This week, the Ontario Court of Appeal surprised many by
deciding that in the context of the CCAA proceedings of Indalex,
pension plan deficiency claims can have priority over security held
by secured DIP lenders. The Court granted priority for the entire
wind-up deficiency of two pension plans over the DIP
lender's security. If not reversed on appeal, the ruling
creates a potential worst case scenario for secured lenders in
Ontario and could affect availability of credit for all employers
who provide defined benefit pension plans for their employees.
At the heart of the decision is the Court's conclusion
that all rights of the beneficiaries of a pension plan accrue as of
the date the plan is wound up. Therefore, the statutory deemed
trust created by Ontario's Pension Benefits Act applies to
the entire deficiency at that date even though the deficit-related
contributions are not then due and the employer had made all
contributions when due. This decision overturns the decision of the
lower court judge who held that, since the amount of the deficiency
may be paid over time and was not due at the relevant time, it was
not subject to the deemed trust.
The Court also discusses the concurrent and sometimes
conflicting duties that face a company when it is, on the one hand,
the employer providing the pension plan as part of operating its
business and, on the other, acting as the administrator of the
pension plan with fiduciary duties to the pension plan members.
One implication of the decision is that employers should
seriously consider resigning as pension plan administrator prior to
insolvency to avoid conflicts of interest. In its ruling, the Court
suggests that the fiduciary duty to plan members owed by the debtor
in its capacity as administrator may require its managers to
advocate the interests of the pension plan against the interests of
its creditors and other stakeholders in insolvency cases. This
conflict would put the managers of an insolvent debtor's
business in an impossible position. The easiest solution may be the
appointment of an independent administrator.
The Court was also critical of the degree to which orders in
CCAA proceedings are made on little or no notice to affected
parties. Indalex as administrator of the pension plan did not
notify the members of the pension plans of its motion for a court
order to approve a DIP secured loan that would rank in priority to
pension claims and, according to the ruling, did not advise the
CCAA Court of the potential pension deficit. As a result, the Court
of Appeal gave no effect to provisions in the order approving the
DIP loan that granted it priority over the statutory deemed trust
for pension obligations.
The Indalex decision is a surprising about-face from
the Ontario Court of Appeal's decision in Ivaco
and the very recent Supreme Court of Canada decision in Century
Services v. Canada. In both of those cases, Courts treated the
priority scheme in the Bankruptcy and Insolvency Act as
appropriate for the distribution of the sale proceeds when the
debtor's assets are sold in a CCAA case. These decisions
permitted easy transition from sales under the CCAA to
distributions under the BIA where statutory deemed trusts are often
unenforceable. By giving a narrow reading to Century
Services and Ivaco, the Court in Indalex
resurrects the argument, thought to have been dead and buried, that
insolvent companies with pension plans cannot file voluntary
proceedings under the BIA without risk of breaching fiduciary
duties as plan administrators.
The somewhat unusual circumstances of the Indalex case
had a significant impact on the Court's decision.
Certainly, the fact that Indalex's parent company was
holding and asserting the DIP lender claims and had taken a direct
role in managing Indalex affected the equities of the case and
implicated the DIP lender with the fiduciary duties of Indalex as
plan administrator. Additionally, the Court's strong
criticisms of the lack of notice given to pension plan members
should lead to changes of practice in CCAA courts. An important
message from the Court of Appeal is that orders made in CCAA
proceedings on inadequate or incomplete notice may be amended or
set aside later.
Observers from each of the commercial lending, insolvency and
pension industries will be watching eagerly to see whether or not
this decision is appealed, whether there is a legislative response
to the decision which enables current practices to continue or
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