One of the issues that we did not have the space to deal with in
our earlier Flash of April 11, 2011 on the Ontario Court of Appeal
decision in Re Indalex Limited, 2011 ONCA 265, was the
expansive impact that the decision may well have on corporate group
insolvencies — and especially ones that are cross-border
As readers of this Flash may already know, the Court of Appeal held that where a debtor has breached its fiduciary duties1 to pension plan beneficiaries, the Court may find that a "constructive trust" applies to the debtor's property (such as the proceeds resulting from the sale of its business) and, therefore, such property (or sale proceeds) must be used to fund the full amount of any pension plan deficiencies first ahead of anyone else — whether or not a statutory deemed trust applies to such pension obligations. In this case, such a result arose in the context of Indalex's U.S. parent attempting to invoke the priority of a court ordered DIP charge (by way of subrogation) after having paid out on its guarantee to the DIP lender. The Court of Appeal found that Indalex U.S. effectively controlled the decisions of the CCAA debtor (Indalex Limited) and, thereby, was the party in effect breaching the fiduciary duties.
In corporate group insolvencies, there is no obvious reason that the Court of Appeal's approach in this case could not be used by any creditor of one of the companies in the corporate group as against other members of the corporate group for any proven breach of fiduciary duty. This issue can be highlighted best in cross-border insolvencies. For example, assume the relatively common circumstance where there is a U.S. parent company with U.S. affiliates that files for Chapter 11 protection while its Canadian subsidiary and its respective affiliates file a parallel CCAA proceeding. A sale of the entire business transpires with proceeds being initially allocated to the U.S. estate and the Canadian estate based on some reasonable assessment of relative asset values. Let us also assume that the Canadian subsidiary owes a considerable sum of money to the U.S. parent for intercompany loans or some other reason. If creditors of the Canadian estate can successfully prove that the U.S. parent controlled the decisions of the Canadian subsidiary2 and, in so doing, breached fiduciary duties that the Canadian subsidiary owed to one or more particular groups of creditors3, then Indalex would provide strong precedent for a trial court to hold that the creditors of the Canadian estate should be paid out prior to any money being paid to the U.S. parent on the intercompany indebtedness. If the sale proceeds are held in escrow in Canada for some reason, then the situation could be even worse (for U.S. creditors) with the court holding that the entire proceeds (or some portion) are held in "constructive trust" for the benefit of the Canadian estate. All good for Canada.
However, turn the situation around — a Canadian parent company in CCAA with a U.S. subsidiary in Chapter 11. Assume that the U.S. estate can successfully prove that the Canadian parent breached fiduciary duties it owed to U.S. stakeholders through exercising complete control over the U.S. subsidiary. For example, by having the U.S. subsidiary fund the Canadian parent through intercompany loans that it knew would never be repaid or through a transfer pricing scheme that it knew stripped value from the U.S. subsidiary. Now the U.S. estate can argue in the Canadian CCAA proceeding that certain proceeds of sale ought to be held in "constructive trust" for its creditors first, with only the remainder being made available for creditors of the Canadian estate.
Of course, intercompany lending and trading structures are generally never as simple and easy to sort out. However, it should be expected that Indalex will certainly be used by various creditor groups of certain companies in corporate groups — and especially cross-border cases — to attempt to "ring fence" value in the relevant company or estate in an attempt to secure a better recovery for them at the expense of others. How this will all play out and be handled by future trial courts remains to be seen.
One may also expect that various stakeholders in a CCAA proceeding will try to elevate their claims to claims for breach of fiduciary duty in order to give them priority over other creditors. The nature of these claims will be limited only by the scope of lawyers' imaginations. While we expect courts to resist finding new fiduciary obligations, equity is a broad tool that is always available to judges.
1. Because Indalex acted as administrator of its pension
plans it had fiduciary duties to the beneficiaries of the
2. Which would not be difficult if there was a unanimous shareholder declaration in place which is often the case.
3. Admittedly, it is difficult to suggest a general example applicable to typical creditors as Canadian law to date has held that a company does not owe any fiduciary duties to its creditors generally. However, there may always be creditors like pension plan beneficiaries. Employees for termination and severance payments or lost health and welfare benefits also come to mind. Various government taxation authorities are also likely candidates as they are wholly reliant on the debtor to collect and remit the various taxes in question not all of which have been granted "extra protection" by statute.
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.