CHCH restructuring raises questions about under-capitalized companies

Insolvency rules are not to blame for the CHCH TV restructuring case that has left former employees of the broadcaster without severance pay, according to a Toronto lawyer who says it is instead corporate law policies that should be reviewed in light of that situation.

As Canadian Lawyer InHouse reported in December, Channel Zero Inc., the parent company of CHCH TV, announced the bankruptcy filing of Channel 11 LP, which was contracted to provide programming and studio operations for CHCH. About 130 full-time and 40 part-time employees of the station were let go.

According to employment lawyer Danny Kastner of Kastner Law, losing a job isn’t ideal at any point, but most employees would prefer early notice and severance pay to longer-term employment that ends abruptly and without severance.

“The advantage of being told earlier and getting severance pay is you have time to look for the next opportunity. Employees lose that if what happens is suddenly the enterprise closes up shop, no severance pay is provided,” Kastner says.

He says the issue with bankruptcy is that it gives creditors primacy over employees who should receive severance.

The company’s bankruptcy filing meant CHCH was relieved of its obligation to pay its creditors, including employees who were not hired back by a private numbered company. Those employees were terminated without severance.

To some, the case is a sign of the need to review bankruptcy laws that leave employees of insolvent companies at an unfair disadvantage, but an insolvency lawyer with one of Canada’s largest law firms says the focus should be on corporate polices.

“People are focusing in on the insolvency aspects of it, but the insolvency aspect is nothing unique or different,” says the lawyer, who asked not to be identified due to potential conflicts.

The bigger question is whether under-capitalized companies should be permitted to continue operating when their liabilities far exceed their assets. When CHCH filed for bankruptcy, it reported $4.5 million in liabilities against just $60,000 in assets.

The CHCH situation raises the question of whether corporate legislation should require the directors to ensure that the company is always able to pay its debts.

If directors are required to act when they realize their company is insolvent — to either file an insolvency proceeding or cease to carry on business — the impact on employees is two-fold, the lawyer says. As soon as the company becomes insolvent, it will of course cease to carry on business.

Channel 11 LP would have theoretically stopped doing business a long time ago. Employees would then be stuck between losing their jobs earlier, and getting severance pay, or continuing to be employed and later being terminated without severance.

“While there is empathy for the employees who were not hired back, to suggest isolated amendments to legislations, or changes to the insolvency regime in particular, to deal with the extremes perverts the regime itself,” says the lawyer.

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