practical strategies for dealing with employee claims in restructuring proceedings_by allan nackan &...
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This is paper that was jointly prepared and presented by Allan Nackan CPA, CIRP of Farber Financial Group and Lily Harmer of Paliare Roland Rosenberg Rothstein LLP for OBA Institute in January 2011, It focuses on evolving trends and issues in dealing with employee claims in insolvency proceedings.Allan Nackan CPA, [email protected]TRANSCRIPT
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January 2011
Lessons Learned: Practical Strategies for Dealing with Employee
Claims in Restructuring Proceedings
Presented at OBA Institute 2011 Program
By: Lily Harmer, Partner Paliare Roland Rosenberg Rothstein LLP
and
Allan Nackan, Partner Farber Financial Group
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A. INTRODUCTION
Employment related claims in restructurings are frequently significant. Courts recognize that
employees have important and often unique interests as stakeholders in insolvent companies.
It is becoming increasingly common in insolvency proceedings for employee groups to obtain
representation orders with funding, and for unions to be active and well-versed in insolvency
matters.
Recent legislative initiatives highlight the increasingly recognized importance of employee
interests in insolvency proceedings. Relevant statutes and the common law continue to evolve
in this direction.
In this paper, we address some of these evolving issues. We first look at fair representation of
employee interests in restructurings, followed by an overview of the recent amendments to the
Companies Creditors Arrangement Act (CCAA) and the Bankruptcy & Insolvency Act (BIA)
impacting employees. The final two sections of this paper address employee benefit issues:
first health and welfare related benefits, then pension benefits.
B. FAIR REPRESENTATION OF EMPLOYEE INTERESTS IN RESTRUCTURING
1) The importance of employee interests
Employee groups have become more engaged and have begun speaking out more often
and more loudly in insolvency matters in recent years. In some cases they have also been
at the forefront in finding workable solutions for insolvent companies1. Employees typically
hold a large voting block which will be required to achieve thresholds for approval of a
CCAA Plan or BIA Proposal. As a group, employees (including pensioners) are recognized
and listened to by courts, and by wise stakeholders who understand that employee interests
are a key component of any successful restructuring.
Employee groups have a real and compelling interest in the outcome of restructurings. As
stakeholders, they stand to lose their jobs, their benefits, even their pensions. Disabled
employees and former retired employees stand to lose the only source of income they may
1 For instance, in the Stelco CCAA restructuring the union (the USW) was instrumental in introducing the successful
purchaser to the process and in supporting the restructuring plan that recognized their successful bid.
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have for the rest of their lives their disability benefits, and some or all of their pensions.
The stakes are therefore enormous. With such stakes, emotions run high. Moreover,
different employee groups may have different interests at different times. Fair
representation of employee interests therefore, while critically important, presents some
challenges.
2) Types of representation: union and non-union
Representation of employee interests may come in different forms. First, there may very
well be one or more unions with exclusive bargaining rights for their members. Second,
representative counsel orders for non-union employees have been used increasingly in
CCAA cases. Third, there may be employee groups who wish to have separate
representation from either their union, or from rep counsel for the majority. These
sometimes competing interests raise difficult issues of real or perceived conflicts of interest,
scope of representation, adequacy of resources, ability to respond to the real time demands
of insolvency litigation, etc.
a) Unionized employees
Unions have become increasingly sophisticated in their involvement in restructurings.
Union involvement has been accepted by courts as appropriate and often essential to
successful restructurings. This requires other creditors to take unions and their
demands seriously, particularly if the insolvency is to succeed in preserving an ongoing
business in some form. Unions and their members must typically ratify a new collective
agreement with the new owner coming out of a restructuring this gives them a unique
opportunity to negotiate outside of a plan of arrangement, and even to negate a
successful plan if their collective agreement vote comes after the vote on a plan.
