A year after the uncertainty created in the Canadian corporate debt financing world by the Ontario Court of Appeal's pensions-friendly decision in the Indalex CCAA restructuring matter2, the Quebec Superior Court, in April 2012, determined in a lengthy and well-reasoned decision that the key restructuring and pensions law principles underpinning Indalex do not apply in Quebec when considering the treatment of defined benefit amortization payment and deficit claims in a restructuring.
In sum, the Court in White Birch noted that in Quebec - unlike in Ontario (at least as decided by the Court of Appeal in Indalex):
- there are no fiduciary duties owed by the company (or its directors) toward pension plan beneficiaries. Quebec supplemental pension plans are administered by a separate body, so must be considered in this different context;
- there are no deemed trusts for pension deficits, or amortization payments relating thereto, arising from Quebec's provincial pensions law that are recognized as having priority under federal insolvency law. This is an argument that, on its face, should find equal application in the other provinces (and will undoubtedly be central to the Supreme Court's analysis of Indalex);
- there are no constructive trusts created under Quebec law applicable to the pension deficits or amortization payments relating thereto. In short, it cannot be argued that from the moment the amounts became due they were somehow withdrawn from the ambit of the debtor company's assets and therefore are beyond the reach of its (other) creditors; and
- that even if there had been a recognized priority afforded to such pension-related amounts in a restructuring, such priority could be subordinated to the creation of super-priority charges for certain types of claims pursuant to Canada's insolvency statutes. The question of whether it would be appropriate to so prime the pension claims rests on whether such measures are required to ensure that the debtor company's efforts to restructure would not be frustrated by the recognition of the primacy of the pension claim amount. This was, in effect, the reasoning proposed in the Ontario Superior Court decisions - post-Indalex - in Timminco3, for permitting certain Court-ordered restructuring charges to prime pension claim amounts.
The timing of the decision in White Birch was fortuitous.
On June 5, 2012, the Supreme Court of Canada will hear the appeal in respect of Indalex. The Canadian Association of Insolvency and Restructuring Professionals ("CAIRP") will be among the interveners.
Represented by McMillan, CAIRP will emphasize the negative implications of the Ontario Court of Appeal's decision on both the availability of restructuring lending and on professionals called upon to become involved in insolvency and restructuring proceedings.
CAIRP will also have the chance to bring to the Supreme Court's attention the clear and persuasive reasoning brought to light in White Birch (which is itself likely to be the subject of an appeal, to the Quebec Court of Appeal, by the pension beneficiaries in that matter).4
Laying the groundwork for uncertainty: the Ontario Court of Appeal in Indalex
To understand the context in which White Birch was decided and which faces the Supreme Court in reviewing Indalex, it is to be recalled that the Ontario Court of Appeal held that upon the commencement of the winding up of an Ontario regulated defined benefit pension plan, there is a deemed trust created by Section 57(4) of the Pension Benefits Act (Ontario) (PBA) that secures all amounts owed by the employer under Section 75 of the PBA, including future special payments and the amount of any wind-up deficiency. That holding was inconsistent with non-binding comments made in other decisions by the same Court. The Court of Appeal also held that the filing by an employer under the CCAA does not trigger bankruptcy priorities and that provincial non-bankruptcy rules continue to apply to the extent that they are not inconsistent with the CCAA.
The Court of Appeal did not discuss the major legislative amendments to the CCAA that came into effect in 2009, after the commencement of the Indalex case. These amendments included changes to the provisions of law - in both the CCAA and in the BIA - that deal with types of claims (arising under provincial law) that have a recognized priority in restructuring and bankruptcy scenarios. In effect, the Court of Appeal was not called upon and did not address whether or not the above-noted Ontario provincial law statutory priorities are now inconsistent with the amended CCAA.
