By Danny Duy Vu, Partner and Melis Celikaksoy, Associate, Stikeman Elliott LLP

In April 2023, the Canadian federal government passed Bill C-228, formally known as an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, with a view to significantly improve the protection afforded to pension plan members in the event their employer or former employer becomes insolvent. Bill C-228 contemplated a four-year transition period, meaning that it will become fully effective as early as April 27, 2027, which is less than a year from now.

This article provides a reminder of what Bill C-228 entails, what changes are imminent, and what impact may be expected.

The Enactment of Bill C-228: Its Objectives

Bill C-228 was enacted with a view to provide additional protection to pension plans members, following the high-profile corporate insolvencies proceedings initiated by large Canadian employers and pension plan sponsors.

More specifically, Bill C-228 was intended to address pensioner vulnerability by amending both the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) to expand the scope of the “super-priority” which pensioners previously benefitted from under both acts. By expanding the pensioners’ super-priority, Bill C-228 aims to ensure that these pensioners are not left bearing the losses of corporate failures, as occurred in previous insolvency matters.

The Amendments to the BIA and CCAA

The table below illustrates how the pension-related claims super-priority status will be amended in both the BIA¹ and the CCAA², as and from April 27, 2027:

In an insolvency scenario, the pension-related claims above will be secured by a super-priority charge over all of the insolvent employer's assets, including current assets, equipment, real property, intellectual property, and other intangible assets, and will rank senior to every other claim, right, charge, or security against the insolvent employer's property, save limited exceptions.

In addition, following the coming into force of the amendments to the BIA and to the CCAA, no BIA proposal or CCAA plan of arrangement will be approved by a court if it does not provide for the payment of the above pension-related claims, unless the court can be satisfied that an agreement has been reached with the members of the applicable pension plans and approved by the relevant pension regulator.

Who May Be Impacted?

Prior to the enactment of Bill C-228, the pension-related claims which previously enjoyed super-priority status were generally known and quantifiable. As noted above, the super-priority will now extend to the full actuarial deficit of a pension plan, where amounts can be significant and difficult to predict in the context of a defined benefit (DB) pension plan.

A DB pension plan is an employer-sponsored retirement plan which provides members with a pre-determined income upon retirement, based on an actuarial calculation that considers, inter alia, the member’s years of membership in the pension plan and its yearly salary. For context, Statistics Canada reported, as of January 1, 2024, that approximately 4.9 million Canadians were members under a DB pension plan, representing more than 2/3 of the total membership in registered pension plans, and roughly 25% of the total Canadian workforce.³

While members of DB pension plans stand to benefit from the enhanced super-priority status taking effect on April 27, 2027, they may also indirectly bear the consequences of the impact that this enhanced priority may have on their employers. Employers that sponsor DB pension plans may need to reassess their pension and compensation strategies in light of a potential increase in their cost of capital. Lenders and prospective lenders will need to assess the risk of being primed by significant unfunded pension liabilities in the event that a borrower or prospective borrower becomes insolvent. Depending on their assessment of the borrower’s financial position and the industry in which it operates, lenders and prospective lenders may seek to implement a range of protective measures, including:

• Reducing available credit, imposing additional reserves or lending restrictions, or taking additional security;

• Imposing stricter financial covenants; and

• Requiring enhanced and periodic disclosure of the DB pension plan's funded status throughout the term of a loan.

Ultimately, access to credit for companies with DB pension plans could potentially become more difficult, more restrictive and more expensive to obtain.

As for parties potentially interested in acquiring the business and/or assets of a company that sponsors DB pension plans, they will also want to place additional scrutiny on their target companies and determine how any acquisition transaction can be financed, before submitting any acquisition offer.

Can Access to Interim Financing Be Impacted?

In the event where an insolvent company that sponsors a pension plan initiates or otherwise becomes subject to insolvency proceedings under either the BIA or the CCAA, a question may be raised as to whether the coming into effect of Bill C-228 can affect the insolvent company’s ability to secure interim financing.

In any insolvency proceedings, and more particularly in the context of CCAA proceedings, Canadian courts benefit from a broad discretion to render any order they deem appropriate in the circumstances, including orders granting super-priority charges in favour of an interim lender that is willing to provide interim financing to an insolvent debtor company. Canadian courts have previously exercised their discretion to grant super-priority charges in favour of interim lenders ranking ahead of pension-related claims. In Timminco Limited (Re), the Court confirmed that it had jurisdiction to grant a DIP lenders' charge with super-priority notwithstanding the deemed trust provisions of provincial pension benefits legislation. In doing so, the Court stated the following:

“It is unrealistic to expect that any commercially motivated DIP Lender will advance funds without receiving the priority that is being requested on this motion. It is also unrealistic to expect that any commercially motivated party would make advances to the Timminco Entities for the purpose of making special payments or other payments under the pension plans. […] If there is going to be any opportunity for the Timminco Entities to put forth a restructuring plan, it seems to me that it is essential and necessary for the DIP Financing to be approved and the DIP Charge granted. The alternative is a failed CCAA process.”⁴

We note that in Catalyst Paper Corporation (Re),⁵ the Court also granted a DIP financing charge with priority over any deemed trust under provincial pension benefits legislation, as well as any future charge that might arise under sections 81.5 and 81.6 of the BIA.

While Bill C-228 will significantly expand the scope of pensioners’ claims which may benefit from a super-priority, it is not intended to change the ranking of such super-priority. This being said, it will be interesting to observe whether the coming into force of Bill C-228 will affect or influence the exercise of the Canadian Courts’ discretion in the context of insolvency proceedings.

Conclusion

Despite the four year transition period since Bill C-228 received Royal assent, there remains some concerns regarding the practical consequences which may arise from the coming into effect of such act. While the market is still adapting, it remains to be seen how it will precisely react, either in the months prior to or after April 27, 2027, and what measures lenders and employers may implement to adjust to the new regime. What is clear is that all employers, lenders, acquirers, and pension plan members alike, would be well-served to use the remaining transition period to assess their position and plan accordingly.

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¹ Sections 81.5 and 81.6 BIA.

² Section 6(6) CCAA.

³ Statistics Canada: The Daily — Pension plans in Canada, as of January 1, 2024

⁴ Timminco Limited (Re), 2012 ONSC 506, at paras. 46 and 47.

⁵ Catalyst Paper Corporation (Re), 2012 BCSC 207.