On February 1, 2013 the Supreme Court of Canada ("SCC") released its long awaited decision in Sun Indalex Finance, LLC v. United Steelworkers, shedding new light on the responsibilities of insolvent companies who act as pension plan administrators and reversing a decision of the Ontario Court of Appeal ("ONCA") that would have seen pension plan beneficiaries paid in priority to a DIP lender with a court-ordered super-priority charge.
In a three-way split decision, the SCC concluded that:
- The statutory deemed trust in section 57(4) of the Pension Benefits Act ("PBA") applies to the wind-up deficiency of a pension plan that was wound-up prior to the commencement of insolvency proceedings;
- A super-priority charge ordered under the Companies' Creditors Arrangement Act ("CCAA") will take priority over the statutory deemed trust in favour of pension plan beneficiaries; and
- Employers who act as pension plan administrators do not necessarily breach their fiduciary duties by commencing CCAA proceedings, but must take steps to address any conflicts of interest before seeking relief that may erode the priority of pension plan beneficiaries, such as DIP financing.
The ruling will bring some comfort to DIP lenders and other parties who benefit from court-ordered super-priority charges, reducing concerns that their priority positions will be supplanted by the imposition of constructive trusts in favour of pension plan beneficiaries. It also provides greater certainty as to the scope of an employer-administrator's responsibilities under the PBA when seeking protection under the CCAA, drawing a distinction between an application for basic CCAA protection, such as a stay of proceedings, and an application that may affect the priority and potential recovery of pension plan beneficiaries. Finally, the expansion of the PBA deemed trust to include wind-up deficiencies will result in greater consideration of the impact of pension plans in CCAA proceedings.
SUMMARY OF THE FACTS
On April 3, 2009, Indalex Limited ("Indalex") obtained an initial order under the CCAA from the Ontario Superior Court of Justice. Indalex was the sponsor and administrator of two defined benefit pension plans: a "Salaried Plan" which had been wound-up approximately two years prior, and an "Executive Plan" which was closed to new members but which had not yet been wound-up. Both pension plans were underfunded, though Indalex had made the minimum necessary payments into both plans, including current service contributions and special payments.
On April 8, 2009, Indalex obtained a further order from the Court approving a DIP credit agreement and granting a super-priority charge for all borrowings on Indalex's property. The order provided that the DIP lender's charge "shall rank in priority to all other security interests, trusts, liens, charges and encumbrances, statutory or otherwise". The DIP facility was guaranteed by Indalex Holding Corp. ("Indalex U.S.").
On July 20, 2009, Indalex obtained an order approving the sale of its assets on a going concern basis and moved for an order to distribute the sale proceeds to the DIP lenders. The proceeds from the sale of assets were not sufficient to repay the DIP facility in full. At the sale approval motion, the United Steelworkers ("USW") (on behalf of certain beneficiaries of the Salaried Plan) and beneficiaries of the Executive Plan objected to the distribution of the sale proceeds on the basis that the deemed trust provisions in the PBA applied to all unpaid amounts owing to the pension plans by Indalex.
The Court approved the sale. However, the Monitor was directed to retain $6.75 million of the sale proceeds as a "Reserve Fund" to address the estimated deficiencies in the Salaried Plan and the Executive Plan. After the sale closed, Indalex U.S. paid the shortfall on the DIP facility of approximately $10.75 million pursuant to its obligations under the guarantee and stepped into the shoes of the DIP lenders, seeking recovery from the Reserve Fund.
DECISION OF THE SUPREME COURT OF CANADA
The SCC divided their decision on the substantive issues raised by the appeal into three discrete questions:
- Does the statutory deemed trust provided for in section 57(4) of the PBA apply to a pension plan wind-up deficiency?
- Does the statutory deemed trust have priority over a court-ordered super-priority charge in view of the doctrine of federal paramountcy?
- Did Indalex Canada breach its fiduciary duties owed to the pension plan beneficiaries and is a constructive trust an appropriate remedy?
The SCC also ruled on a costs issue raised by USW which is not addressed in this update.