The Court of Appeal also held that, when an employer is also the administrator of a pension plan (which is normal in Ontario, but not in Quebec), the employer continues to owe a fiduciary duty to the pension plan beneficiaries after it files under the CCAA. The Court of Appeal held that this duty does not prevent the employer from filing under the CCAA. However, it was improper, in the Court of Appeal's view, for Indalex to do nothing to protect the rights of the pension plan beneficiaries and to fail to put someone else in the position to protect those rights. The Court of Appeal also stated that it was improper for Indalex to seek leave to file for bankruptcy (without any request from arm's length creditors) and to delay the commencement of the wind up of one of the pension plans in order to reverse the priority of the pension claims. As a result of the Court of Appeal's ruling that Indalex had breached its fiduciary duties as plan administrator, the Court of Appeal held that it was appropriate to protect the beneficiaries of the second pension plan that was not being wound up at the time of the sale by imposing a constructive trust as a remedy for the breach of the fiduciary duty.
As a result of these lines of reasoning, the Court held that the DIP charge did not have priority over the statutory or constructive pension trusts for various reasons, including that the disclosure and notice given at the time the DIP loan was originally approved by the Court was inadequate.
A different approach and different facts: the Quebec Superior Court in White Birch
In early 2010, White Birch filed for creditor protection under the CCAA. As part of this filing, an interim lender was afforded a DIP charge in consideration of its post-filing financing, the whole without effective contestation by any parties purporting to be prejudiced by having an otherwise priority claim over the assets of the debtor company. A sale process ensued, and much of the substantive elements of the restructuring were completed in the first 18 months of the case.
A belated contestation
However, in November 2011 certain White Birch employees and retirees (the "Plan Beneficiaries") filed motions before the Superior Court of Quebec seeking the application of the findings of Indalex to their own situation.
The Plan Beneficiaries argued that the terms of the initial court order should be changed so as to require the company to make amortization payments that, in a non-restructuring context, would have had to be made in order to begin to address the deficit in the pension plans. They argued that such amortization payments are protected by a deemed trust created under Québec's Supplemental Pension Plans Act ("SPPA"). In effect, they argued that such payments should get priority over repayment of the interim financing that otherwise had been afforded super-priority status at the outset of the case.
Most of the other parties to the proceedings opposed, citing the existence of the Court-ordered charges in favour of the interim lender and those in favour of other intermediaries whose efforts are crucial for the orderly treatment of CCAA proceedings.
There are no fiduciary duties of the company or directors to plan beneficiaries in Quebec
In his decision, Mr. Justice Mongeon distinguished the facts before him from those in Indalex. First, he noted that there was no question of conflict of interest, as White Birch (and its directors) is not the administrator of the pension plans under the SPPA. An employer and its directors have no fiduciary duties toward pension plan beneficiaries under Quebec pensions law, irrespective of what may be the case under Ontario pensions law.
Adequate notice of the stay of amortization payments was given in fact
Mr. Justice Mongeon also noted that the Plan Beneficiaries had had, since the outset of the case, notice that White Birch was seeking the suspension of amortization payments due under the SPPA in its application for an initial order. The Plan Beneficiaries never opposed this suspension request, which is not atypical in recent Quebec CCAA matters and was specifically blessed in AbitibiBowater inc. (Arrangement relatif à)5. Accordingly, the facts in White Birch differed from those in Indalex, where the issue of adequate notice to plan beneficiaries and disclosure of the request for interim financing was at the heart of the debate. Indeed, in White Birch, the Plan Beneficiaries only first complained over a year and a half into the file, when they attempted to import the Indalex decision to their circumstances.