Sometimes unions are in a position to strike if a collective agreement expires during an
insolvency, or perhaps if a notice to bargain is served pursuant to section 65.12 of the
BIA or section 33 of the CCAA. This can either give the union additional bargaining
power if an ongoing business is part of the plan and labour is essential to that ongoing
business, or result in labour chaos. Either way, from a practical perspective, such issues
must be adequately recognized and addressed.
Unions have a distinct advantage in ensuring fair representation of their members
interests in an insolvency. They already have in place the infrastructure for notice,
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sharing of information, ratification, etc. Their leadership has the democratic support of
the members. At the same time, however, involvement in insolvency proceedings
usually requires significant resources, access to expert financial and actuarial advice,
and the political capital to make appropriate decisions acceptable to the membership in
real time. Some or all of these factors may play a significant role in how involved a
union may become, or in how responsive a union may be in the positions it takes.
b) Non-unionized employees
For non-union employees, it has become common for representatives and their counsel
to be appointed by the courts for employee groups. This serves a number of purposes:
it gives this group a cohesive, coordinated voice in the process, as well as access to
needed resources, while permitting the court and other stakeholders to rely on rep
counsel for practical purposes such as service, notice, execution of settlement
agreements, and other necessary acts which would be otherwise hugely unwieldy.
Recent amendments to the CCAA and the BIA are supportive of the concept of
representation for employees and other creditor groups. In particular, section 11.52 of
the CCAA and section 64.2 of the BIA give the court the ability to grant an administrative
charge to secure the fees of financial, legal and other experts engaged by an interested
person if the court is satisfied that the security or charge is necessary for the effective
participation of that person in proceedings.
3) Optimal time to get involved
It is often beneficial for employees to become involved in the restructuring process as early
as possible. Issues may arise in respect of the Initial Order and its immediate aftermath:
How will pension contributions be treated? Will current service pension contributions and
special payments towards a pension funding deficit continue to be funded? What will
happen to ongoing health and welfare benefits? These may be of critical importance to
employee groups. Employee support is also usually critical in obtaining approval for a
restructuring plan, given their sheer numbers. Employee groups may also have a real
interest in the approval process for the sale of assets, given the potential impact on
employment, pension and benefits, etc. It is important, then, for employee groups to get
organized and to seek representative status at the earliest opportunity.
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4) Benefits of co-ordinated information flow and decision-making
Once representatives and their counsel are appointed, they often face significant challenges
in providing fair representation to their members, particularly in the case of non-union
employees where a unions infrastructure is not present. The breadth and significance of
the issues to be addressed will require the ability to disseminate information quickly, and to
respond to questions and issues from often very concerned members, while at the same
time respecting the confidentiality of that information.
Ultimately, court appointed representatives have the authority to make binding decisions
affecting members of the group who have not chosen to opt out, subject always to court
approval. These decisions may not be popular with all members, leading to dissension and
sometimes unpleasant confrontations with distraught people facing the prospect of a
significant and very personal financial loss. From a practical perspective, it is important for
other stakeholders to be aware of these dynamics.
It is important for debtor companies, the Monitor, other creditors, and the court to
understand the pressures faced by employee representatives, and the critical role employee
groups can play in a restructuring Fair representation does not always mean that every
employee group will be represented as they might wish; it does mean, however, that
employee groups are represented and funded in a way that permits meaningful participation
in an often complex process. An understanding of the pressures faced by such
representatives in attempting to serve the interests of an often diverse group of employees,
former employees, disabled employees, unionized employees, and retired employees is
important to dealing practically and effectively with this usually large, often unwieldy, group
whose only source of income may be at stake.
5) Nortel Networks engaging counsel and managing conflict of interest
The court in the ongoing Nortel Networks insolvency proceedings under the CCAA has
addressed a number of issues in relation to fair representation of employee claims. At its
peak in 2000, Nortel had 93,000 employees worldwide. By January 2009 when it filed under
the CCAA it had 6,000 employees in Canada, with more than 11,000 Canadian pensioners.
