The Supreme Court of Canada's decision in Sun Indalex
Finance, LLC v. United Steelworkers1 has caused a
flurry of activity amongst legal commentators as to how it may
impact secured creditors generally. Over simplified, the Indalex
decision determined that if a pension fund is being wound up, then
pursuant to the Ontario Personal Property Security Act
R.S.O. 1990, c. P.10 (the "PPSA"), any deficiency on the
winding up of the pension plan would be a deemed trust which would
rank in priority to secured creditors. As it is challenging for a
secured creditor to quantify the size of the potential pension
deficiency on an ongoing basis, this deemed trust could materially
and negatively impact a recovery that a lender could anticipate on
its advances in an insolvency. As with deemed trusts generally, a
secured creditor can manage this risk by employing federal
insolvency laws to flip the priority but this limits the options
available to a secured creditor.
The above concerns, however, do not apply to the finance of
equipment or inventory financing that satisfies the requirements of
a purchase-money security interest under Section 33 of the PPSA.
Although deemed trusts are taken outside the scope of the PPSA by
Section 4(1)(b), deemed trusts arising under the Employment
Standards Act, R.S.O. 1990, c. E. 14 or the Pensions
Benefits Act, R.S.O. 1990 c. P. 8, are included pursuant to
the exception in Section 30(7) of the PPSA. This section
specifically provides that the deemed trust is superior to accounts
and inventory, however Section 30(8) expressly denies the
application of this subordination rule to a purchase money security
interest in inventory. Equipment is not mentioned and therefore is
not impacted by the special priority created by Section 30(7).
Accordingly, the Indalex decision has no negative impact for
equipment financiers whether they finance by lease, conditional
sales contract, or specific note and security agreement, or to a
financier who validly takes a purchase-money security interest in
inventory. Further, to the extent that a secured creditor has a
general security agreement and one of the assets secured is
equipment, the charge on the equipment would not be subordinated to
the deemed trusts arising from the legislation referenced in
Section 30(7). Equipment financiers and lenders who take a valid
purchase-money security interest in inventory may continue with
their credit approval procedures employed prior to the Indalex
1 Sun Indalex Finance, LLC v. United Steelworkers,
2013 SCC 6 ("Indalex")
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.
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