What Is PERTA and How Does It Affect Businesses?
Understand how new Canadian law shifts financial risk in business insolvency by giving employee and retiree claims priority over secured creditors.
The Protecting Employees and Retirees in Business Bankruptcies Act (PERTA) is a Canadian law designed to safeguard the financial interests of workers and pensioners when a company declares bankruptcy. Its primary function is to change how employee and retiree claims are prioritized during insolvency proceedings. The legislation addresses concerns about fairness for individuals, aiming to ensure their earned compensation and retirement funds are better protected.
Purpose of the Act
This legislation stems from a history of high-profile corporate insolvencies where employees and retirees experienced substantial financial losses. In many past bankruptcy cases, like the Sears bankruptcy, the pensions and unpaid wages of workers were treated as low-priority debts. This meant that after a company’s assets were liquidated, there was often little money left to cover what was owed to them.
PERTA was established to correct this imbalance. The law recognizes that employees and retirees are in a vulnerable position when a business fails, as their livelihood is tied to a single employer. The act seeks to instill greater fairness into the process by reordering the priority of payments, providing a safety net for earned wages and retirement savings.
Key Protections Offered
The legislation amends existing Canadian laws, most notably the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), to strengthen protections for workers. These changes target specific types of compensation that are fundamental to an employee’s financial security.
A primary protection relates to unfunded liabilities in a company’s defined benefit pension plan. An unfunded liability occurs when the plan does not have sufficient assets to cover all its future obligations. PERTA gives a special priority status to the amount needed to eliminate this shortfall, ensuring that money is set aside to fund the pension plan before many other creditors can be paid.
The act also provides enhanced protection for unpaid wages, salaries, and vacation pay owed to employees at the time of the bankruptcy filing. Previously, there were limits on the amount of unpaid wages that received priority payment. The new legislation increases the priority amount for these claims, offering a more substantial recovery for workers who are often left without their final paychecks.
Mechanism of Protection in Bankruptcy
The core mechanism through which PERTA protects employees and retirees is by granting their claims “super-priority” status. This legal concept elevates their claims in the hierarchy of payments during bankruptcy or insolvency proceedings. This means the funds required to cover specific employee and retiree entitlements must be paid out from the insolvent company’s assets before the claims of most other creditors, including secured lenders.
This represents a direct reversal of the previous system where secured creditors held the highest priority. Under the old rules, employee wages had a limited priority, and pension deficits were often treated as unsecured claims, placing them far down the list. Under the new framework, the court overseeing the insolvency must recognize the super-priority status of these claims, forcing a reordering of how financial obligations are settled.
Implications for Businesses and Creditors
The implementation of super-priority for employee and retiree claims has notable consequences for other stakeholders, particularly businesses and their creditors. The revised payment hierarchy alters the risk assessment for lenders. Since secured creditors are now positioned behind pension and wage claims, they face a greater risk of not recovering their loans in the event of a borrower’s bankruptcy.
This shift in risk may influence lending practices. Financial institutions might become more cautious when extending credit to companies that have large, underfunded defined benefit pension plans. The existence of a significant pension obligation now represents a higher potential claim that could supersede a lender’s security interest, which could lead to stricter borrowing conditions or increased costs of capital.
For businesses, this legislation underscores the importance of responsibly managing their pension obligations. The act incentivizes companies to keep their pension plans well-funded to avoid creating a large priority claim that could hinder their ability to secure financing.