At least six motions were brought by different groups seeking court appointed representative
status. These groups included:
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two different sets of representatives vying to represent the recently severed
Canadian employees owed termination and severance pay; former employees
including pensioners;
retirees formerly represented by the CAW;
Nortel Continuing Employees;
disabled employees; and
dissenting LTD beneficiaries.
All sought funding and access to corporate information, among other things. Various
conflicts of interest were alleged as between the groups to justify separate representation.
The Court initially appointed one law firm to represent the entire employee group, on the
basis that the process can be best served by having one firm put forth the arguments on
behalf of all employees as opposed to subdividing the employee group. In its analysis, the
Court found its authority to appoint representative counsel under Rules 10/01 and 12.07 of
the Rules of Civil Procedure, as well as in its wide discretion under s. 11 of the CCAA to
both appoint representatives and order that payment of legal and other professional fees be
paid from the debtors estate. The Court relied upon the principles applicable to assessing
commonality of interest when addressing the classification of creditors in the CCAA process
to conclude that the Nortel former employees had a commonality of interest best served by
the appointment of one representative counsel. In subsequent proceedings, the Court also
appointed separate counsel for active employees.
The Court accepted that employees and retirees are a vulnerable group of creditors in an
insolvency, and that they have little financial means to pursue their claims in respect of
pension, termination, severance, retirement payments and other benefit claims in complex
insolvency proceedings. It held further that the granting of a representation order would
provide a social benefit, and would serve to streamline and introduce efficiency to the
process for all parties involved. The courts choice of counsel ultimately rested on the
experience of counsel, the number of people signed up to the particular representative
group, the variety of interests covered by the group, and the significant overlap in those
interests.
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The Court rejected the concerns about a conflict of interest as being hypothetical only, and
indicated that should future conflicts arise, further directions could be obtained from the
court at that time. In fact, such a situation did subsequently arise, and steps were taken at
that time to permit limited separate representation for the purpose of dealing with the
particular issues giving rise to the conflict of interest.
The results in Nortel in dealing with the appointment of representative counsel serve to
illustrate the careful balancing required to recognize the vulnerable position of large
employee groups in complex restructurings, with both overlapping and divergent interests,
while preserving efficiency and respecting funding constraints within the estate.
C. RECENT AMENDMENTS TO THE CCAA AND THE BIA IMPACTING EMPLOYEES
In September 2009, fairly extensive amendments were made to the CCAA and the BIA, in order
to bring these statutes in line with evolved practices as well as introduce some new features. A
number of the amendments impact upon employee interests, as detailed below.
1) Introduction of Wage Earner Protection Program (WEPP)2
The Wage Earner Protection Program Act secures the prompt payment of wages, vacation
pay, termination pay and severance pay to employees in a bankruptcy and/or receivership.
An employees claim against the WEPP is the lesser of the unpaid amount or 4 weeks of
insurable earnings under the Employment Insurance Act, which currently equates to a
maximum of approximately $3,254 per employee.
2) Super-priority for unpaid wages and vacation pay
A priority charge has been created by the BIA in favour of employees who are owed
remuneration at the date of bankruptcy or upon the appointment of a receiver (the
Employee Remuneration Charge)3. The Employee Remuneration Charge secures up to
$2,000 of wages, salaries, commissions or compensation for services rendered in the 6
months prior to bankruptcy or receivership (and up to $1,000 for disbursements owing to
2 Established pursuant to the Wage Earner Protection Program Act in July 2008
3 Bankruptcy & Insolvency Act sec. 81.3 and sec. 81.4
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travelling salesmen). Compensation includes unpaid vacation pay but does not extend to
unpaid termination or severance pay.
The Employee Remuneration Charge attaches to the current assets of the insolvent
debtor. Where employees have already received payment under WEPP, the federal
governments subrogated claim arising from payment under WEPP will have the benefit of
this first ranking charge.
3) Super priority for unpaid pension contributions
The BIA has been amended to provide a charge (the Pension Charge)4 over all of the
insolvent debtors assets to secure: (i) unremitted employee contributions, (ii) any unpaid
employer defined pension contribution payments, and (iii) any unpaid normal costs as
defined by applicable pension legislation, as at the date of Bankruptcy or appointment of a
Receiver.
