Before a secured lender takes a dollar out of an insolvent business’s cash, receivables and inventory, up to $2,000 per employee of unpaid wages comes off the top. Bankruptcy and Insolvency Act section 81.3 says so for a bankruptcy and section 81.4 repeats it for a receivership. The pension charge in sections 81.5 and 81.6 reaches every asset, not only the current ones.
Key takeaways
SECTION 01 OF 09
Marginal note: Security for unpaid wages, etc. — bankruptcy. Subsection 81.3(1) makes an employee’s claim for wages, salaries, commissions or compensation “secured, as of the date of the bankruptcy, to the extent of $2,000 … by security on the bankrupt’s current assets”.
Secured is the operative word: a security interest on identified property, not a preferred claim in a queue. And the property is narrow. Section 2 defines current assets as “cash, cash equivalents … inventory or accounts receivable, or the proceeds from any dealing with those assets”.
So the charge misses the building, the machinery and the goodwill, and lands on the receivables ledger and the stock — the pool an asset buyer prices hardest. Treadstone Law on lender security versus unpaid wages puts it from the lender’s side: PPSA perfection orders private creditors, not a federal charge above them.
SECTION 02 OF 09
The window is statutory: services rendered “during the period beginning on the day that is six months before the date of the initial bankruptcy event and ending on the date of the bankruptcy”. That event is defined in section 2 and can be a notice of intention filed months earlier, so the clock starts earlier than buyers expect.
The cap is per person, not per estate: forty employees each owed $2,000 produce forty secured claims. Subsection 81.3(3) adds a travelling salesperson’s disbursements “to the extent of $1,000”. Both figures are in the Act, not in a regulation.
The exclusion matters as much. Subsection 81.3(9) defines compensation so that it “includes vacation pay but does not include termination or severance pay” — usually the largest employee numbers on the page. Employees in a distressed acquisition covers the rest.
SECTION 03 OF 09
Subsection 81.3(4) is blunt: the security “ranks above every other claim, right, charge or security against the bankrupt’s current assets — regardless of when that other claim, right, charge or security arose — except rights under sections 81.1 and 81.2…”. A 2015 general security agreement loses to last month’s wage claim.
The exceptions are short. Section 81.1 is the Right of unpaid supplier to repossess goods; section 81.2 the Special right for farmers, fishermen and aquaculturists; and subsection 67(3) preserves the federal deemed trusts for unremitted source deductions.
A displaced lender is left with little. Section 136(1) distributes the estate “Subject to the rights of secured creditors”, then gives the lender an unsecured claim for “the amount equal to the difference a secured creditor would have received but for the operation of sections 81.3 and 81.4…”.
SECTION 04 OF 09
Section 81.4 secures the same $2,000 for services in “the six months before the first day on which there was a receiver”, on current assets “that are in the possession or under the control of the receiver”. Where the bankruptcy version also carves out the subsection 67(3) deemed trusts, subsection 81.4(4) ends at “except rights under sections 81.1 and 81.2.”
Two groups are shut out. Subsection 81.3(6): “No officer or director of the bankrupt is entitled to have a claim secured under this section.” And a non-arm’s-length claimant gets nothing unless the trustee is of the opinion that “it is reasonable to conclude that they would have entered into a substantially similar transaction…”.
The owner-manager who left salary in the business is therefore exactly who the sections exclude — count that head separately. Directors can still be personally liable for the same wages under provincial employment standards: Treadstone Law on Ontario directors, and buying from a receiver for the sale process.
SECTION 05 OF 09
Section 81.5, marginal note Security for unpaid amounts re prescribed pensions plan — bankruptcy. Where the bankrupt participated in a prescribed pension plan, the unpaid amounts listed there “are secured by security on all the assets of the bankrupt”. Not current assets — all of them. Section 81.6 mirrors it in a receivership.
It starts with money that was never the employer’s — amounts deducted from employees’ remuneration for the fund — then reaches normal cost, special payments under the Pension Benefits Standards Regulations, 1985, and, since 2023, “any amount required to liquidate any other unfunded liability or solvency deficiency of the fund”.
Subsection 81.5(2) ranks that security above everything except sections 81.1 and 81.2, the deemed trusts, and “securities under sections 81.3 and 81.4”. Wages first, pension second, secured lender third. Treadstone Law on topping up a pension shortfall has the share-purchase mirror image.
