On January 24, 2014, the Québec Superior Court (Quebec Court) issued a decision in the Companies' Creditors Arrangement Act (Canada) (CCAA) proceedings of Timminco Limited (Timminco) and Bécancour Silicon Inc. (BSI). In this decision, the Quebec Court concluded that the Supplemental Pension Plans Act (Quebec) (SPPA) created a deemed trust that secured an employer's obligation to fund normal course payments and amortization payments (i.e. special payments), but the statutory deemed trust did not extend to the entire solvency deficiency of a defined benefit pension plan. The Quebec Court also held that the deemed trust ranked in priority to pre-filing contractual security.
The Quebec Court's decision in Timminco comes almost a year after the Supreme Court of Canada's (SCC) landmark pension priority decision in Re Indalex Ltd. In that case, the SCC concluded that Ontario's Pension Benefits Act (PBA) created a deemed trust that secured an employer's obligation to fund not only normal cost contributions and special payments to be made into a pension plan, but on the wind-up of a defined benefit pension plan, the entire wind-up deficiency. In Ontario, section 30(7) of the Personal Property Security Act (PPSA Ontario) expressly provides that a deemed trust created by the PBA enjoys priority over secured creditors with respect to working capital assets (i.e. inventory and receivables). An earlier SCC case, Royal Bank of Canada v. Sparrow Electric Corp. (Sparrow Electric) held that unless there was an express statutory provision granting priority to a deemed trust, the deemed trust did not enjoy priority over prior registered secured creditors. In Timminco, the Quebec Court held that although Quebec does not have an equivalent provision to section 30(7) of the PPSA Ontario, the reasoning in Sparrow was not applicable.
SUMMARY OF THE FACTS
On January 3, 2012, Timminco and its wholly owned subsidiary BSI filed for protection from their creditors before the Ontario Superior Court of Justice (Ontario Court) pursuant to the provisions of the CCAA. Pursuant to an order of the Ontario Court issued on January 16, 2012, the amortization payments to be made by BSI with respect to two defined benefit pension plans were suspended. Both pension plans had an aggregate actuarial deficiency of approximately C$14 million. During the course of the CCAA proceedings, substantially all of BSI's assets and all of which were located in Quebec, were sold and the super priority debtor-in-possession (DIP) financing obtained by Timminco and BSI was repaid in full. Excess sales proceeds were available for distribution.
Following repayment of the DIP, BSI's pre-filing secured creditor, Investissement Québec (IQ), which held a universal hypothec (the equivalent of a general security interest) on all of BSI's movable property (i.e. personal property) asserted priority to the sale proceeds. The Quebec pension plan committees representing each Quebec pension plan disputed IQ's priority and asserted that BSI's obligation to fund the actuarial deficit of the pension plan and BSI's obligation to make the suspended amortization payments rank in priority to BSI's obligation to repay its secured indebtedness to IQ. Given the priority dispute involved, the priority of the claims of Quebec pensioners under the SPPA, relative to the priority of claims of a pre-filing creditor holding hypothecary security, the Ontario Court transferred the priority dispute to the Quebec Court for adjudication.
EXISTENCE OF A DEEMED TRUST
Section 49 of the SPPA reads as follows:
"Until contributions and accrued interest are paid into the pension fund or to the insurer, they are deemed to be held in trust by the employer, whether or not the latter has kept them separate from his property."
From the outset, the Quebec Court acknowledged that it had previously rendered a decision in the White Birch case that held that section 49 of the SPPA did not create a deemed trust. This decision was the subject of a previous Blakes Bulletin: Quebec Court Won't Apply Indalex. In that decision, the Quebec Court went on to say that even if it was incorrect in its interpretation of section 49, the deemed trust would not enjoy priority over the super priority DIP charge that was granted in that case.
After carefully considering the arguments of the parties and various decisions dealing with the concept of a statutory deemed trust, the Quebec Court concluded that section 49 of the SPPA does in fact create a deemed trust. On this point, the Quebec Court reversed its earlier ruling in White Birch. The Quebec Court, however, found that the scope of this trust covers only unpaid contributions to the plan and not the entire actuarial deficit.
CONSEQUENCE OF THE CREATION OF THE TRUST
After emphasizing that there is no equivalent legislation in Quebec to section 30(7) of the PPSA in Ontario granting express priority to the statutory deemed trust created by the SPPA, the Quebec Court concluded that section 264 of the SPPA nonetheless ensures that the property that is subject to the deemed trust of section 49 of the SPPA is not affected by the universal hypothecary creditor.
Section 264 of the SPPA reads as follows:
"Unless otherwise provided by law, the following amounts or contributions are unassignable and unseizable:
(1) all contributions paid or payable into the pension fund or to the insurer, with accrued interest;" [...]
The Quebec Court held "[t]he notion of unassignability and unseizability of due and unpaid contributions prevents the employer and his creditors from using these funds for purposes other than those specified in the SPPA. These amounts therefore, cannot be the subject of a universal movable hypothec with or without delivery." The Quebec Court therefore concluded that the reasoning adopted earlier in Sparrow Electric cannot be applied in these circumstances. In the view of the Quebec Court, it is not necessary, given the wording of the provision in question, to physically separate the amortization payments for them to benefit from being unassignable and unseizable.
In conclusion, the Quebec Court stated that the amortization payments that have not been paid to a pension plan are subject to a deemed trust created by law, and that these contributions are unassignable and unseizable and cannot therefore be affected by a hypothec even if the amortization became due after the establishment of the said hypothec.
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