The Pension Charge attaches to all of the Companys assets, as opposed to just the current
assets, and these claims will have priority over other creditors in both bankruptcies and
receiverships. There is no maximum amount for the Pension Charge but it should be noted
that it does not extend to funding deficiencies under defined benefit plans nor would it cover
unremitted special payments.
4) Priority for unpaid wages and pension contributions in CCAA restructurings and
BIA Proposals
The Employee Remuneration Charge and Pension Charge are not triggered in
reorganizations under the CCAA or BIA. These charges only arise in the event of a
bankruptcy or receivership, as does the employees entitlement to make a claim under the
WEPP.
However, the CCAA and BIA do, in effect, give wages and pension related claims priority in
restructuring proceedings by requiring that amounts equivalent to those that would have
been secured by the Employee Remuneration and Pension Charge be paid before the
4 Bankruptcy & Insolvency Act sec. 81.5 and sec. 81.6
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Courts can approve a CCAA plan or BIA Proposal5. This is intended to achieve uniformity of
treatment of employees among the various restructuring statutes. In practice, however,
there may be circumstances where there are inconsistencies in the treatment of employees.
One example is liquidating CCAA or BIA proposals, a practice which has become more
prevalent. In these instances, the restructuring debtor sells off some or all of its assets while
still under CCAA or BIA protection. Employees who will remain as employees of the
restructured company will obviously favour a successful plan or proposal. However,
terminated employees may, in fact, not do as well as if the company were to wind up its
affairs in a bankruptcy or receivership.
The reason for this is that employees receive a priority amount by way of the Employee
Remuneration Charge of up to only $2,000 in the restructuring, with the balance of their
claims ranking as ordinary unsecured claims. In a bankruptcy or receivership, employees
can claim up to $3,254 from the WEPP under an expanded definition of compensation.
Their entitlement under WEPP will be calculated taking into account unpaid termination and
severance which do not enjoy any priority in a restructuring.
The practical implication of this is that terminated employees may get more money and
potentially sooner in a bankruptcy or receivership than if distribution were implemented
under the Proposal. In its Report to Creditors on the Proposal, the Proposal Trustee
should include separate disclosure to terminated employees that they may be eligible to
receive additional amounts from the WEPP. Such disclosure would allow employees to
make an informed decision of whether the Proposal is in their favour or not.
5) Collective Agreements in force at the time of filing may not be altered except by
agreement among the parties6
While the CCAA and BIA have been amended to allow the reorganizing debtor to disclaim,
resiliate and assign a broad range of agreements, the collective bargaining agreements in
5 Sec. 60 (1.3) of BIA and sec. 6(5) of CCAA require the Courts may only sanction a plan of restructuring if it
provides for immediate payment to employees of equivalent amounts that they would have been qualified to
receive under sec. 136(1)(d) of BIA. In addition, sec 60(1.5) and 60(1.6) of BIA require that provision be made in a
Proposal for payment of normal pre-filing pension contributions, prior to Court granting its approval of a Proposal.
6 sec. 33 of CCAA; sec. 65.12 of BIA
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place at the time of filing may not be amended, except by agreement with the bargaining
agent.
If no voluntary agreement can be reached between the company and the bargaining agent,
the CCAA and BIA permit the company to apply to Court to seek an order authorizing the
company to serve a notice to bargain under applicable provincial laws. This was hoped to
have the effect of the requiring the company and bargaining agent to meet to negotiate
amendments to the collective agreement in good faith.
When these provisions were enacted, critics argued that the legislators had not gone far
enough and that the inability to disclaim or amend the collective agreement in Canadian
proceedings would make it difficult to drive a solution with the Union. By contrast, in US
Chapter 11 proceedings, collective agreements can be amended in a restructuring. The
amendments make it clear that, in Canada, collective agreements continue to be valid
despite an insolvency.
