April 2027: the date that could empty your claim against a manufacturer

In an ordinary bankruptcy an unpaid supplier is an ordinary creditor. It ranks behind the secured creditors, behind the preferred claims, and shares what is left — when anything is left.

Since 2023 one category of claim has moved ahead of everyone. Including the bank.

What the Pension Protection Act does

Bill C-228, the Pension Protection Act, received royal assent on 27 April 2023 (S.C. 2023, c. 6). It amends sections 81.5 and 81.6 of the Bankruptcy and Insolvency Act — which already protected payroll deductions and a plan's normal cost — to add two new elements:

• special payments determined in accordance with the federal pension benefits standards regulations;
• any amount required to liquidate any other unfunded liability or solvency deficiency of the plan.

In other words: the full deficit of a defined-benefit plan.

The rank

This is the part that matters. Those amounts are secured by a charge over all of the bankrupt's assets. And subsection 81.5(2) provides that the security ranks above every other claim, right, charge or security against the bankrupt's assets, regardless of when that other claim arose.

The exceptions are short: the rights of the unpaid supplier and of farmers and fishers (ss. 81.1 and 81.2), the deemed trusts of subsection 67(3), and the charges for wages (ss. 81.3 and 81.4). Everything else comes after. Including the bank.

The order of distribution, summarized: deemed trusts under s. 67(3); then the unpaid supplier under s. 81.1 and farmers and fishers; then wages (ss. 81.3-81.4) and the pension deficit (ss. 81.5-81.6); then secured creditors; then preferred claims under s. 136(1); and finally ordinary creditors, pro rata on what remains.

Why April 2027

The Act provides a four-year transitional period. Section 7 of the transitional provisions excludes application of the new rules to an employer who, the day before they came into force, was already participating in a covered plan — until the fourth anniversary of the Act's coming into force. The Act came into force on royal assent, 27 April 2023. The fourth anniversary therefore falls in April 2027.

Two points. First, the reprieve covers only plans existing at assent: a plan created afterwards does not benefit from it. Second, the delay does not suspend the Act — it suspends its application to those employers. Which means a bankruptcy occurring the day after the deadline is governed by the new rules, for a deficit accumulated long before.

And in a proposal or under the CCAA?

The super-priority in sections 81.5 and 81.6 operates in bankruptcy and receivership. In a Division I proposal the mechanism differs but the effect is comparable: payment of the special payments and the residual deficit becomes a condition of court approval (s. 60(1.5) BIA). The same logic applies under the CCAA for sanctioning a plan (s. 6(6)).

In both cases there is a valve: the court may approve without payment where the parties have entered an agreement approved by the pension regulator (s. 60(1.6) BIA and s. 6(7) CCAA).

What this means for you in practice

If you sell on credit to industrial or manufacturing businesses — the kind that still has a defined-benefit plan — your real exposure on those accounts is larger than it was. Three things to do.

1. Identify the customers concerned. A defined-benefit plan is recognizable: unionized, long-established, manufacturing or transport sector, collective agreement. If you are unsure, a public company's financial statements say so, and a frank conversation with a long-standing customer does too.

2. Look harder at section 81.1. That is the line that concerns you directly: the unpaid supplier ranks ahead of the pension deficit. The Bankruptcy and Insolvency Act gives an unpaid supplier a right to repossess goods delivered shortly before the bankruptcy, on strict conditions of timing and form. The right has always existed and almost nobody exercises it, because you must act fast and know it is there. In the new order of distribution it is one of the few ranks that remains ahead of the deficit.

3. Reduce the exposure before the deadline, not after. A tighter credit limit on those accounts, personal guarantees from the principals, a letter of credit, or simply shorter payment terms. These are negotiated while the relationship is good. They are not negotiated once the customer starts paying late.

The calendar

April 2027 is not far away for a credit portfolio. Between now and then you have time to revise limits, obtain guarantees and shorten terms. After that, you will have time to file an ordinary claim.