How Bill C-228 may adversely impact commercial lending

Authors: William E. J. Skelly, Mark Gill, Dax Moir

Bill C-228 was designed to protect pension plans in the wake of insolvency proceedings in Canada. However, the proposed legislation may have unintended consequences – and may even lead to some employers abandoning defined-benefit pensions in order to maintain their access to capital from commercial lenders.

Bill C-228 may soon become law

Bill C-228 (“Bill C-228”), An Act to Amend the Bankruptcy and Insolvency Act (“BIA”), the Companies’ Creditors Arrangement Act (“CCAA”) and the Pensions Benefits Standards Act, 1985, has now made its way to the Senate committee stage and may be passed into law as early as the first quarter of this year. The bill seeks to provide additional priority benefits to pension plans involved in insolvency proceedings in Canada and has received broad political support from across the aisle.

Current state of the law

Currently, pension plan liabilities in Canada are granted super priority status under the BIA and CCAA in certain limited contexts, including:

  • amounts deducted from employee renumeration for contribution to the pension fund; and
  • unpaid “normal costs” or other unpaid amounts required to be paid by the employer to the pension fund or administrator under a registered pension plan or pursuant to a defined contribution provision (as applicable).

Proposed changes

In addition to the current super priority rules under the BIA and CCAA, Bill C-228 seeks to extend super priority status for pension plan liabilities to also include:

  • special payment amounts determined in accordance with section 9 of the Pension Benefits Standards Regulations, 1985, that the employer is required to pay to the pension fund in order to liquidate an unfunded liability or a solvency deficiency; and
  • any amount required to liquidate any other unfunded liability or solvency deficiency of the pension fund (collectively, the “Proposed Changes”).

The Proposed Changes would grant super priority status to any funds required to be added to a pension plan’s assets to operate indefinitely on a going concern basis, as well as any funds needed to meet the pension plan’s obligations if it were to be wound-up.

Special payment amounts that would receive super priority status under the Proposed Changes include arrears in periodic payments, which an employer is required to pay to the pension plan to amortize a deficit. However, it is important to note that an employer’s unfunded liabilities and solvency deficiency do not have a fixed value and special payment amounts can only be determined by actuarial assessment at a particular point in time. As such, the Proposed Changes would not only apply to past payments that an insolvent employer was required to make pursuant to a plan, but would also extend to payments that the employer may be liable to pay at some point in the future.

If passed into law, the Proposed Changes would take effect four years from the date Bill C-228 receives Royal Assent (the “Transition Period”). The Transition Period would provide companies, pension plans and other affected stakeholders time to plan and assess the status of any unfunded liabilities or a potential solvency deficiency and adjust their affairs accordingly.

The impact of Bill C-228 on defined-benefit plans

The Proposed Changes will likely have a significant effect on employers that offer defined-benefit pension plans. Insolvent employers would first need to fund special payment amounts for past, present and future pension plan liabilities prior to restructuring or paying the debts held by other creditors.

Furthermore, given the actuarial complexity and uncertainty surrounding the value of a defined-benefit pension plan’s unfunded liabilities or solvency deficiency in the future, commercial lenders interacting with employers offering such plans may not be able to determine the full extent of an employer’s liability in the event of a future insolvency proceeding.

Potential concerns if Bill C-228 passes

Access to capital

A knock-on effect of the Proposed Changes may leave employers offering defined-benefit pension plans with reduced access to capital from commercial lenders. Commercial lenders need to be able to evaluate their risk exposure in order to effectively lend to borrowers, and the amount of money to cure a defined-benefit pension plan’s solvency deficiency or to fund its unfunded liabilities in the future is largely unknowable due to the dynamic nature and complexity of such plans. If secured lenders are not able to occupy a first position in the insolvency pecking order, at the very least such lenders would generally require the quantum of the obligations that rank ahead of them to be calculable.

For example, the amount financed in a revolving asset-based lending facility is directly related to the “borrowing base,” which is determined by the value of a borrower’s assets. Only assets that can be turned into cash in the medium-term business cycle, such as inventory and receivables, are financed in this way. However, “priority payables” – amounts secured by statutory liens that are capable of ranking ahead of a lender’s security – are usually deducted from the borrowing base. If the Proposed Changes take effect, the amount deducted as priority payables at the time a lender advances funds to a borrower with a defined-benefit pension plan would be largely unknowable. Lenders would likely seek to maximize their discretion when assessing priority payables in these circumstances since their funds would be at risk.

As a result of the foregoing, Bill C-228 is likely to make it more expensive and difficult for an employer who has adopted a defined-benefit pension plan to obtain credit, which could effectively increase the risk of bankruptcy for employers who are subjected to increased cost of capital.


Another notable concern arising from the Proposed Changes relates to time. In particular, calculating the amount it would take to top-up an insolvent defined-benefit pension plan could take months or years to determine based on the size and complexity of the plan. As a result, there could be substantial delays in making payments to creditors or large hold-backs may have to be made in order to accommodate pension plan top-ups during insolvency proceedings.

Possible collapse of defined-benefit pension plans

If Bill C-228 is passed into law, we may see the demise of defined-benefit pension plans altogether. Employers may abandon these plans in favour of defined-contribution pension plans in order to secure better options for financing. Notwithstanding the fact that Bill C-228 was put forward to protect pension plans, an unfortunate effect of the Proposed Changes may be that employers use the Transition Period to move away from defined-benefit pension plans.

Bill C-228 may increase likelihood of insolvencies

While Bill C-228 attempts to improve the position of pension plans when employers become insolvent, it may actually make insolvency more likely due to the increased costs associated with commercial lending. If Bill C-228 receives Royal Assent, employers should take the time to evaluate their borrowing position and lenders should be aware of how the Proposed Changes affect their lending portfolio.

For further information on Bill C-228 and how the Proposed Changes may affect you or your business, please contact a member of our Banking & Commercial Lending Group or Insolvency & Restructuring Group.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.