Priority claims and corporate assets
When a corporation files for bankruptcy, there can be different classes of creditors making claims against the assets of the bankrupt company. Who has priority on these assets?
The following are examples of the usual types of creditors involved in a bankruptcy process:
This is a creditor who holds a mortgage, pledge, charge or lien on or against some or all of the assets or property of the debtor as guarantee of payment.
To qualify for an operating loan with a lending institution, a company may have signed a general security agreement, commonly referred to as a GSA in Ontario, or a Movable Hypothec on a Universality of Movable Assets in Quebec. This means that this creditor would have registered a security under the appropriate provincial legislation (in Ontario, this is the Personal Property Securities Act, and in Quebec, the Régistre des droits personnels et réels mobiliers) in order to ensure that it would enjoy a priority over all of the corporate assets to be able to recover their money should the debtor default on the loan agreement.
There could be more than one creditor registered on the same assets; which secured creditor holds a priority over the others is usually determined by the earliest date that the security was perfected and still valid; a legal opinion may be sought in some of the more complex situations.
Purchase Money Security Instrument (PMSI)
This secured creditor has registered its security in such a way as to provide it with a priority over other regular secured creditors on specific assets. This is usually seen when a debtor purchases or finances equipment or vehicles.
PMSI aren’t available in Quebec.
Reservation of ownership: Leasing or Instalment Sale
In Quebec, creditors who finance the acquisition of movable property will either proceed through an installment sale or a lease.
Depending on the situation, a creditor in Quebec may publish a reservation of ownership in the Register of Personal and Movable Real Rights to register its priority on the movable property financed. Usually, this applies to vehicles, equipment, machinery, etc.
Unpaid employee wages
Under s.81.3 of the Bankruptcy and Insolvency Act (BIA), claims for unpaid wages earned within 6 months of the employer’s bankruptcy enjoy a security of up to $2,000.00 per employee on the current assets (such as cash, accounts receivables, inventory).
These claims have priority over a secured creditor’s claim on the current assets. Should there be insufficient current assets to pay these claims out, s. 136(d) allows these wage claims to recover the difference as a preferred creditor, and in the event that there are any funds available, they will be paid in priority to the regular unsecured creditors.
Security for unpaid amounts in a prescribed pensions plan
Under s.81.5 of the BIA, if the bankrupt corporation was an employer who participated in a prescribed pension plan for the benefit of its employees, and there are amounts that are unpaid on the date of the bankruptcy, these amounts may enjoy a security on all the assets. This security ranks ahead of every other claim, right, charge or security against the bankrupt’s assets, regardless of when that other claim, right, charge or security arose, except those having
- rights under s. 81.1 and 81.2 for unpaid suppliers
- deemed trust claim for payroll deductions
- securities under s. 81.3 and 81.4 for unpaid employee wages
Canada Revenue Agency
Unremitted Payroll Deductions or Source Deductions is a deemed trust claim, and as such, this claim enjoys a “super priority” above all of the creditors over the property of the bankrupt.
Contrary to Source Deductions, a claim for GST/HST loses its deemed trust status in a bankruptcy and ranks as a regular unsecured creditor.
A landlord’s claim for unpaid rent loses its priority status in a bankruptcy, however, under s.136(f) it may claim a preferred status over the regular unsecured creditors for arrears of rent up to three months immediately prior to bankruptcy and, if provided for in the lease agreement, accelerated rent up to 3 months.
This preferred status claim is limited on the proceeds derived from assets located on the leased premises. Any residual amounts rank as unsecured.
Unpaid suppliers /”30 day goods”
Under s.81.1 of the BIA, a claim for unpaid goods or supplies delivered within 30 days of the date of bankruptcy may be recovered by the supplier, if:
- a notice of claim is made to the Licensed Insolvency Trustee (“LIT”) within 15 days after the date of bankruptcy
- the goods are still in the possession of the LIT
- the goods are identifiable as those delivered by the supplier and are not fully paid
- the goods are in the same state as they were delivered
- the goods haven’t been resold or subject to an agreement for sale at arm’s length
Farmers, fishermen and aquaculturists who have provided products to the bankrupt company have similar rights under s. 81.2 of the BIA, but their goods must have been delivered within 15 days of the bankruptcy date and remain unpaid. They have 30 days to make a claim to the LIT and would enjoy a security on the bankrupt’s entire inventory (excluding that which is subject to the claims of the supplier as stated above) to the extent of the amounts that they are owed.
Property Claims (third party)
A party having a claim for property in possession of the bankrupt must make its claim within 15 days of the date of bankruptcy or 15 days after the meeting of creditors. The onus is on the claimant to establish its claim to or on the property.
Most suppliers, contract and trade workers, utilities, credit cards, and even income tax rank as regular unsecured creditors.
Should there be any funds available in a bankruptcy after having settled the secured and preferred claims, the Licensed Insolvency Trustee’s fees and expenses, along with the required levy payable to the Office of the Superintendent of Bankruptcy, the unsecured creditors will share in the residual proceeds on a pro-rated basis. For example, if the amount available for distribution represents 10% of the total claims filed, then each unsecured creditor would receive 10% of their accepted claim.
The Role of Licensed Insolvency Trustees
The Licensed Insolvency Trustee must review the validity of each claim before accepting them, and follow the rules and regulations under the Bankruptcy and Insolvency Act in dealing with them and their priorities. The LIT may require additional information from the creditor to verify the information filed in the claim.
If the LIT determines that the claim is not valid, he/she can disallow the claim in part or in full. The creditor can either accept the LIT’s position or can apply at Court within the prescribed time frame to challenge the decision and have the claim admitted.