Originally published in Blakes Bulletin on Restructuring
& Insolvency, Pension & Employee Benefits and Financial
Services Groups, December 2011
On Thursday, December 1, 2011, a three-judge panel of the
Supreme Court of Canada granted leave to appeal from the decision
of the Court of Appeal for Ontario in Re Indalex.
The Ontario Court of Appeal released its landmark decision on
April 7, 2011. The case involved a priority dispute over the
proceeds from the sale of the assets of Indalex Limited (Indalex).
The sale was approved by an order of the Ontario Superior Court of
Justice in Indalex's proceedings under the Companies'
Creditors Arrangement Act (Canada) (CCAA). The United
Steelworkers (USW), which represented Indalex's unionized
workforce and certain pension beneficiaries, and a group of former
executives receiving pension benefits, argued that Indalex's
obligation to fund its pension wind-up deficiencies ranked in
priority to Indalex's obligation to repay its debtor in
possession (DIP) financing. In holding for the USW and the former
executives, and departing from earlier case law, the Ontario Court
of Appeal made the following key findings:
The deemed trust (a form of statutory security interest)
provided for under the Pension Benefits Act (Ontario)
(PBA) not only secured payment of normal course contributions and
special payments into a registered pension plan but also secured an
employer's obligation to fund the entire wind-up deficiency on
the wind-up of a defined benefit pension plan;
Although a court-ordered charge securing DIP financing could
have priority over the PBA deemed trust, the DIP charge granted in
Indalex's CCAA proceedings did not enjoy this priority. The
Court of Appeal noted that the doctrine of federal paramountcy was
not expressly invoked at the time of the initial application under
the CCAA. This doctrine provides that federal legislation such as
the CCAA has priority over provincial legislation such as the PBA
(where the two statutes are incompatible). The Court of Appeal also
noted that each of the pension beneficiaries was not provided with
prior notice of Indalex's request for DIP financing; and
Based on the Court of Appeal's interpretation of the facts
before it, Indalex breached its fiduciary duty to beneficiaries of
the pension plans, by allowing its role as administrator of the
pension plans to conflict with its role as employer and sponsor of
the pension plans. The Court of Appeal imposed a constructive trust
in favour of the pension beneficiaries over the sale proceeds. The
constructive trust ranked in priority to the DIP Charge.
Since its release, the Indalex decision has led to
extensive discussion and debate among professionals who practice in
the insolvency, pension and financial services area. Now that the
Supreme Court of Canada has granted leave to appeal, it is hoped
that Canada's highest court will clarify the scope and
application of the PBA deemed trust and provide guidance to a CCAA
debtor company in circumstances similar to Indalex. It is expected
that the Supreme Court of Canada, in the normal course, will hear
the case sometime in late 2012 or early 2013.
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