[co-author: Zachary Thacker - Articling Student]

Federal Bill C-228¹ (the Bill), new legislation intended to improve the protection of, and to extend the super-priority given to claims relating to, defined benefit pension plans in insolvency proceedings, completed third reading in the Senate on April 18, 2023 and is now awaiting Royal Assent before it becomes effective. The Bill is the result of a private members' bill, which was passed by the House of Commons in late 2022. Many market commentators have raised concerns that the Bill could have a chilling effect on the continued existence of the very pension plans it purports to protect.

Under the current regime, the priority afforded to employer-sponsored pension plans in insolvency under the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) includes:

• unpaid amounts deducted from employees' pay for payment to the pension fund;
• unpaid amounts required to be paid by the employer to the pension fund under a defined contribution provision;
• unpaid "normal costs" required to be paid by the employer to the pension fund, being the cost of the benefits that accrue during the plan year determined on the basis of a going concern valuation, excluding special payments; and
• unpaid amounts required to be paid by the employer to the administrator of a pooled registered pension plan.

Bill C-228 proposes to significantly expand the scope of the super-priority afforded to private sector defined benefit pension plans through the inclusion of all "special payments" required to be paid to the fund by the employer and any other amount required to liquidate any other unfunded liability or solvency deficiency of the fund. Specifically, the super-priority will now also extend to:

• an amount equal to the sum of all "special payments" required to be paid by the employer in accordance with applicable legislation to liquidate an unfunded liability or a solvency deficiency of the plan (where an "unfunded liability" refers generally to amounts that are required to be paid to the fund to fund all benefits if the pension plan were to be continued indefinitely, and a "solvency deficiency" being the amount the pension fund would need to meet its obligations if the plan were fully wound up); and
• any amount required to liquidate any other unfunded liability or solvency deficiency of the pension fund at the relevant time.

The extension of this super-priority offered to pensions is important considering they will be paid in priority to the majority of most other creditors, regardless if secured or when registered, with limited exceptions being:

1. unpaid suppliers repossessing goods within 30 days;
2. unpaid wages up to $2,000, and
3. amounts owing under certain provisions of the Income Tax Act, Canada Pension Plan and Employment Insurance Act.

Further, no BIA proposal or CCAA plan of arrangement may be approved by a court if it does not provide for the payment of these funds in priority to other claims.

One major impact this new extended super-priority may have is on the availability of financing from lenders for businesses sponsoring defined benefit pension plans. The new super-priority will impact all lenders, including both secured and unsecured, but is likely of most concern to secured lenders. Defined benefit pension plans are funded and audited in accordance with applicable pension standards legislation and actuarial practices based on various assumptions as to inflation, life expectancy, interest rates, etc. This new super-priority will result in the full funding of such plans in the context of insolvency or bankruptcy on both a going concern basis and a solvency basis which is likely to require additional amounts to be paid under the super-priority. It will be difficult for lenders to determine with certainty in advance what amounts could be claimed in priority. Consequently, due to the increased risk of a priority payable, the cost of borrowing to such businesses may increase or they may be unable to obtain financing altogether.

Bill C-228, if enacted, provides that the amendments will not come into force for four years following the date of its enactment. The Bill is expected to receive Royal Assent prior to the 2023 summer adjournment of Parliament. Borrowers with defined benefit pension plans should expect additional lender diligence and increased covenants and disclosure obligations when financing or refinancing.