Secured lenders beware – feds give super-priority over secured assets to workers upon insolvency of employer, Autumn 2008

Under the Wage Earner Protection Program Act and amendments to the Bankruptcy and Insolvency Act that took effect on Jul. 7/08, super-priority rights have been given to employees that will take priority over existing secured creditors of their employer in the event of the bankruptcy or receivership of the employer. The amendments provide workers with priority with respect to current assets (basically account receivables and inventory) over secured creditors for wage arrears up to $2,000 per employee.

The priority does not apply to equipment, and lenders on the security of fixed assets may not be directly affected by these particular provisions. However, a further super-priority has been created for unpaid pension contributions and unremitted employee pension deductions. There is no maximum amount for this pension priority and these claims will have priority over all secured creditors.

Fortunately, the amendments are not retroactive and will only apply to bankruptcies and receiverships that occur on or after Jul. 7/08.

In addition, a new agency is to be established to administer a “Wage Earner Protection Program”, which program will guarantee payment of arrears of wages up to $3,000 per employee during the six month period preceding the bankruptcy or receivership. When the program pays an employee's claim, the program is then subrogated to the employee's claim, which means it becomes entitled to the super-priority over secured creditors outlined above.

Secured lenders losing priority appear to have little recourse other than to assert a preferred claim, which ranks below secured claims thereby putting the lender in a worse position.

Unfortunately, the amendments fail to set out a procedure to determine whose secured assets should fund the wage and pension claims, and one can foresee a situation where one secured creditor will lose its security over assets while another does not.