client update released earlier this month, we discussed the
recent decision of the Ontario Court of Appeal in the CCAA
proceedings of Indalex Limited. In that case, the Court decided
that Indalex's pension plan wind-up deficiency claims had
priority over Indalex's CCAA secured lender in the context of
that case. Of concern is the "chill" that decision may
have on secured lending in Ontario to borrowers that sponsor
defined benefit pension plans.
From a secured lender's perspective, although there is much
to dislike about the case, the situation may not be as dire as it
may first appear.
As a starting point, the Ontario Court of Appeal only dealt with
the priority of the statutory deemed trust for wind-up deficiency
claims in relation to court-ordered CCAA security. The Court was
not determining the priority of the statutory deemed trust
relative to ordinary security granted to a secured lender in a
regular financing context. The distinction is important.
That priority has been considered by the Supreme Court of
Canada. In Royal Bank of Canada v. Sparrow, the
Supreme Court held that a security interest created by a general
security agreement has priority over subsequently arising statutory
deemed trusts, unless the lender has agreed otherwise or
legislation provides otherwise.
In the case of the deemed trust created by the Pension
Benefits Act (Ontario) which was the subject of the Indalex
decision, that Act does not give the deemed trust any special
priority. On the other hand, the Personal Property Security
Act (Ontario) elevates the priority of the deemed trust over a
security interest in inventory or accounts. As a result, the good
news is that ordinary security over collateral other than working
capital assets, such as a mortgage over real property or a security
interest in equipment, should not be impacted by the Indalex
However, as it relates to security over inventory and accounts,
the Ontario PPSA creates a further challenge. Nevertheless, there
still may be possible strategies available to working capital
lenders in certain situations.
In this regard, another important conclusion of the Supreme
Court of Canada in Royal Bank of Canada v.
Sparrow was that security granted pursuant to the Bank
Act (Canada) has priority over statutory deemed trusts. Of
particular note is that this decision has been applied by the
Ontario Court of Appeal in the specific context of the deemed trust
under the Pension Benefits Act (Ontario). Although Bank
Act security is not available to all lenders and for all
collateral, it is a form of security that may be taken by Canadian
chartered banks and authorized foreign banks in respect of
inventory within the manufacturing, agricultural, mining and forest
products industries, among others (industries in which defined
benefit plans are not uncommon). As a result, in situations where
Bank Act security is available, it may provide a possible priority
solution for secured lenders in respect of inventory and accounts
receivable that are proceeds of inventory.
In summary, the Ontario Court of Appeal's decision in
Indalex creates challenges for secured lending to Ontario borrowers
with defined benefit pension plans. However, the scope of the
case's application is limited and in appropriate circumstances,
strategies may be available to lessen its impact.
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.
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