SECTION 06 OF 09
That last limb is new. It came from the Pension Protection Act, S.C. 2023, c. 6, recorded on Justice Laws as “Assented to 2023-04-27” — the amendment that turned a charge over missed contributions into one able to reach a whole solvency deficiency.
It does not bite on every employer yet. Section 7(1) provides: “Sections 2 to 4 do not apply in respect of a person who is an employer and who, on the day before the day on which those sections come into force, participated in a prescribed pension plan for the benefit of the person’s employees until the fourth anniversary of the day on which this Act comes into force.” Read against the assent date, that is 27 April 2027 for a legacy sponsor — arithmetic on the Act’s own words, not a departmental reading. The term “prescribed pension plan” is itself set by a regulation not fetched here. See also director liability for pension contributions.
SECTION 07 OF 09
WEPPA pays employees so they are not waiting on the estate. Section 7(1) caps a payment at “the amount of eligible wages owing to the individual up to a maximum of an amount equal to seven times the maximum weekly insurable earnings under the Employment Insurance Act”. ESDC gives that as “$9,275.00 for 2026” on its WEPP page: the 2026 maximum insurable earnings of $68,900, over 52, times seven.
The programme is broader than the charge. WEPPA section 2 defines wages to include “salaries, commissions … vacation pay, termination pay, severance pay and any other amounts prescribed by regulation”, and section 5 extends eligibility to certain proposal, CCAA and foreign proceedings. An employee can be paid for amounts section 81.3 never secured.
Payment does not clear the charge off the assets. Section 36(1) subrogates Canada “to any rights the individual may have in respect of the eligible wages against” the employer and its directors. Section 21(1) obliges the trustee or receiver to “identify each individual who is owed eligible wages”, so the number a buyer wants already exists in that file.
SECTION 08 OF 09
The Act names one enforcement route, and it does not point at the purchaser. Under subsection 81.3(5), if the trustee disposes of covered current assets, “the trustee is liable for the claim … to the extent of the amount realized on the disposition of the current assets”; section 81.4(5) does the same to a receiver.
Extinguishment against a buyer comes from the court order, not these sections. Subsection 65.13(7) and CCAA subsection 36(6) let a court authorise a sale free and clear, moving the charge onto the proceeds. Outside such an order I could not source a BIA provision discharging the section 81.3 or 81.4 security against a purchaser: without a vesting order the protection is contractual, not statutory — and not every interest is swept even with one.
A proposal or CCAA sale has a further gate aimed at this money. Subsection 65.13(8) lets a court approve a sale “only if the court is satisfied that the insolvent person can and will make the payments” required by section 60, and CCAA subsection 36(7) is the twin. Paragraph 60(1.3)(a) requires employees to be paid “amounts at least equal to the amounts that they would be qualified to receive under paragraph 136(1)(d)…”. Selling a business out of insolvency covers the approval test.
SECTION 09 OF 09
Size it before you bid; it is arithmetic, not judgment. On parameters of my own choosing rather than data — 40 employees each owed at least $2,000 inside the window, and $600,000 of receivables and inventory in the purchased pool — the section 81.3 charge is $80,000 ranking ahead of every lender, 13.3 per cent of that pool.
Four questions cover most of it. How many employees are owed wages or vacation pay inside the window — a number the officeholder must already have determined under WEPPA section 21(1)? How many are officers, directors or non-arm’s-length? Did the employer sponsor a prescribed pension plan before 27 April 2023? And is the sale delivered by a vesting order or a bill of sale? Treadstone Law on buying assets from an insolvent company sets what recourse survives.
Two boundaries. This is federal law, and says nothing about what a buyer owes staff it hires: that is provincial employment standards, in what happens to the staff when the business is sold, with the mechanics in buying from a trustee. And no judgment is cited here — every proposition comes from statutory text, because the case-law databases were unreachable this session.
Only current assets. The wage charge attaches to cash, cash equivalents, inventory and accounts receivable — it misses the building, the machinery and goodwill, and lands instead on the receivables ledger and stock, the working capital an asset buyer prices hardest.
No, if they are an officer or director. No officer or director of the bankrupt is entitled to have a claim secured under the section, and a non-arm’s-length claimant is excluded unless the trustee concludes the arrangement was substantially the same as one struck at arm’s length.
The wage charge ranks first. The pension charge is ranked above every other claim except the unpaid-supplier and farmer rights, the federal deemed trusts, and the wage charges themselves — so wages come first, the pension charge second, and the secured lender third.
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