I. Scope of The Statutory Deemed Trust
The PBA provides for three types of pension plan liabilities: (i) current service costs, (ii) special payments and (iii) wind-up deficiencies. In Indalex, a central issue was whether some or all of the wind-up deficiency in the Salaried Plan could benefit from the deemed trust created by section 57(4) of the PBA. Section 57(4) applies to "employer contributions accrued to the date of the wind-up but not yet due under the plan or regulations." Thus, to be subject to the deemed trust, the plan must be wound-up and the amounts in question must be "employer contributions", "accrued to the date of the wind-up" and "not yet due".
Based on prior case law, the Ontario Superior Court of Justice concluded that the wind-up deficiency in the Salaried Plan did not have the benefit of the deemed trust. The ONCA reached the opposite conclusion, however, reasoning that the deemed trust applies to "all amounts owed by the employer on the wind-up of its pension plan".
The SCC upheld the decision of the ONCA on this issue, ruling that the scope of section 57(4) of the PBA is broad enough to capture the wind-up deficiency in a pension plan that was wound-up prior to the commencement of the CCAA proceedings. The Justices were in agreement that the full amount of the wind-up deficiency was an "employer contribution" that was "not yet due", however, they disagreed as to whether the wind-up deficiency had "accrued". The majority of the court found that the wind-up deficiency did accrue as of the date of the wind-up, based on the legislative history and purpose of section 57(4) of the PBA. As a result, the full amount of the wind-up deficiency in the Salaried Plan was found to take the benefit of the deemed trust.
The court was also in agreement that no deemed trust could arise under section 57(4) until the pension plan was wound-up. Consequently, there was no deemed trust for any potential future wind-up deficiencies in the Executive Plan.
II. CCAA Charges And Federal Paramountcy
Having found that the statutory deemed trust extended to the full amount of the wind-up deficiency in the Salaried Plan, the ONCA had gone on to conclude that the deemed trust should be paid in priority to the CCAA super-priority charge in favour of the DIP lenders. The ONCA reasoned that although a CCAA court has the power to authorize a DIP charge that would supersede the statutory deemed trust, the order in Indalex did not have this effect because federal paramountcy had not been invoked by the CCAA court. As a result, the deemed trust took priority under section 30(7) of the Personal Property Security Act ("PPSA"), which provides pension plan deemed trust liabilities with priority over security interests on the inventory and accounts of the employer.
The SCC reversed this aspect of the ONCA's decision, with the majority finding a clear conflict between the provincial priority given to pension plan liabilities under the PBA and the PPSA, and the federal priority given to the DIP lenders under the CCAA. The majority held that it is not necessary for the CCAA court to specifically invoke federal paramountcy when granting super-priority charges under the CCAA in order for those charges to take precedence over provincially legislated charges and priorities. Furthermore, although the CCAA court did not advert to the deemed trust in favour of the pension plan beneficiaries in granting the DIP charge, the factors considered by the CCAA court were appropriate and consistent with the remedial purpose of the CCAA, including most significantly the conclusion that there was no other alternative available to Indalex that would facilitate a going concern solution to its insolvency.
III. Fiduciary Duties of Pension Plan Administrators
Under the PBA, each pension plan must have an administrator which is responsible for conducting the internal management of the pension fund. The PBA imposes a number of fiduciary duties on the administrator, including a duty to ensure that pension payments are made when due, a duty to inform the Superintendent of Financial Services if pension payments are not made when due, and the authority to commence court proceedings when pension payments are not made.
One party that is expressly authorized by the PBA to act as a plan administrator is the employer company. However, where the employer opts to act in this capacity, conflicts of interest may arise. The board of directors of the employer will typically owe fiduciary duties under corporate legislation to act in the best interests of the company, which may diverge from their fiduciary duties under the PBA.