Federal insolvency statutes do not recognize provincial deemed trusts for amortization payments or plan deficiency claims
Another key element of White Birch involved Mr Justice's Mongeon's determination that the statutory-based, deemed trust for pension deficits, or amortization payments relating thereto, arising from Quebec's provincial pensions law, are not recognized as having any priority under federal insolvency law. This is an argument that, on its face, should find equal application in the other provinces. It will undoubtedly be central to the Supreme Court's analysis of Indalex. In coming to this determination, Mr Justice Mongeon cited another Supreme Court decision. In Century Services Inc. v. Canada (Attorney General)6, the Supreme Court specifically refused to give precedence to a statutory deemed trust arising under the Excise Tax Act that was not specifically recognized in the CCAA. Mr Justice Mongeon also noted that, in cases where there are provincial statutes that afford a deemed trust to certain types of claims or amounts, such statutes are not recognized as applicable in the event that they are not specifically incorporated by reference into federal insolvency legislation, according to the doctrine of the paramountcy of federal statutes. Inasmuch as the SPPA's deemed trust for amortization payments is not cited in the relevant portions of federal insolvency legislation, same should not be considered valid.
There are no common law constructive trusts in Quebec
Moreover, Mr Justice Mongeon dealt with the issue of whether anything akin to the common law constructive trust relied on in Indalex exists in Quebec. In sum, there is no such construct under Quebec law. Rather, the elements of a trust in relation to the amortization payment amounts and/or plan deficit amount, as recognized under Quebec law, would have had to exist in order to afford priority to claims relating to such amounts. Mr Justice Mongeon concluded that the trust created by the SPPA could not be recognized as such, in no small part because the funds in question had never been segregated from, and were still accessible by, White Birch.
The need to encourage restructurings under both the CCAA and the BIA: Court's power to give restructuring charges priority over recognized secured claims extends to priming pension plan priority claims
Finally, in concluding his analysis, Mr Justice Mongeon cited lengthily from two recent, 2012 decisions of the Ontario Superior Court rendered by Mr Justice Morawetz in Timminco7. In this case, decided after the Indalex ruling, the Court rejected an application by the plan beneficiaries to have their claims recognized in priority to claims benefitting from certain Court-ordered charges (in favour of the directors and the restructuring professionals needed to address the case). In coming to this conclusion, Mr Justice Morawetz reasoned that to decide otherwise, and deprive the corporate directors and restructuring professionals of any security for their costs in participating in the restructuring, would have frustrated the debtor company's ability to restructure and avoid bankruptcy.
In a nutshell, Justice Mongeon simply restated the proposition raised in Century Services to the effect that "the contemporary thrust of legislative reform has been towards harmonizing aspects of insolvency law common to the two statutory schemes to the extent possible and encouraging reorganization over liquidation"8.
Quebec restructuring law as it relates to pension plans is unique - whatever happens with Indalex
On the basis of the foregoing, White Birch makes clear several propositions of law, the effect of which is that:
- there are a number of legal and practical considerations - common to restructurings throughout Canada and irrespective of the particularities of defined benefit pension plan schemes in the various provinces - that militate strongly in favour of the Supreme Court overturning the Ontario Court of Appeal's ruling in Indalex; and
- even if the Supreme Court determines that Indalex was properly decided, the particular facts of that matter and the particularities of Quebec's pension plan scheme is such that the decision Indalex should be of only tangential relevance to Quebec.
* White Birch Paper Holding Company (Arrangement relatif à), 2012 QCCS 1679 (CanLII).
2 Indalex Limited under the Companies' Creditors Arrangement Act ("CCAA"). Indalex Limited (Re), 2011 ONCA 265 (CanLII) [Indalex]. On April 7, 2011, the Ontario Court of Appeal rendered a decision in the restructuring proceedings involving Indalex Limited that was inconsistent with prior non-binding comments by the same court relating to the priority of certain pension claims.
3 Timminco Limited (Re), 2012 ONSC 948 (CanLII) and Timminco Limited (Re), 2012 ONSC 506 (CanLII) ("Timminco").
4 On May 10, 2012, White Birch employees and retirees filed a Motion for Leave to Appeal before the Quebec Court of Appeal. Such Motion for Leave will be heard on June 6, 2012.
5 2009 QCCS 2028 (CanLII).
6 2010 SCC 60 (CanLII) ("Century Services").
7 Supra note 3.
8 Century Services, supra note 6 at par. 24.
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.
© Copyright 2012 McMillan LLP