In its April 2011 ruling, the Court of Appeal held that the
entire amount an employer is required to contribute to fund a
pension plan wind-up deficiency under the Ontario Pension
Benefits Act (PBA) is subject to the deemed trust provisions of the PBA and, in the
circumstances, should be paid in priority to outstanding secured
creditor claims. A detailed account of the facts is available in a
Osler Update relating to the Ontario Court of Appeal
In 2009, Indalex Limited (Indalex) obtained creditor protection
under the Companies' Creditors Arrangement Act
(CCAA) and debtor-in-possession (DIP) financing pursuant to a CCAA
court order which granted super priority status to its DIP loan
ahead of other creditors. A sale of Indalex's assets was
approved by the CCAA court, and the monitor was directed to make a
distribution to repay the DIP loan from the proceeds of the sale.
The sale of the assets was opposed by pension claimants who argued
that assets equal to the entire amount of the funding deficiencies
under the company's pension plans were deemed to be held in
trust and should be remitted to the plans in priority to the DIP
The Ontario Court of Appeal held that:
the deemed trust under subsection 57(4) of the PBA extended to
all amounts owed by the employer on plan wind-up, regardless of the
fact that the regulations under the PBA permit employers to pay the
pension shortfall over a period of five years;
the DIP charge granted by the CCAA court did not have priority
over such deemed trust; and
with respect to one of the affected pension plans that had not
been wound up, Indalex was in a conflict of interest position with
respect to its sponsor and administrator roles in dealing with
pension issues under the CCAA proceedings, giving rise to a
constructive trust in respect of the plan deficit which took
priority over the DIP charge.
A review of the Indalex decision by the Supreme Court
of Canada is welcome news for borrowers, lenders and pension plan
The Ontario Court of Appeal decision represented a significant
departure from what was widely viewed as established law, and has
caused much uncertainty concerning the ability of DIP lenders and
other secured creditors to protect the value of their security
interest against pension claims, as well as raising pension plan
governance concerns in the context of CCAA and more generally. We
will keep you posted with any further updates relating to this
Ian McSweeney practises exclusively in the
field of pensions and employee benefits and advises clients on
pension plans, supplemental retirement arrangements, deferred
profit sharing plans and other employee and executive compensation
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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