Service Canada's subrogation rights under WEPPA clarified

Metroland Media Group Ltd. (Re), 2024 ONSC 2261
What is the extent of Service Canada’s subrogation right under WEPPA?

Overview: In this case, the Court considered the extent of Service Canada’s subrogation rights under the WEPPA to recover WEPP payments made from a distribution in a proposal. The Court rejected an argument that Service Canada was entitled to receive only 17 cents on the dollar for each WEPP payment made to an employee. Instead, the Court agreed with Service Canada that it was entitled to recover, on a dollar-for-dollar basis, up to the full amount of the WEPP payment made, with the balance to be paid to the employee.

Metroland Media Group Ltd. (“Metroland”) is a media publisher and distributor of 70 newspapers in southern Ontario. It filed a Notice of Intention to Make a Proposal under s. 50.4(1) of the Bankruptcy and Insolvency Act in September 2023. At the time of filing, Metroland terminated approximately 600 employees en masse, approximately 500 of whom were non-unionized. Representative counsel was subsequently appointed for these former non-unionized employees.

Metroland made a proposal, which attracted the support of 99.6% of creditors and was approved by the Court. Under the terms of the proposal, the unsecured creditors are entitled to receive a distribution of approximately 17 cents on the dollar of their claims (the “Distribution”). His Majesty in Right of Canada (“Service Canada”) had approved payments to certain of Metroland’s former non-unionized employees under the Wage Earner Protection Program Act (the “WEPPA”). The issue on this motion was the extent of Service Canada’s rights under the WEPPA to recover those payments from the Distribution.

The WEPPA was introduced in 2005 in Bill C-55. From the outset, pursuant to s. 36(1), the WEPPA provided that Service Canada could recover payments under the WEPPA (“WEPP payments”) from available funds paid by the trustee or receiver to the employer’s creditors by way of subrogation to the employee’s rights against the employer. In 2009, the benefits under the WEPPA were expanded. Whereas previously, the WEPP payments only applied to unpaid “wages”, which excluded severance and termination pay, the 2009 amendments included severance and termination pay in the definition of “eligible wages” and “wages” for which the employee could receive a WEPP payment. Accordingly, and by definition, Service Canada’s subrogation rights under s. 36(1) were extended to severance and termination payments. In 2018, the financial provisions of the WEPPA were again amended. In s. 36(1), the term “unpaid wages” was replaced with “eligible wages”, but the subrogation wording remained the same. A new section, s. 36.1(1), was introduced. That section directs a trustee or receiver to pay Service Canada its subrogated amount before making any payment to the individual on account of eligible wages.

The WEPP payments in this case related to unpaid severance pay. As such, the Attorney General of Canada (“AGC”) accepted that Service Canada’s subrogation rights under s. 36(1) of the WEPPA related to unsecured claims. Representative Counsel, supported by the Proposal Trustee, Metroland, and Unifor Local 87-M, argued that since Service Canada was subrogated to an unsecured claim, it is entitled to receive only 17 cents on the dollar for each WEPP payment made to an employee. The balance is to be paid to the employee. The AGC argued that under Service Canada’s subrogated right, it is entitled to recover from the Distribution on a dollar-for-dollar basis, up to the full amount of the WEPP payment made, with the balance to be paid to the employee. The difference in the amount payable to the employees under the two interpretations was approximately $2 million.

The Court held that the wording of ss. 36(1) and 36.1 reflects the intention of the legislature to permit Service Canada to recover WEPP payments out of any funds due to the employee from the bankrupt or insolvent employer, up to the amount of the WEPP payment. Section 36(1) provides that where “an insurer is subrogated to the claim of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced”. Here, Service Canada was subrogated to the employee’s claim to eligible wages from Metroland. Service Canada was not asserting its own claim against Metroland. Therefore, while Service Canada can only recover from whatever the employee receives from Metroland (for example, $17,000 in respect of an unsecured claim for $100,000), Service Canada was not limited to 17 cents on the dollar of its WEPP payment to the employee as if it was a separate creditor of Metroland.

This interpretation was reinforced by the language of s. 36.1, which is directive in nature. It requires that the trustee/receiver determine whether Service Canada is subrogated to any “rights the individual may have in respect of the eligible wages” and then pay Service Canada the “amount” in respect of which Service Canada is subrogated. It evidences the legislative intention that Service Canada’s subrogated amount be paid out of the employee’s distribution first and that the employee receive the balance after Service Canada has been paid. If Service Canada were only entitled to a pari passu distribution along with the other unsecured creditors, there would be no reason for it to receive its payment ahead of the employee.

The purpose of the WEPPA is to provide timely, limited relief to employees whose employers are insolvent or bankrupt. Since these types of proceedings can be lengthy and uncertain, the focus of the WEPPA was to get monies for unpaid wages (and later, severance and termination pay) into the hands of the employee quickly rather than waiting for a distribution to occur months or years down the road, if at all. However, the legislators sought to strike a balance in this statutory scheme. Recognizing that WEPP payments are funded with taxpayer dollars, the program sets limits on the WEPP payments. It further includes provisions enabling Service Canada to recover funds if and when they later became available in the bankruptcy or insolvency. This recovery right acts as a deterrent to strategic behaviour on the part of companies facing bankruptcy or insolvency.

The Court held that the AGC’s interpretation of a dollar-for-dollar recovery of its WEPP payments was more consistent with the objectives underlying the WEPPA. Employees are paid quickly from Service Canada, up to a prescribed limit. Service Canada is required to wait and see if there will be any distributions from the bankrupt or insolvent employer. Service Canada will only recover funds if and when there are distributions, up to the amount paid by Service Canada to the employee. Even if Service Canada is later able to recover those payments from available funds, the employees will have had the benefit of receiving the WEPP payment at a time when their employment had been terminated and they were most vulnerable.

Accordingly, the Court directed the Proposal Trustee to pay to Service Canada, from the Distribution owed to a WEPP recipient, the amount of that Distribution on a dollar-for-dollar basis, up to the amount of the WEPP payments made to that recipient.

Judge: Conway J.

Counsel: Walter Kravchuk, Emily Atkinson and Rebecca Ro of the Department of Justice for the Attorney General of Canada

Andrew Hatnay and Abir Shamim of Koskie Minsky, Representative Counsel for the Non-Union Employees and Retirees

David Ullmann and Alexandra Teodorescu of Blaney McMurtry for Grant Thornton as Proposal Trustee for Metroland Media Group

Steven Graff and Samantha Hans of Aird & Berlis for Metroland Media Group

Brett Hughes of Dewart Gleason for Unifor Local 87-M