On December 1, 2011, the Supreme
Court of Canada (the "SCC") agreed to hear an appeal of
the landmark Ontario Court of Appeal decision in the restructuring
proceedings of Indalex Limited ("Indalex") under the
Companies' Creditors Arrangement Act.
In April of this year, the Court of
Appeal of Ontario, to the surprise of many, rendered a decision
that was inconsistent with what many viewed as accepted law in
respect of the priority of certain pension claims. Briefly, the
decision stated that certain wind up pension deficiencies of
Ontario regulated defined benefit pension plans (that the Ontario
Court of Appeal held to be protected by provincial deemed trusts)
may, in certain circumstances, have priority over the court ordered
charge granted to lenders providing interim financing during the
proceedings ("DIP Lenders") and other creditors relying
on the security of the working capital assets of the debtor
company. In its decision, the Ontario Court of Appeal also cast
doubt over whether the use of bankruptcy proceedings to defeat the
priority of provincial statutory liens and trusts for pension and
other claims is still acceptable. In so holding, the Ontario Court
of Appeal created material implications for working capital lenders
to businesses with Ontario regulated defined benefit pension plans
and for such businesses seeking funding.
In addition, the Ontario Court of
Appeal held that when an employer is also the administrator of a
pension plan (which is normal in Ontario and was the case in
Indalex), the employer in its capacity as plan administrator
continues to owe a fiduciary duty to the pension plan beneficiaries
after it files under the CCAA. The Court held that that duty did
not prevent the employer from filing under the CCAA. However, it
was improper for the employer to do nothing to protect the rights
of the pension plan beneficiaries or to put someone else in the
position to protect those rights. As a result of Indalex's
breach of its fiduciary duties, the Court of Appeal held that it
was appropriate to supplement the statutory lien and trust with a
constructive trust to protect the pension plan which was not being
wound up at the time of the sale of the business.
It should be noted, however, that
the Court of Appeal made it clear that CCAA courts have
jurisdiction to grant a super-priority charge over pension deemed
trusts, however, whether such a charge should be approved by a
Court must be determined on a case by case basis. The decision will
force counsel to take additional procedural steps to ensure that
DIP Lenders are assured priority over provincial statutory liens
A review of the Ontario Court of
Appeal judgment by the SCC is welcome news to many lenders; however
until overturned, DIP Lenders and working capital lenders are
advised to take steps in order to mitigate some of the effects of
the decision. Please contact any member of the restructuring and
insolvency group at McMillan to discuss such risk management
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
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