What has not been resolved, however, are questions about these provisions will play out in
practice. For example:
will the usual bargaining provisions of the relevant labour relations statutes apply,
including the strike and lockout provisions, once notice to bargain has been given?
what impact will the stay of proceedings have, if any, on this process?
will this give employers an opportunity to unilaterally change terms and conditions
of employment once the bargaining process has broken down?
These amendments are too new for these issues to have played out in real circumstances
only time will tell what practical implications these amendments are likely to have on labour
relations in restructurings.
6) Administrative Charge for interested parties, including employee groups
The CCAA and BIA now provide that the Courts may grant an Administrative Charge7 over
the debtors assets to secure the payment of financial, legal and other experts engaged by
interested parties where the Court is satisfied that the advisors are necessary for the
7 CCAA (sec 11.52) and BIA Proposal (sec 64.2)
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interested party to effectively participate in the proceedings, and upon notice to secured
creditors who might be affected. These amendments further enable employee groups to
appoint representative counsel, financial and other advisors and have those parties
remuneration paid on a secure basis from the assets of the debtor. The monitor, creditor
committees and lenders will usually not oppose these requests as it facilitates a more co-
ordinated and effective discussion among stakeholders, rather than dealing with a broad
group of unrepresented employees.
D. EMPLOYER BENEFIT ISSUES
1) The treatment of health and welfare claims
The issue of the treatment of health and welfare trusts and other vehicles through which
employee benefits are provided has been the subject of some discussion lately. Bill S-216
was recently introduced in the Senate, largely as a result of intense lobbying by Nortel
employees in receipt of long-term disability benefits, in an effort to grant priority in an
insolvency to disability plan liabilities. The Bill proposed amendments to both the BIA and
the CCAA. It was voted down in a close vote in the Senate on November 26, 20108.
In the Nortel CCAA proceedings, the status of a health and welfare trust established by
Nortel to fund its employee benefit obligations has been the focus of much time and energy,
and formed much of the impetus for the introduction of Bill S-216. Nortel had established a
trust fund to fund these liabilities, but had neglected to contribute sufficient funds over the
years, leading to a significant funding shortfall. In the spring of 2010, Nortel negotiated an
Employee Settlement Agreement (described in more detail below) to address both the
ongoing funding of the health and welfare trust (HWT), and the allocation and distribution
of the corpus of that trust.9 The court appointed representatives for Nortel employees and
those employees represented by the CAW entered into an agreement with Nortel that Nortel
would continue to pay medical, dental, income and life insurance benefits until December
8 The vote was 6 5 in the Banking Committee of the Senate.
9 The Settlement Agreement contemplated withdrawal of an application for leave to the Supreme Court of Canada
brought by Employee Representatives in relation to motions for amendment of the CCAA Initial Order to permit
payment of certain employee related payments for termination, severance, voluntary retirement and retirement
allowances.
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31, 2010, and would establish a fund to contribute to the payment of termination and
severance payments owed. After that time, although the HWT was significantly
underfunded, its corpus would be distributed. Employees agreed that any claims arising
from a shortfall in the HWT would be unsecured claims.
The Court approved the Employee Settlement Agreement, and the Ontario Court of Appeal
dismissed an appeal brought by dissenting long-term disability beneficiaries. Subsequent
motions challenged the manner of allocation and distribution of the HWT, which had been
determined through the use of complex methodologies by court order. That challenge,
which was unsuccessful, is currently under appeal. Ultimately, the Court approved an
interim distribution of a portion of the HWT funds, to attempt to alleviate some of the
potential hardship caused by a complete cessation of payments from that fund after
December 31, 2010.
In an earlier effort to relieve hardship, the Court had established a hardship application
process whereby employees and former employees who met certain financial criteria would
receive a maximum payment equal of up to 8 weeks salary, payable in monthly installments.
While the results do not fully alleviate the losses suffered by these most vulnerable groups
of employees, they are an attempt to address the most pressing concerns in a fair manner
while managing the expectations and interests of other stakeholders.
2) Strategies for restructuring pension plan obligations
Large pension deficits have been prevalent in many insolvency cases in recent years
(including Nortel, GM, Abitibi Bowater etc.). The financial difficulties and the vulnerability to
market factors of plan sponsors have significantly contributed to this trend. Defined benefit
plans have generally not lived up to their promises, in the face of the recent economic crisis,
market declines impacting plan assets, and extended longevity of plan members.
Preventing and then dealing with large pension deficits in situations where the plan sponsor
becomes insolvent is an emotionally charged issue that is fraught with many conflicting
financial and policy agendas. Insolvency professionals, legislators, politicians, and the
Courts continue to grapple with issues of whether priority should be afforded to employee
pensions in restructurings. In recent cases such as Nortel, extensive media coverage has
focused attention on the plight of employees and particularly the impact on retirees and
those on long-term disability.
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As described more fully below, Nortel employees were able to secure ongoing funding of
their pension benefits (current service and special payments) and contributions to the health
and welfare trust, at least for a limited time after the filing date. However, as payment of
employee benefits neared an end (and were in fact ultimately terminated on December 31,
2010), employees, assisted by representative counsel, have waged their battles in the
courtroom and escalated their issues in the political arena.
Restructuring of pension obligations and proposed pension reform takes on various faces,
including:
a) Pension reform
The Pension Benefits Amendment Act, 2010 introduced a number of notable
amendments to the Pension Benefits Act in Ontario. These will hopefully insulate plans
to a greater extent in the future and facilitate recovery of ongoing pension plans which
are currently underfunded. However, these kinds of structural changes take years to
bear fruit and are of little assistance to those pensioners currently in the throes of an
insolvency or restructuring.
b) Negotiated continuation of benefits
By actively engaging in the CCAA process, employees or union representatives have
been successful in negotiating a continuation of pension contributions and other
employee benefits in insolvency cases. In some instances, concessions have been
made by other creditors (as in Nortel see below) and in other cases, provincial or
federal governments have contributed to the solution (e.g. Algoma Steel, Stelco).
There is an inherent tension between the financial interests of employees and other
creditors (including bondholders, DIP lenders, and other senior lenders) on issues of
funding of employee pensions and benefits in an insolvency, but deals can be struck for
mutual benefit. Chart I attached hereto contrasts some of the key differences between
the outlook and options available to employees vs. bondholders if a company files for
protection under the CCAA or BIA.
In the example of Nortel, the Initial CCAA order did provide for the ongoing payment of
pension contributions and benefits post-filing. However, there was significant pressure
on Nortels ability to continue to fund its ongoing activities in CCAA, including payment of
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these employee benefits. The Canadian head-office was the primary employer of
Canadian employees and sponsor of the various pension and benefit plans, but was
heavily reliant on its US subsidiary, which also filed for protection under Chapter 11, for
its ongoing operating funding. At the time that a new interim funding agreement was
being worked out with the US, a Court-approved Settlement Agreement was entered into
in Canada which secured the ongoing payment of current service pension contributions
until the pension wind-up date of September 30, 2010. The settlement also secured the
continuation of funding of medical, dental and life insurance to pensioners and long term
disability beneficiaries through to December 31, 2010. Although these concessions
cost the company and its creditors up to approximately $57 million, employees agreed to
waive their right to assert any priority claims, serving the interests of bondholders and
the U.S. unsecured creditor committee (UCC) by bringing much needed certainty to the
process. This in turn helped to facilitate the ongoing funding of Nortels CCAA estate by
the US estate.
The impact of the discontinuance of benefits to Nortel retirees and those relying on
company funded long-term disability has featured prominently in the press. There have
been public rallies, appeals to appellate courts, political lobbying, and proposed
legislative reform in the form of private member bills.
c) Proposed legislative reform
Proposed legislative changes have had some traction in the form of Bill C-501: An Act to
amend the Bankruptcy and Insolvency Act and other Acts (pension protection). This
private members bill progressed to second reading in the House of Commons.
Submissions were then heard from all stakeholders at the Federal governments
Standing Committee on Industry, Science and Technology in November 2010, at which
time the clause-by-clause consideration of the Bill was put over until to February, 2011.
The Bill proposes to grant federal pension plans super-priority status in the event a
company entered restructuring, bankruptcy, or liquidation proceedings.
While motivated by an important social agenda, concerns have been raised that such
changes could have a significant impact on the viability of the companies that sponsor
defined benefit pension plans and their ability to attract financing on favourable terms.
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Affording unfunded pension liabilities a super-priority in insolvency proceedings sends
chills down the spines of lenders due to the sheer size and complexity around the
calculation of estimated pension shortfalls. There are many complex variables which will
impact upon the ultimate pension shortfall, including the value of underlying pension
assets which continually fluctuate with financial market performance; and the
quantification of liabilities which are driven by complex assumptions and calculations
relating to the life expectancy of plan members, estimated risk and returns factors etc.
At any point in time, likely exposure can only be suitably estimated with the assistance of
actuaries. Even in a plan wind-down, it can take years to determine the quantum of the
actual deficit in the pension plan.
Thus, it is incredibly difficult, if not impossible, for lenders to get any meaningful read on
pension liabilities which could rank ahead of them if super-priority were granted to
pension liabilities. Critics argue that the impact on lending could be disastrous,
particularly at a time when access to credit is so critical for corporate growth and
success.
That said, while the future status of Bill C-501 is uncertain, future iterations are likely to
emerge in Canada and other jurisdictions around the world. In fact, at the time of writing
this paper, this is a very live issue in the United Kingdom, where enforcement of
pension claims on a priority basis was considered by the U.K. High Court in December
2010 in the Nortel and Lehman Brothers cases.
d) U.K. Experience Status of post-filing FSD claims
One of the powers of the U.K. Pension Regulator is to issue a Financial Support
Direction (FSD) to any party which is connected or associated with the company
responsible for the pension scheme, if that company is itself unable to continue to
support the scheme. The U.K. Pensions Regulator can look to any company in a group
of companies whether in the UK or not, including parent companies, as well as directors
or controlling shareholders.
The U.K. Administrators of Nortel and Lehman, contending with pension deficits of 2.1B
and 125m respectively, argued that the FSD was inoperable in the insolvency
proceedings and that its impact would be crippling. However, the judge ruled that an
FSD could be imposed and that it would rank as an Administrative Expense of the
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insolvency. This effectively allows the pension schemes to jump up in the priority ranking
ahead of all other creditors and even ahead of the Insolvency Administrators own
remuneration.
Experts contend that the U.K.s position as a centre for cross-border insolvencies and
restructurings has come under serious threat due to the High Court ruling in the
Nortel/Lehman case which dramatically strengthens the Pensions Regulators ability to
compel companies and subsidiaries to help cover pension fund deficits. The
Nortel/Lehman ruling is so wide in its implications that it could even discourage
insolvency practitioners from taking administrations in the U.K., and increase the cost of
borrowing and access to funding from banks. It has been said that it brings U.K.s rescue
culture under attack and is most certain to be appealed.
e) Alternatives to conventional wind-up of pension plans
Typically, pension plans are automatically wound up following a bankruptcy or failed
restructuring. All the money is ultimately converted into annuities, which pay a
guaranteed rate of return for the rest of their plan members lives. A limited top-up to a
maximum of $1,000 per month is provided in Ontario only by the Pension Benefit
Guarantee Fund (PBGF). Employees in other provinces currently do not have access
to a pension protection fund.
In the case of Nortel, this would mean that pensioners would crystallize a substantial
loss (recently estimated to be approximately 30%), equivalent to the estimated solvency
status of the plan. Further, concerns have been voiced about the ability of the Canadian
insurance annuity market to absorb such a large amount of pension funds. This could
result in deeper losses to pensioners, due to the lack of competitive forces governing the
insurance annuity markets.
