Who pays employee claims when buying assets out of receivership?

A receiver sells an insolvent business’s assets for its creditors, and a buyer reasonably asks whether the employees’ unpaid claims come with them. Federal insolvency law decides who pays what employees are already owed. Provincial employment standards laws decide what follows for the employees you take on.

What the Bankruptcy and Insolvency Act secures

Section 81.4 of the Bankruptcy and Insolvency Act secures claims for wages and vacation pay for services rendered in the six months before the first day on which there was a receiver, up to a fixed dollar amount, on the debtor’s current assets in the receiver’s possession or control. That security ranks above every other claim on those assets except the rights under sections 81.1 and 81.2, and termination and severance pay are not included. If the receiver sells those assets, the Act makes the receiver liable for these claims up to the amount realized.

Who the statute shields, and who it does not

The same Act says a receiver or trustee that carries on the business or continues the employees is not personally liable, including as a successor employer, for employee liabilities that arose before its appointment. It then adds that this does not affect the liability of a successor employer other than the trustee. A buyer is not the receiver, so that protection is not automatically yours.

What provincial law adds

British Columbia’s Employment Standards Branch says employment under a receiver is deemed continuous, and that if the business is sold without ceasing operation, the employees who continue become the new employer’s employees and section 97 applies in the normal way. It treats bankruptcy differently: when a trustee sells and employees continue, their rights under the Act are extinguished and the purchaser is not liable for earlier wages. Ontario deems employment continuous when a purchaser employs an employee of the seller.

What to ask for before you bid

• The court order approving the sale and the sale agreement, to see what they say about employees.
• Whether the receiver has terminated anyone, and when, since that fixes who owes what.
• Start dates for each employee you plan to hire, because they decide the service you carry. See also what employee liabilities come with a distressed business.