On February 1, 2013, the Supreme Court of Canada released its decision on what has come to be known simply as the Indalex case. The Supreme Court gave a final determination on the priority given to pension fund deficiencies, in the context of an insolvency.
Case Comment: Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6
The Supreme Court of Canada's recent Indalex decision sheds light on the ranking of creditors' and pensioners' interests in the context of CCAA proceedings, and provides some cautions to various classes of creditors of financially troubled companies.
By the spring of 2009, rising commodity prices and the economic recession had taken such a toll on the U.S. and Canadian branches of Indalex (aluminum extrusions manufacturers) that these companies were on the brink of bankruptcy. In light of their financial circumstances the companies took steps in the United States and Canada to restructure and protect their remaining assets. The Canadian company, Indalex Ltd., was granted an Initial Order under the Companies' Creditors Arrangement Act ("CCAA"), staying all proceedings in respect of the company and its assets. An order was granted in the CCAA proceedings approving debtor-inpossession (DIP) financing. These loans were guaranteed by Indalex Ltd.'s parent company in the U.S. (Indalex U.S.) and were sanctioned by the CCAA court, which granted the DIP lenders priority over the claims of other creditors.
Indalex Ltd. was also the sponsor and administrator of two employee pension plans: a salaried plan and an executive plan. During the course of the restructuring both the salaried and executive plans were being wound up and both ended up with deficiencies. There was simply not enough money to go around.
Indalex Ltd. ultimately sold its business to SAPA AB, a Swedish company, for approximately US$30 million. SAPA did not assume the pension liabilities and the sale proceeds amounted to less than what was owed to the company's creditors, in particular the DIP lenders, who were owed US$27 million at the time of closing. As the guarantor of the DIP loans, Indalex U.S. paid the shortfall and stepped into the lenders' shoes, thereby claiming a first right to the sale proceeds.
Unsurprisingly, the pensioners disputed the priority claimed by Indalex U.S. and asserted that the sale proceeds should be held for them in trust so as to satisfy the pension wind-up deficiencies. The majority of judges at the Supreme Court of Canada ("SCC") agreed that a trust should apply to the wind-up deficiency of the salaried plan in accordance with provincial law (i.e. the Ontario Pension Benefits Act). However, the Court went on to find that even if the trust existed, it was superceded by the court-ordered priority granted to the DIP lender in the federal CCAA proceedings. This was a result of the doctrine of federal paramountcy, which dictates that in the case of a conflict between overlapping federal and provincial laws, the federal law will prevail. Because the CCAA is a federal statute, it prevails over the priorities set out under provincial law, including those under the Pension Benefits Act, to the extent that there is a conflict resulting from overlapping provisions.
The judges at the SCC sympathized with the manner in which the pensioners' interests were neglected during the course of the CCAA proceedings. They disagreed about the precise stage in the proceedings when Indalex Ltd. began to act in breach of its fiduciary duties to the pension plan beneficiaries; however, they recognized the inherent conflict of interest in purporting to represent the interests of pensioners while securing company loans that put those interests directly at risk by superseding the priority of the pension plans' claims over the company assets. Nevertheless, the majority found that even if a fiduciary duty had been owed and was subsequently breached, the appropriate remedy was not to place a constructive trust over the funds.
The majority of the judges at the SCC concluded that the pensioners' rights were subject to the priority granted to the DIP lenders (i.e. ultimately, Indalex U.S) in the CACA proceedings, and therefore the interests of Indalex U.S. should prevail. The SCC reflected on the aims of bankruptcy proceedings - "not to disadvantage creditors but rather to try to provide a constructive solution for all stakeholders when a company has become insolvent." This necessarily involves a balancing of competing interests in scarce assets.
This case provides a straightforward example of the power of the CCAA court to displace pre-existing priorities amongst creditors, particularly those secured via provincial legislation. It also illustrates the vulnerability of certain groups of creditors and, perhaps most importantly, the need for their input at the time when issues of priority are being argued before the court. At the same time, there may be some chilling effect on lenders, given the recognition of secured priority claims for pension plans in some circumstances.
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