Indalex was one such employer-administrator, both in respect of the Salaried Plan and the Executive Plan. While serving in these dual roles, Indalex performed a number of activities that might have given rise to a conflict of interest, including: (i) applying for the initial CCAA order, (ii) applying for an order authorizing the creation of a DIP charge with priority over the pension plans, (iii) applying for an order approving a sale of its business as a going concern, knowing that no payment would be made to the underfunded pension plans, and (iv) applying for an order authorizing Indalex to assign itself into bankruptcy in order to reduce the priority of the deemed trust in favour of the pension plan beneficiaries.
The ONCA found that as a result of these activities, Indalex had breached its fiduciary duties under the PBA in three respects: (i) it had put itself in a conflict of interest by continuing to act as administrator when it knew it was insolvent and should have known that it would be unable to comply with its fiduciary duties under both the PBA and corporate legislation, (ii) it had applied for CCAA protection without notice to the pension plan beneficiaries, and (iii) it had sought various relief in the CCAA proceedings, including the DIP charge, sale approval and authority to make an assignment into bankruptcy, which was prejudicial to the pension plan beneficiaries. As a remedy for these breaches, the ONCA imposed a constructive trust over the Reserve Fund in favour of the pension plan beneficiaries, including beneficiaries of the Executive Plan, which would have seen them paid out in priority to Indalex U.S. (which by that time had been subrogated to the position of the DIP lenders after paying them out in full under the guarantee).
The SCC agreed that some breaches of fiduciary duties had occurred, but found them to be more limited in scope. The majority found that the failure to provide notice of the initial application for CCAA protection did not breach fiduciary duties as the pension plan beneficiaries would not have been entitled to notice of the application in any event, and because the relief sought on the initial order, including a stay of proceedings, was not directly prejudicial to the pension plan beneficiaries. The majority agreed, however, that when Indalex took the further step of seeking approval of a DIP charge that would rank in priority to the pension plan beneficiaries, and that could render it impossible for Indalex to make future pension payments, Indalex had breached its fiduciary duties under the PBA. On this point, the court provided some guidance to future employer-administrators seeking CCAA protection, noting that any conflict of interest should be brought to the attention of the CCAA judge as soon as possible, to allow the judge to make appropriate arrangements for the representation of the pension plan beneficiaries.
While the SCC agreed that Indalex had breached its fiduciary duties under the PBA, the majority reversed the ONCA's decision to impose a constructive trust in favour of the pension plan beneficiaries. The majority noted that in order to impose a constructive trust, the assets subject to the trust had to result from the activities of Indalex in breach of its fiduciary duties. There was insufficient evidence to establish that the DIP charge would not have been granted if the pension plan beneficiaries had the benefit of independent representation on the DIP approval motion. On the contrary, a number of holdings of the CCAA judges suggested that the DIP financing was absolutely necessary in order to achieve a going concern solution to the Indalex insolvency. Furthermore, by the time of the sale approval motion the pension plan beneficiaries had independent representation, and the approval order was still granted on the grounds that it was in the best interest of the stakeholders generally.
Consequently, although the SCC agreed that employer-administrators must take steps to ensure pension plan beneficiaries are properly represented before seeking relief that has the potential to erode their priority position, they were not prepared to impose a constructive trust in favour of the plan beneficiaries that would grant them priority over CCAA super-priority charges.
The SCC ruling in Indalex brings closure to one of the most contentious lines of insolvency decisions in the last few years. DIP lenders and other beneficiaries of court-ordered charges will take comfort from the court's conclusion that CCAA super-priority charges take precedence over provincial charges to the extent of any conflict, regardless of whether the CCAA court specifically adverts to principles of federal paramountcy. Companies acting as employer-administrators will also have the benefit of clearer guidelines respecting the scope of their fiduciary duties and the appropriate time to address any conflicts of interest – after the initial CCAA application, but prior to seeking any priority charges or other relief that will erode the priority of pension plan beneficiaries. Finally, pension plan beneficiaries in Ontario are now clearly protected by a statutory deemed trust in respect of all employer contributions, including any wind-up deficiency in a pension plan that has been wound-up. While pension plan deemed trusts may still be exposed to a change in their priority in a bankruptcy, the expansion of the deemed trust will provide a larger stake for pension plan beneficiaries in CCAA proceedings.
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