Canada: Setting The Record Straight On Pension Plan Deficits And CCAA

In a decision issued on April 20th, 2012, Justice Robert Mongeon of the Superior Court of Quebec gave a decisive answer to one of the most troubling questions facing debtors and DIP lenders in reorganizations under the Companies' Creditors Arrangement Act (CCAA). Justice Mongeon's decision in White Birch should go a long way to calming concerns stemming from last year's decision of the Ontario Court of Appeal in Indalex, at least with regard to proceedings in Quebec.

The Indalex decision, now before the Supreme Court of Canada, caused a stir because it reduced the rank of claims that had been granted "super-priority" status in the context of CCAA proceedings. Most notably, these include claims of the debtor-in-possession (DIP) lender, which are typically accorded a rank ahead of all pre-filing creditors pursuant to the terms of the Initial Order. DIP lenders provide capital essential to permit an insolvent company to successfully reorganize its affairs, and without a guarantee of super-priority status, that capital would simply not be made available.

In the Indalex matter, DIP financing had been provided and super-priority status had been granted for the DIP loan under the terms of the Initial Order. Despite this fact, the Ontario Court of Appeal ordered that a claim relating to deficits in the company's pension plans be paid in priority to the claim for reimbursement of the DIP loan. The Court's justification for reaching that decision was that the pension plan deficiencies were protected by a deemed trust created under Ontario pension legislation and/or by a constructive trust established by the Court as a result of perceived inequitable behaviour by Indalex. The Court of Appeal ruled that such trust claims ranked ahead of the super-priority claims of the DIP lender.

Many observers wondered whether this decision might have a chilling effect on the availability of interim financing in Canada, as lenders might be concerned that their super-priority status could be lost.

At the same time, pension plan beneficiaries saw the decision as an opportunity to seek a similar order in CCAA proceedings across the country. Indeed, in the White Birch file, the pension plan beneficiaries opted to seize this opportunity.

In October 2011, nearly a year and a half after the Initial Order was issued in White Birch, the labour unions, as well as a group of retirees and the company's pension committees all made motions based on the Indalex decision, seeking an order that would grant certain pension plan claims a rank superior to the super-priority DIP claims established by the Initial Order. The Court was also asked to order that the company recommence making past service contribution payments, which had been stayed since the Initial Order, and to further order that those payments (which would serve to reduce the pension plan deficit) receive priority over any repayment of the company's DIP loan.

Summary of the Findings in White Birch

In its April 20th decision, the Court dismissed the Applicants' motion and held that the legal principles on which the Indalex (Re) decision was based did not apply in Quebec. Below is a brief summary of the reasoning the Court used to come to this conclusion.

Deemed Trusts Cease to Apply

Firstly, and perhaps most importantly, the Court held that in light of the Supreme Court of Canada's decision in Century Services Inc. v. Canada (Attorney General), the deemed trust found in Article 49 of the Supplemental Pension Plans Act, RSQ, c R-15.1 (SPPA) had no further effect once a debtor had been afforded protection by the Court under the CCAA. The Court explained that for any such trust to have survived, Section 37 of the CCAA would have had to confirm in clear and unmistakable terms the survival of the deemed trust created by Section 49 of the SPPA. This is a very significant finding that may have a major impact in CCAA files. A number of deemed trusts will be affected.

Section 49 of the SPPA Does Not Create a Valid Trust

The Court then proceeded to assess whether the trust created by Section 49 of the SPPA qualified as a trust under Quebec law. To make that determination, the Court held that it must rely on the Supreme Court of Canada's judgment in Bank of Nova Scotia v. Thibault, which outlined the requirements that must be met for a Quebec trust to be constituted. These requirements are: "property must be transferred from an individual's patrimony to another patrimony by appropriation; the property must be appropriated to a particular purpose; and the trustee must accept the property."

Based on a three-pronged analysis, the Court held that Section 49 of the SPPA could not give rise to a real trust within the meaning of Quebec law. In doing so, Justice Mongeon concurred with Superior Court Justice Danièle Mayrand's conclusion in AbitibiBowater inc. (Arrangement relatif à).

In addition, the Court held that Section 49 of the SPPA did not give rise to a floating charge on the assets of the Debtor. For this conclusion, the Court relied on the Minister of Justice's commentary to Article 2715 CCQ, which specifically stated that the notion of floating charge in common law did not exist in Quebec law.

The Court further considered whether, as the employer, White Birch had a fiduciary duty to the pension plan or pension fund. In answering this question, the Court pointed to several articles of the SPPA, including Section 147, which specifies that every pension plan is to be administered by a pension committee, and Section 150 of the SPPA, which states that it is the pension committee that is to act in the capacity of a trustee. In light of these provisions, the Court held that unlike the Ontario Pension Benefits Act, the SPPA does not impose an obligation on an employer to act as an administrator of the pension plans belonging to the unionized and non-unionized employees, and therefore, White Birch was not in violation of the kind of fiduciary duty that applies to a constructive trustee in common law.

Res Judicata

As a final note, in his analysis of the motions before him, Justice Mongeon made some interesting comments as to the nature of CCAA orders. White Birch had argued that the motions by the labour unions, retirees and pension committees should be dismissed because the issue of rank had already been dealt with under the terms of the Initial Order and various subsequent decisions. White Birch pointed out that the labour unions had received service of the motion for an initial order and were called on to make representations at the hearing, but declined to do so. In addition, all subsequent decisions (notably with regard to the stalking horse sales process and the entitlement to the proceeds from that process) were also served on the interested parties, and none chose to make representations asserting prior rank at the hearings. White Birch, therefore, insisted that the petitioners were no longer entitled to seek such relief, as much time had passed and many parties had relied on the rank conferred by the Court's previous orders.

Justice Mongeon concluded that the CCAA orders in question were subject to what he termed "chose decidee" (i.e. something similar to "chose jugée" or res judicata). Although he recognized that certain CCAA orders may be varied by the CCAA judge (notably by way of the comeback clause), he went on to state that a court asked to vary an order must take into account the rights of all interested parties who may have made decisions based on the order. In this light, he ruled that unless the previous orders were issued without notice to the petitioners, they cannot be varied to the prejudice of parties that relied on the orders in good faith.

In the White Birch matter, as the DIP lender had disbursed significant sums based on the super-priority granted by the Initial Order, the subsequent reduction of the rank of its claim would obviously cause it significant prejudice.

Where Do We Go From Here?

It remains to be seen whether any or all of the petitioners will seek to appeal from Justice Mongeon's decision. What appears clear, however, is that this decision will have a major impact on present and future CCAA filings in Quebec and in the rest of Canada.

Of particular interest is the Court's adoption of Justice Morris Fish's position in Century Services with respect to the survival of deemed trusts in the CCAA context. If followed, this will align CCAA proceedings more closely with the Bankruptcy and Insolvency Act framework, in which only explicitly recognized in the Act continues to apply post-filing. Clearly, a number of current beneficiaries of deemed trusts will be dissatisfied with this result.

Notwithstanding the dissatisfaction from this quarter, we expect that the insolvency community as a whole will receive this decision in White Birch very positively. It will restore DIP lenders' confidence in the process and thus ensure that essential capital is available to companies seeking to reorganize under the CCAA. This, in turn, should be a positive outcome for all stakeholders, as a successful reorganization is virtually always better than an outright bankruptcy.

We look forward to seeing how the courts of Quebec and of the other Canadian provinces will react.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions