Canada: Supreme Court Of Canada Restores Super-Priority Of DIP Lenders In CCAA Proceedings

In (Re) Indalex, the Supreme Court of Canada (SCC) affirmed the super-priority of the security granted to a debtor-in-possession (DIP) lender, over a deemed trust created under provincial pension legislation, in the context of a Companies' Creditors Arrangement Act (CCAA) proceeding. The SCC's analysis leaves open further issues.

In a decision released on February 1, 2013, in respect of Indalex Limited (Indalex), which had been operating under the protection of the CCAA, the Supreme Court of Canada reversed, in part, a 2011 decision of the Ontario Court of Appeal (the Court of Appeal).

Indalex was both the sponsor and administrator of two employee pension plans—one for salaried employees (the Salaried Plan) and the other for executive employees (the Executive Plan). When Indalex became insolvent and entered CCAA protection, the Salaried Plan was in the process of being wound up; the Executive Plan had been closed, but was not yet being wound up. Both plans had wind-up deficiencies. As part of the CCAA proceedings, the Ontario Superior Court of Justice (Commercial List) (the CCAA Court) granted an order authorizing DIP financing from a syndicate of secured lenders (the DIP Lenders) to allow Indalex to have the necessary finances to continue operations throughout the CCAA process. Pursuant to an order of the CCAA Court, the DIP lenders were granted a priority over all other creditors.

When the business was ultimately sold, the proceeds of sale were insufficient to pay back the DIP Lenders. The CCAA Court authorized a payment to the DIP Lenders; however, an amount was held in reserve pending the resolution of the challenge by the members of both the Salaried Plan and the Executive Plan.

Ontario Court of Appeal

In a lengthy decision released on April 17, 2011, the Court of Appeal held that the Ontario Pension Benefits Act (PBA) imposes a deemed trust over the full amount of any funding deficiency that exists when a pension plan is wound up (wind-up deficiencies).  In the context of this case, the Court of Appeal also found that the deemed trust ranked ahead of the security granted in favour of the DIP Lenders. The Court of Appeal found that since the issue of "paramountcy" between the PBA remedy and the CCAA charge had not been addressed by the CCAA Court when it gave the priority, it could not trump the priority accorded to the deemed trust under provincial legislation.

Indalex appealed to the SCC, which handed down its long-awaited decision on February 1, 2013.

The Supreme Court of Canada

The SCC reached three main conclusions:

  • Section 57(4) of the PBA extends a deemed trust to not only current contributions, but also to wind-up deficiencies, when the pension plan is being wound up;
  • The security granted to a DIP lender in the context of a CCAA proceeding can take priority over the PBA deemed trust; and
  •  Indalex did breach certain fiduciary duties owed to plan members as a plan administrator, but the appropriate remedy for such a breach was not to deprive the DIP lenders of their priority.

The statutory deemed trusts under the PBA attach to wind-up deficiencies

In a 4-3 split decision, the SCC upheld the Court of Appeal's interpretation of the scope of the deemed trust provisions under the PBA. At issue specifically was the proper interpretation of the term "accrued." In short, the deemed trust provisions of the PBA attach to contributions of an employer "accrued to the date of the wind-up but not yet due." As wind-up deficiencies cannot be calculated at the date of the wind-up, Indalex argued that these contributions are not ascertainable and cannot be characterized as accrued.

The majority held that wind-up deficiencies constitute accrued obligations as at the date of the wind-up, and are subject to a deemed trust under the PBA. Employee entitlement under a plan ceases upon winding-up; therefore, the liabilities of an employer are complete, and have accrued as at the date of the wind-up, even if the specific quantum is not yet ascertainable. So long as liabilities are assessed as of the date of the wind-up, they constitute accrued contributions for the purposes of determining the quantum of a deemed trust. For the purposes of determining the scope of a deemed trust, it is irrelevant if the calculation cannot actually be completed as of the date of wind-up.  

A court order super-priority for DIP financing trumps the claims of a statutory deemed trust under the PBA

In a unanimous decision, the SCC overturned the Court of Appeal's holding that granted priority to deemed trusts created under the PBA over that of a DIP financer.

A DIP lender, the SCC held, is entitled to super-priority over a deemed trust created under provincial statute, such as the PBA. The SCC invoked the doctrine of paramountcy, which elevates federal legislation over provincial statute to the extent the two conflict, and upheld the super-priority of a DIP lender. The SCC held that paramountcy continues to operate as a matter of law, even where it is not raised at an initial proceeding.

A fiduciary duty exists for employers that administer employee pension plans; however, the creation of a constructive trust is not the appropriate remedy

In a 5-2 split decision, the SCC held that a fiduciary duty clearly exists on employers that administer employee pension plans. This fiduciary duty creates conflicts where an employer is subject to CCAA proceedings. In this case, Indalex was clearly in a conflict at some point while it was acting as both a plan administrator, and thus representing the interest of plan members as creditors, and as a debtor company seeking to navigate through a CCAA proceeding.

Despite the existence of this conflict, the SCC held that in this case the creation of a constructive trust was not the appropriate remedy. A constructive trust is only appropriate where a wrongdoer is unjustly enriched by an identifiable asset that was created as a result of its wrongdoing. In this case, while Indalex had breached its fiduciary duties, it was not appropriate, as a remedy, to use a constructive trust to effectively give pension plan beneficiaries a priority over the DIP Lenders.

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