In a lengthy decision released yesterday in respect of Indalex
Limited, which had been operating under the protection of the
Companies' Creditors Arrangement Act (CCAA), the Ontario Court
of Appeal found that the Ontario Pension Benefits Act (PBA) imposes
a deemed trust over the full amount of any funding deficiency that
exists when a pension plan is wound up. Previous court cases had
found that such a deemed trust did not arise in respect of any such
deficiency on wind-up. In the context of this case, the Court also
found that the deemed trust ranked ahead of Indalex's parent
company, which was a secured creditor by virtue of its guaranteed
repayment of the debtor-in-possession (DIP) facility, even though
the DIP had been granted a super-priority charge by the CCAA Court.
The Court found that as the issue of "paramountcy" had
not been addressed by the CCAA Court when it gave the priority, it
could not trump the priority accorded to the deemed trust under
The Court of Appeal also found that, during the CCAA period, the
company had been in breach of its fiduciary obligations as
administrator of the pension plans by failing to consider the
interests of the plan beneficiaries when liquidating the assets of
the company. As a result of this breach, the Court found, in the
alternative, that ranking the pension deficiency ahead of the
non-arm's-length secured creditor was an appropriate remedy.
The Court applied this same equity reasoning to find that the
funding deficiency in a second Indalex pension plan should rank
ahead of the secured creditor, even though at the applicable time
that plan had not been wound up and thus had not given rise to a
deemed trust under the PBA.
This case may have significant and far-reaching implications for
all lenders and for pension plan sponsors. We are continuing our
review of this case and will provide a more detailed analysis
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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