Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Restructuring & Insolvency/Pension & Employee Benefits, April 2011
The Ontario Court of Appeal released its decision in Re Indalex on April 7, 2011. The Court of Appeal held that, on the wind-up of a pension plan, the Pension Benefits Act (Ontario) (PBA) creates a deemed trust (akin to a statutory security interest) over the employer's assets for the amount necessary to fund the deficiency that arises on the wind-up of a defined benefit pension plan. Accordingly, Re Indalex is important to Ontario companies with defined benefit pension plans and lenders to those companies.
As a result of Re Indalex, secured lenders to companies with pension deficits will likely make various structural and procedural adjustments to protect their security value or priority, whether the facility is being provided through a traditional asset-based lending (ABL) facility or by way of debtor-in-possession (DIP) financing. The Blakes Restructuring & Insolvency, Financial Services and Pensions & Employee Benefits Groups would be pleased to discuss these issues. For further information, please contact any of the partners listed at the end of this bulletin.
A discussion of Re Indalex is set out below.
Indalex Limited (Indalex), a Canadian company, was in the business of manufacturing and selling extruded aluminum products. Indalex was the sponsor and administrator of two registered defined benefit pension plans commonly known as the "Salaried Plan" and the "Executive Plan." Under the PBA, the administrator of a pension plan registered in Ontario is responsible for administering the plan in accordance with the PBA and the plan documents. In performing its duties as plan administrator, Indalex was subject to certain duties to plan members imposed under section 22 of the PBA.
On April 3, 2009, Indalex and certain related entities sought and obtained protection from the Ontario Superior Court of Justice (the CCAA Court) pursuant to the Companies' Creditors Arrangement Act (Canada) (CCAA), Canada's principal statute for the restructuring of large insolvent companies. Indalex's parent company and its related U.S. entities (collectively, Indalex U.S.) also sought protection pursuant to Chapter 11 of the U.S. Bankruptcy Code. The purpose of the filings was to allow Indalex and Indalex U.S. to stabilize their businesses and seek a going-concern sale.
At the time of the CCAA filing, the Salaried Plan was in the process of being wound up and had a wind-up deficiency that was being amortized. The Executive Plan was not wound up and, based on the most recent actuarial valuation of the plan, had a funding deficiency determined on a wind-up basis. A defined benefit pension plan has a wind-up funding deficiency if, on the termination or "wind-up" of the plan, there would be insufficient assets in the plan to fully satisfy the obligations owing to beneficiaries.
Indalex sought and obtained approval for DIP financing from its existing lender (the DIP Lender). The DIP Lender was only prepared to advance funds on a "superpriority" basis. The Initial Order (as amended and restated) approved the DIP financing and granted the DIP Lender a super-priority charge (the DIP Charge) prior to all liens and encumbrances, including statutory liens and deemed trusts. Indalex and Indalex U.S. guaranteed each others obligations under the DIP credit agreement.
The Sale Approval Motion
In July 2009, Indalex entered into an agreement for the sale of substantially all of its assets and sought approval of the sale by the CCAA Court. The purchaser did not assume the Salaried Plan or the Executive Plan as part of the sale. The United Steelworkers (USW), which represented Indalex's unionized employees (all of whom were to be hired by the purchaser), supported the sale, while a group of former executives (the Former Executives) opposed the sale on the basis that they believed a higher recovery could be obtained in a piecemeal liquidation of Indalex's assets.
The sale was approved by the CCAA Court over the objection of the Former Executives. The USW represented certain members who were beneficiaries of the Salaried Plan. The Former Executives were beneficiaries of the Executive Plan. Both the USW and the Former Executives reserved their rights to assert a priority over the DIP Charge to the proceeds of sale, based on the assertion that the wind-up deficiency in each pension plan was subject to a deemed trust that ranked in priority to the DIP Charge.
