If your company is both the sponsor and administrator of a
pension plan you should take note of the recent Ontario Court of
Appeal decision in Re Indalex. Although the case deals
with competing claims in insolvency and deficits in wound up
pension plans, it highlights the need for a well articulated
governance structure making it clear whether the organization acts
as employer, as administrator, or as both. Although the case has
many issues, this article focuses on high level implications for
sponsors of ongoing pension plans.
Indalex Pension Plans
The facts in the case are quite complicated. Indalex was the
sponsor and administrator of two defined benefit pension plans. It
started winding up one of the plans prior to insolvency proceedings
under the Companies Creditors Arrangements Act
("CCAA"). The other plan was wound up after CCAA
proceedings started. With court approval, Indalex borrowed funds on
a "debtor in possession" or "DIP" basis to
allow it to continue operating. The DIP lenders' claims were
granted a super-priority over all other creditors. When Indalex
subsequently sold its assets, members in each plan objected to the
distribution of the sale proceeds to the lenders. They argued that
the deficits in the pension plans should have priority over the DIP
lenders even though the DIP lenders had a
The Ontario Court of Appeal decided that:
The entire windup deficit in one of the plans was subject to a
deemed trust in favour of the members pursuant to the Ontario
Pension Benefits Act ("PBA"); and
Indalex had breached its fiduciary obligations to the pension
plans' beneficiaries as administrator of the plans, for which
the remedy was imposition of a constructive trust (meaning the
court created a trust) for the amount of the wind up deficit.
The Court's Rationale
How did the Court make its decisions? It relied on the "two
hats" theory that is embedded in pension standards legislation
of most Canadian common law jurisdictions – that an
employer can be both the sponsor and administrator of a pension
plan. Although the company does not have a fiduciary duty when it
acts as employer/sponsor of the plan, it does when it acts as
The Court said that for much of the CCAA proceedings, Indalex
was acting as employer and was not subject to fiduciary duty.
However, as administrator of the pension plans, Indalex had to act
in the best interests of the plan members. This conflicted with its
role in the CCAA proceedings. Indalex addressed the conflict by
ignoring its role as administrator (including by not funding the
plans, and by seeking a court order to approve payment of the sale
proceeds to the DIP lenders). For that reason it was found to have
breached its fiduciary duties to the plan members.
Implications For Other Pension Plans
What does this all mean? It means that if your company is a plan
sponsor, you should look at the documents and structures that are
currently in place for your pension plans. You need to know what
actions are being performed by the employer/sponsor and what
actions by the administrator. Many pension plans and governance
structures do not distinguish between these functions. The result
is that the decision makers may risk personal and organization
liability because they do not know if they have to consider only
member interests (when they are acting as administrator, for
example) or whether they may consider the organization's
business interests (when they are acting as employer/sponsor).
Although Indalex is not binding outside of Ontario, we
expect that courts in other provinces will consider it, subject to
differences in governing pension standards legislation and subject
to any appeal to the Supreme Court of Canada (which we understand
is in process).
Unfortunately, reasonable accommodation for employees in the workplace continues to be the source of significant litigation and even today we continue to see outrageous examples of employers behaving badly.
We are now beginning to see reported cases involving charges and subsequent fines laid against employers for failing to provide information, instruction and supervision to protect a worker from workplace violence.
On October 13, 2016, the Supreme Court of Canada denied leave to appeal an Ontario Court of Appeal decision which ordered an employer to pay a former employee 37 months of salary and benefits following termination.
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