KERPs (Key Employee Retention Plans) and KEIPs (Key Employee Incentive Plans), otherwise referred to as “pay to stay” compensation plans, are commonly offered by employers to incent key employees to remain with the company during an insolvency restructuring proceeding when so-called “key employees” may be tempted to find more stable employment elsewhere. However, courts will carefully scrutinize these plans because there are multiple competing interests as well as the overall policy objective of maximizing recoveries from the restructuring which can be diluted through overly generous incentive plans. Employers who are contemplating restructuring under the Companies’ Creditors Arrangement Act (CCAA) should be aware of the framework for assessing KERPs or KEIPs recently established by the Ontario Superior Court of Justice.

Key takeaways

In a recent decision Industrial Alliance Insurance and Financial Services Inc. v Wedgemount Power Limited Partnership 2018 BCSC 970, the British Columbia Superior Court confirmed that:

• under Canada’s Bankruptcy and Insolvency Act, courts have broad powers and discretion to protect the interests of creditors and other affected parties including by staying the operation of an agreement to arbitrate if it is necessary to maximize recoveries in an insolvency proceeding.

Background

In this dispute, a receiver had been appointed by the court over Wedgemount Power Limited Partnership, Wedgemount Power (GP) Inc. and Wedgemount Power Inc. (collectively, “Wedgemount”) on the application of the primary lender and secured creditor in 2017.