As a result of the USW's and the Former Executives'reservation of rights, the court-appointed monitor (the Monitor) withheld C$6.75-million from distribution to the DIP Lender (the Reserve Fund), which was an approximation of the total wind-up deficiencies. As a result, Indalex was unable to repay its DIP financing in full. The DIP Lender then called on the guarantee provided by Indalex U.S. After satisfying the obligation owed by Indalex to the DIP Lender, Indalex U.S. was then subrogated to the rights of the DIP Lender and the DIP Charge as against the Reserve Fund.
The Deemed Trust Motions
The USW and the Former Executives brought motions (the Deemed Trust Motions) asserting a deemed trust for the pension deficiencies over all assets of Indalex, claiming priority over secured creditors to proceeds of inventory and receivables. This priority is provided for by s. 30(7) of the Personal Property Security Act (Ontario). Contemporaneously with the Deemed Trust Motions, Indalex brought a motion to make a voluntary assignment in bankruptcy. In a bankruptcy, a deemed trust claim would be of no force or effect.
At first instance, Indalex acknowledged that the deemed trust provisions of the PBA secured any employer contributions accrued to the date of the wind-up that were not yet due, but took the position that the deemed trust did not secure the wind-up deficiency. In any event, Indalex submitted the DIP Charge ranked in priority to any such deemed trust. The CCAA Court agreed that the PBA deemed trust did not extend to the wind-up deficiency and the Deemed Trust Motions were dismissed by the CCAA Court. The CCAA Court held it was not necessary to decide the bankruptcy motion, as it had already held that the PBA deemed trust did not apply to the wind-up deficiency under the PBA.
Court of Appeal Decision
The USW and the Former Executives appealed to the Court of Appeal. By the time this matter was heard by the Court of Appeal, the sale transaction had closed, Indalex no longer had any employees or directors, and its insolvent estate was being administered by the Monitor, pursuant to an order of the CCAA Court. Indalex U.S.'s Chapter 11 proceedings were terminated and converted into bankruptcy proceedings under Chapter 7. There was no corporate governance structure of any kind in place for Indalex. The Monitor, the trustee in bankruptcy for the now bankrupt U.S. parent company and the secured creditor of the U.S. parent company responded to the appeal.
In allowing the appeal, the Court of Appeal departed from earlier case law and held that the deemed trust under section 57(4) of the PBA extended to the entire wind-up deficiency of the Salaried Plan. Further, the Court of Appeal held that on the specific facts of this case, citing a number of procedural matters, the DIP Charge was not effective to grant priority over the deemed trust.
With respect to the Executive Plan, which was not being wound up, the Court of Appeal held that the argument that there is a deemed trust for the deficiency prior to a wind-up would seem to be inconsistent with the terms of the PBA. However, the Court of Appeal ultimately declined to decide whether a deemed trust could arise in these circumstances (leaving open the possibility) and instead held that the Former Executives were entitled to a constructive trust over the Reserve Fund arising from a breach of fiduciary duty.
The facts in the case were not unusual – the company acted in a manner consistent with other CCAA cases where the debtor was also the pension plan administrator. However, the Court of Appeal held that Indalex was in a conflict of interest position. Indalex's corporate duty was to treat all stakeholders fairly when their interests conflicted, but its ultimate duty was to act in the best interests of the corporation. Indalex's duty as administrator was to act in the pension plan beneficiaries' best interests. These duties were in conflict, and the Court of Appeal held this conflict resulted in a breach of fiduciary duty by Indalex in its capacity as plan administrator. The court held that the appropriate remedy was to impose a constructive trust that had the effect of giving the beneficiaries of both pension plans priority over the DIP Charge.
The Court of Appeal did confirm that in the right circumstances, a DIP charge could be granted in priority to the PBA deemed trust; however, several procedural and structural changes will have to be incorporated into what had been, prior to the Indalex decision, the usual practice in Ontario.
Re Indalex departs significantly from prior case law in this area and appears, in some ways, to be inconsistent with the recent Supreme Court of Canada decision in Re Ted LeRoy. Blakes will be providing periodic updates as necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.