The SCC's decision in Indalex eliminates many of the concerns that arose from the Court of Appeal's ruling in this case. In a nutshell:
- the super-priority of debtor-in-possession financing is upheld as overriding provincial deemed trusts;
- the statutory deemed trust under Ontario's Pension Benefits Act (the "PBA") was upheld to apply to the amount of any deficit in a pension plan that is already in wind-up but not to the deficiency in a pension plan which is not in the process of being wound up. This should give some comfort to secured lenders, although the amount of the potentially higher ranking claim may exceed what they expected in the past;
- what constitutes a breach of fiduciary duty to pension plan beneficiaries in insolvency cases has been limited to not arranging for independent representation and notice for plan beneficiaries. Ideally, corporations can avoid the issue entirely by having an independent pension plan committee; and
- the use of a "constructive trust" remedy in this case was overturned.
As many readers of this Flash will already know, in the Indalex decision the Ontario Court of Appeal held that where a debtor has breached its fiduciary duties to pension plan beneficiaries, the Court may find that a "constructive trust" applies to the debtor's property (such as the proceeds resulting from the sale of its business) and, therefore, such property (or sale proceeds) must be used to fund the full amount of any pension plan deficiencies first ahead of anyone else – whether or not a statutory deemed trust applies to such pension obligations. The Court of Appeal also held that the statutory deemed trust under the PBA applies to the amount of any deficit in a pension plan that is already in wind-up.
The seven member panel of the Supreme Court of Canada released their reasons today holding (5 panel members to 2) that a "constructive trust" was not an appropriate remedy in this case. While Indalex had breached a fiduciary duty in failing to take steps to ensure that the pension plan beneficiaries had the opportunity to be fully represented (in particular, on the motion to approve the debtor-in-possession financing), such a breach in the circumstances of this case did not warrant overriding the super-priority granted to such debtor-in-possession financing by use of the constructive trust remedy.
That said, the SCC did uphold (4 panel members to 3) the Ontario Court of Appeal's opinion that the statutory deemed trust under the PBA applies to the amount of any deficit in a pension plan that is already in wind-up but concluded (in a different 4 to 3 mix) that, as a result of the application of the doctrine of federal paramountcy, the debtor-in-possession financing granted by the trial level court overseeing Indalex's proceedings under the Companies' Creditors Arrangement Act (the "CCAA") had priority over this deemed trust. The SCC majority's basis for this conclusion was largely that the CCAA judge had considered factors that were relevant to the remedial objective of the CCAA and found that Indalex had in fact demonstrated that the CCAA's purpose in general would have been frustrated without the debtor-in-possession priority charge even though the CCAA judge did not specifically find that the recognition of the pension deemed trust specifically would frustrate the purpose of the CCAA proceeding.
It should be kept in mind that this case was decided in the context of the CCAA as it existed prior to the 2009 wholesale amendments that were made to such legislation. As such, relying on a paramountcy argument for priority in this case may not fully close the gate. The 2009 amendments now make debtor-in-possession financing an explicit statutory provision of the CCAA and specifically state that a court may order that such a charge rank in priority to any "secured creditor". Given how "secured creditor" is defined in the CCAA, there remains room to argue that the definition does not catch deemed trusts under the PBA thereby providing an avenue of attack to the paramountcy argument advanced in Indalex (as, arguably, there is now no inconsistency between federal and provincial law on this particular point). So, while the battle was certainly won in this case, the war might not be over just yet.
It is also worthy to note that, in its fiduciary duty analysis, the majority of the SCC rejected what has come to be known as the "two hats" characterization – i.e., a director only owes a fiduciary duty to pension plan members when acting as the plan administrator as opposed to when acting as a director of the corporation. Rather, the SCC held that the correct approach is to determine whether or not there is a conflict of interest between one's duties as a plan administrator versus as a corporate director. A conflict of interest arises when there is a "substantial risk" that the plan administrator duties would be "materially and adversely affected by" the director's duties to the corporation – and not, as the Court of Appeal had held, whenever a company makes decisions that have a potential to affect the plan beneficiaries. If there is a conflict of interest, a solution must be found to ensure that the plan members' interests are taken care of which may be putting the members on notice, finding a replacement administrator, appointing representative counsel or finding some other means to resolve the conflict. In this regard, commencing CCAA proceedings was not, on its own, seen as giving rise to such a conflict of interest. Furthermore, not providing notice to the plan beneficiaries on the initial CCAA application in this case was also held as not giving rise to a conflict of interest. However, the SCC did explicitly state that a debtor that finds itself in such a conflict of interest must bring the conflict to the attention of the judge overseeing the CCAA proceedings. It will then be up to the CCAA judge to decide how best to ensure that the interests of the plan beneficiaries are fully represented in the context of the CCAA proceedings – by appointing representative counsel, appointing an independent administrator, providing direct notice mechanics or otherwise.
The SCC also did not squarely address the Court of Appeal's holding that a voluntary assignment into bankruptcy should not be used to defeat a secured claim under valid provincial legislation and, in particular, that: "it is inappropriate for a CCAA applicant with a fiduciary duty to pension plan beneficiaries to seek to avoid those obligations to the benefit of a related party by invoking bankruptcy proceedings when no other creditor seeks to do so." However, the majority of the SCC appear to conclude that Indalex's motion to voluntarily enter into bankruptcy was itself not a breach of this fiduciary duty and that it should be open to do so provided that the conflict of interest between its corporate interests and its duties as plan administrator were meaningfully addressed at the same time.
It is expected that Canadian credit markets will be generally relieved with the majority holdings by the SCC in this case. The spectre of a constructive trust remedy has effectively been put back to the place it was prior to the Court of Appeal's ruling in this case. In addition, what constitutes a breach of fiduciary duty to pension plan beneficiaries in insolvency cases has been neatly refined to something that will be very manageable for debtors in future CCAA cases (effectively arranging for independent representation and notice for plan beneficiaries) – a process which has largely become a matter of practice in any event since the Court of Appeal's decision.
The one holding of the SCC which should be of note as a "game changer" (in the sense that it is likely a different conclusion from what was the generally held view prior to this case) is that the statutory deemed trust under the PBA has now been held to unequivocally apply to the amount of any deficit in a pension plan that is already in wind-up. Secured lenders will do well to keep this in mind as this will impact their priority position in all cases outside of a formal bankruptcy if a wind-up of a pension plan is initiated subsequent to their advance of credit.
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