In January and February of 2012, Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) released two decisions1 in which he authorized a debtor-in-possession ("DIP") financing charge, an administration charge, and a directors and officers ("D&O") charge ranking ahead of, among other claims, possible pension deemed trusts over the objection of the debtor companies' unions and on notice to the members of the companies' pension administration committees.
Morawetz J.'s decisions are a road map to the courts' approval of priority charges in CCAA cases in light of the Ontario Court of Appeal's decision in Indalex.2 Critical points include: (1) notice to unions, pension committees and pension regulators, (2) evidence that without priming charges, a restructuring (whether a conventional restructuring or court supervised sale process) cannot proceed and the debtor will not be able to carry on business much longer, (3) evidence that a DIP loan is not available except on a priming basis, (4) evidence that professionals are not prepared to act without the benefit of an administration charge and that the professionals are necessary to the restructuring process, (5) evidence that directors and officers are needed and will likely resign without an appropriate D&O charge, (6) evidence that the debtor cannot pay and the DIP lender will not permit the payment of special payments related to pension plans, (7) evidence that the terms of the DIP financing are at market or otherwise appropriate, (8) confirmation or support of these points from the Monitor, and (9) evidence that the DIP financing will allow the debtor companies to continue to operate and thus facilitate a restructuring process (sale process or conventional restructuring).
Morawetz J. referred to the sections of the CCAA that expressly authorize priority charges for DIP financing, administration charges and D&O charges and cited the Court of Appeal's decision in Indalex for the proposition that a CCAA court has the power to override conflicting provisions of provincial statutes where the application of the provincial legislation would frustrate the company's ability to restructure and avoid bankruptcy and frustrate the objectives of the CCAA. As Justice Morawetz noted, the purpose of the CCAA is to facilitate the making of a compromise or arrangement between the debtor companies and its creditors, with the purpose of allowing the business to continue. This purpose continues to exist regardless of whether a company is actually restructuring or is continuing operations during a sale process in order to maintain maximum value and achieve the highest price for the benefit of all stakeholders. Justice Morawetz concluded based on the evidence that the debtor companies' ability to restructure (conventional restructuring or sale) would be frustrated unless the court authorized charges were given priority over secured creditors including any pension plan deemed trusts.
The decisions in Re Timminco show that in the post-Indalex world priority DIP financing charges and other typical priority charges can be obtained where the debtor companies may be faced with potential pension plan deemed trust claims, provided that appropriate notice is given and provided the court has the evidence necessary to prove that those priority charges are necessary to permit a restructuring to move forward.
The decisions do not assist with the critical question whether pension deemed trusts trump pre-filing security interests for distribution purposes under the CCAA and the equally critical question whether it is appropriate to place a debtor company in bankruptcy for distribution purposes where a sale has been completed but without a plan of compromise or arrangement. The answers to those questions may not be known until the Supreme Court of Canada has rendered its decision in Indalex.3
Footnotes
1 Timminco Limited (Re), 2012 ONSC 506; and Timminco Limited (Re), 2012 ONSC 948.
2 Indalex Ltd. (Re) (2011), 75 C.B.R. (5th) 19 (Ont. C.A.). Leave to appeal to the Supreme Court of Canada was granted on January 19, 2012. Sun Indalex Finance, LLC, et al. v. United Steelworkers, et al. (SCC Docket 34308).
3 The case is tentatively scheduled to be heard on June 5, 2012.
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