147(1) levy is therefore payable by the Bank . . .

Therefore, while a situation in which a trustee would consider it valuable to the estate to conduct a redemption is conceivable, such a situation would be rare.Footnote 9

Conclusion

The OSB takes the following positions in respect of the super priority wage and pension claims created under s. 81.3–s. 81.6 of the BIA:

1. The levy applies to super priority wage claims under s. 81.3 and super priority pension claims under s. 81.5 as these claims only arise in the context of a bankruptcy and are paid through administration of the bankrupt's estate as contemplated by s. 147 of the BIA. There are exceptions to this rule, but it is anticipated that these exceptions will rarely be applicable.

2. The levy does not apply to super priority wage claims under s. 81.4 or super priority pension claims under s. 81.6 as these claims only arise in the context of a receivership (i.e., outside administration of a bankruptcy) to which s. 147 of the BIA does not apply.

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