Bonus and incentive

Incentive Bonuses and Bankruptcy

The Office of the Superintendent of Bankruptcy (OSB) overseas and supervises the insolvency system in Canada and ensures that all aspects of the Bankruptcy and Insolvency Act (BIA) are complied with. Since 2009 the OSB also carries out the duties and powers mandated by the Companies’ Creditors Arrangements Act (CCAA). The CCAA is a federal law allowing insolvent corporations that owe their creditors in excess of CAD 5 million to restructure their business and financial affairs. The aim with the law is to enable companies in financial difficulties to avoid bankruptcy and to maximize returns for creditors and at the same time preserve the business.

A case that was decided by the Superior Court of Quebec in Montreal involved the CCAA and payment of incentive bonuses. The matter involved the company Qbiogene Inc (Company) that sought protection under the CCAA and as part of this process the former CEO of the company, Mr Cumberlidge (Petitioner) made an application to the courts to have his annual incentive compensation paid.

The Petitioner had entered into a contract with the Company that stipulated that if his employment was terminated he would be entitled to receive his incentive compensation. The contract the Petitioner had entered into with the Company stipulated that in the case of involuntary termination or without cause he would receive an incentive compensation and he wanted this to be part of his severance package. However, the catch was that this compensation had to be approved by the board of directors of the Company prior to actually being paid out.

A Licensed Insolvency Trustee is a person licensed by the OSB to manage and administer consumer proposals and bankruptcies in Canada and the Licensed Insolvency Trustee who was handling this case was of the opinion that the Petitioner was not entitled to any such amount as part of his severance package, since he had not « earned » any incentive compensation for 2003 at the date of his termination.

The word “earned” in the employment contract turned out to be crucial to the court in this case, since it found that it means to receive it as a return for work done or services rendered and for anything to be “earned” it has to first be approved by the board of directors of the Company, which was not the case here.

The court also took into consideration that the Company was in financial difficulties and did not even award any incentive compensation to managers that still remained with the Company. Consequently, the court found that the Licensed Insolvency Trustee administering the Company under the CCAA was correct in denying the Petitioner the right to any incentive bonus.

Contact a Licensed Insolvency Trustee for further information on the CCAA or the insolvency matters in general.