A group of concerned Nortel pensioners, with input from legal, financial and actuarial
advisors, worked to develop a creative alternative to conventional wind-up of the pension
plan and the purchase of annuities. The proposal was to provide the plan members the
alternative of investing the value of their pension with private fund managers with a view
to maximizing returns over time. This would require legislative and regulatory changes.
After much discussion and analysis, a solution has been agreed upon with the Ontario
government which is intended to provide pensioners with flexibility but maintain
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important checks and balances and impose stringent disclosure requirements to enable
pensioners to make informed choices.
If this initiative were to be adopted more broadly, employees in Ontario would now have
the choice of either opting for traditional pension plan wind-up, with limited top-up by the
PBGF, or electing to invest the value of their pension with private fund managers.
Access by private financial managers to longevity hedges to offset the risk of pensioners
living longer than expected is an important component of these alternate wind-up
models10.
While some proponents applaud the opportunity for choice now available to Nortel
pensioners, others are concerned that such flexibility will only serve to further undermine
retirement funds, as pensioners make choices to move pension funds from secure
annuities to more volatile investment vehicles.
E. CLOSING COMMENTS
There is clearly a lot going on in relation to employee claims in restructuring proceedings. An
aging population suggests that pension issues are sure to maintain prominence for some time.
Increasingly sophisticated and vocal employee groups will continue to insist on being heard.
Large global restructurings bring home the additional complexities introduced when employee-
related claims in other jurisdictions purport to directly impact Canadian proceedings. What is
clear from a practical perspective is that the human element involved in employee claims is an
important component that must be carefully managed in the complex web of any restructuring.
For more information, please feel free to contact:
Lily Harmer Paliare Roland Rosenberg Rothstein LLP 416-646-4326 lily.harmer@ paliareroland.com www.paliareroland.com
Allan Nackan Farber Financial Group 416-496-3732 [email protected] www.farberfinancial.com
10
While these are ground-breaking developments in Canada, there is precedent in Europe for pension schemes to
offload longevity risks (e.g. Deutsche Bank took over longevity risks of approximately 3 billion of pension liabilities
from BMWs UK pension scheme).
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Page 18
CHART I Employees vs. Bondholders Insolvency Impact
Employees Bondholders
Level of
sophistication
Relatively unsophisticated Sophisticated participants in capital
markets
Level of knowledge Unless part of senior management, have
very limited knowledge of: overall strategy,
financial status, insolvency impact.
Sophisticated investors who are in the
business of providing finance and
assessing financial risk. Access to
market data, analysts etc.
Access to expert
professional advice
Appointment of representative counsel for
employee groups has become prevalent.
With recent CCAA/BIA amendments, such
groups are able to get a court approved
Administrative Charge to secure fees of
financial, legal and other experts.
Union provide infrastructure and expertise
to speak for unionized employees.
Hire top-notch legal and financial
advisors, investment bankers,
analysts etc. Most often have formal
representation via UCC and
Bondholder Committees. These
groups have a powerful voice in
CCAA and Chapter 11 proceedings,
and their legal and financial experts
are most often funded directly from
the assets of the insolvent company.
Ability to hedge None available other than the limited
protection offered by:
Pension Benefit Guarantee Fund
(in Ontario only) for portion of
pension deficit
WEPPA for unpaid wages and
other compensation (only in a
receivership or bankruptcy)
Can effectively hedge by purchasing
credit default swaps which will offset
losses suffered in insolvency
proceedings or result in possible
recovery even greater than their initial
investments.
Ability to exit Current employees may be living
paycheque-to- paycheque, cant just leave.
Many remain loyal to the company until the
bitter end.
Ability to trade their position by selling
bonds before and after the filing date.
Special
considerations
Retirees and employees on long-term
disability are particularly vulnerable and are
dependent on pension promises and
continuation of health and welfare benefits,
which may not be adequately funded.