In Indalex Limited (Re), 2011 ONCA 265, 2011, the
Ontario Court of Appeal held that a breach of fiduciary duty by the
corporation called for the exceptional remedy of constructive trust
because, "Without the proprietary remedy, the Plans'
beneficiaries have no meaningful remedy" (at para 204). The
Court of Appeal's 2011 decision effectively sent the message
that the interests of good conscience were sufficient to justify
undermining the legitimate priority of existing secured creditors.
This month, the Supreme Court of Canada reversed the Court of
Appeal's decision, thereby restoring predictability for
secured creditors and rejecting the application of the constructive
trust as a remedy for wrongful acts in the commercial context.
Ultimately, the message in Sun Indalex
Finance, LLC v United Steelworkers is that the constructive
trust is not an appropriate remedy where its effect is to undermine
the predictability and certainty of commercial transactions.
The wrongful act at issue in Indalex was the breach of fiduciary
duty by the employer, Indalex, which also played the role
administrator of the pension plan. Indalex was the wholly owned
Canadian Subsidiary of a U.S. Corporation, and as a result of the
economic downturn Indalex began insolvency proceedings in 2009. In
an effort to keep the business a going concern Indalex and its U.S.
holding company entered into an agreement for debtor-in-possession
financing. The pension plan beneficiaries did not participate in
this first round of financing, and when Indalex applied for
authorization to increase the amount of debtor-in-possession
financing the pension plan beneficiaries did not oppose it. Indalex
then brought an application to begin a bidding process where they
would sell their assets and distribute the sale proceeds to the
debtor-in-possession lenders. The pension beneficiaries objected;
such objection was dismissed. Following the sale, the majority of
the funds were distributed to the secured creditors, and a portion
was kept back pending a conclusion with respect to the entitlement
of the pension beneficiaries. The key issue on appeal was whether
Indalex had acted in the face of a conflict of interest by acting
as both employer and administrator throughout the insolvency
proceedings, thereby breaching its fiduciary duty to the pension
The Supreme Court of Canada agreed with the Court of
Appeal's decision that there was a breach of fiduciary duty but
disagreed that the proceeds from the sale arrived in the hands of
Indalex's creditors as a result of the breach. The SCC
recognized the loss to the pension beneficiaries however, it held
such loss is not sufficient to justify undoing carefully negotiated
commercial agreements. Indalex strongly suggests that the generous
application of constructive trusts advocated in Soulos v
Korkontzilas,  2 SCR 217, has no place in the commercial
context. In fact, the SCC was unequivocal in its rejection of
constructive trust as a remedy in context of complex commercial
transactions when it concluded that "imposing a $6.75 million
penalty on the other creditors as a remedial response to this
breach is so grossly disproportionate to the breach as to be
unreasonable" (at para 239).
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
The Court of Queen's Bench of Alberta authorized a disposition of a debtor's assets by a receiver immediately upon appointment and without being forced to conduct a marketing process within the receivership proceedings.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).