On January 24th, 2014, Justice Mongeon of the Superior Court of Quebec issued an important decision (the Timminco Decision) regarding the status of pension plan claims in the context of a CCAA restructuring. The Timminco Decision established that Section 49 of the Quebec Supplemental Pension Plans Act (the SPPA) creates a valid deemed trust1 which ranks ahead of pre-existing conventional security, and which survives the issuance of an Initial Order pursuant to the Companies' Creditors Arrangement Act (CCAA). This deemed trust protects all special contributions (or catch-up payments), even if they were not actually placed in a distinct trust account.
The Timminco Decision is Justice Mongeon's second judgment regarding the issue of pension plan claims in the CCAA context. Unfortunately, it is, in many ways, irreconcilable with his previous decision in White Birch Paper (theWhite Birch Paper Decision). As a result, it raises more questions than it answers.
Although it was to be expected that the court would modify its findings due to the Supreme Court of Canada decision in Indalex (the Indalex Decision), which was issued subsequent to the White Birch Paper Decision, Justice Mongeon didn't simply follow the principles established by the Supreme Court. He actually reversed some of his own previous findings that were specific to the Quebec Supplemental Pension Plans Act.
As the Timminco Decision only (directly) addresses the relative rank of the deemed trust purportedly created pursuant to Section 49 of the SPPA and conventional security created prior to the issuance of the CCAA Initial Order, it is unclear how the Timminco Decision affects the status of Quebec law regarding the relative rank of pension plan claims and super-priority charges. This question remains open to interpretation.
What's more, it is not clear whether the court's analysis of and conclusion regarding the validity of the deemed trust purportedly created pursuant to Section 49 of the SPPA will withstand the scrutiny of the province's higher courts. The Quebec Court of Appeal has already received a motion for leave to appeal with respect to the Timminco Decision, which motion is presentable in mid to late May of this year.
In our view, the Court of Appeal should consider adopting the approach taken by Justice Schrager of the Superior Court of Quebec in the Aveos Fleet Performance Inc. matter (the Aveos Decision). As explained in greater detail below, we believe that his recent decision regarding the status of the deemed trust created pursuant to the federal Pensions Benefits Standards Act (PBSA) presents the opportunity to establish a more well-balanced and universally applicable framework relating to the status of statutory deemed trusts in an insolvency context.
Section 49 Does Create a Valid Prior Ranking Deemed Trust (after all)
In the White Birch Paper Decision, Justice Mongeon ruled that Section 49 of the SPPA did not create a valid deemed trust. In reaching this decision, he focused on the requirements that must be met in order to create a true trust pursuant to Quebec law, as well as the Minister of Justice's comments regarding Article 2715 CCQ (which governs floating hypothecs), which specifically establish that the common law notion of a floating charge does not exist pursuant to Quebec law.
In the Timminco Decision, Justice Mongeon approached the same question from an entirely different perspective. He did not address the Minister's comments and set aside the criteria to establish a true trust. Instead, he focused principally on a series of decisions interpreting the deemed trust provisions contained in the federal Income Tax Act.
Over the years, in decisions such as Henfrey Samson Belair, and Sparrow Electric, the Supreme Court of Canada repeatedly invalidated or limited the scope of such provisions. In each case, the federal legislator responded by amending the language of the provision in order to meet the requirements established by the Supreme Court. Finally, in First Vancouver Finance, the Supreme Court declared it was satisfied that the wording of the deemed trust provision was sufficient to establish its scope and rank.
Although Justice Mongeon considered such decisions in detail, his analysis ended with a recent Quebec Court of Appeal decision that followed First Vancouver Finance and declared that the deemed trust provision contained in the Quebec Tax Administration Act (formerly the Act Respecting the Ministère du Revenue), and worded in such a way as to mirror the amended federal deemed trust provisions, creates a valid and enforceable deemed trust under Quebec law.
Despite having acknowledged the Supreme Court's insistence on a strict interpretation of deemed trust provisions, and upon the "magic words" required, Justice Mongeon failed to enforce the requirement that the provision purporting to establish a deemed trust must clearly define the assets charged as well as the moment when the deemed trust attaches. Indeed, there is no discussion in the Timminco Decision of these requirements, which appear to be missing from the wording of Section 49 of the SPPA. Indeed the text of Section 49 is comparable to the equivalent provision in the Income Tax Act prior to the amendments made in order to address the Supreme Court's requirements.
In addition, the Timminco Decision circumvents the requirement, established in the Supreme Court decision in Sparrow Electric, that the relevant legislation explicitly grant priority not only over subsequent security, but also over existing conventional security.
With respect to this issue, the Timminco Decision refers to Section 264 of the SPPA, which states that "All contributions paid or payable into the pension fund" are unassignable and unseizable. The court considered this sufficient and concluded that these contributions were protected from claims by other creditors, including existing secured creditors.
This conclusion will no doubt be the subject of debate before the Court of Appeal, as the reasoning, while creative, appears somewhat flawed. At the very least, it must be said that Section 264 of the SPPA does not contain explicit wording of the type referred to in the Sparrow Electric decision.
How Does the Timminco Decision Affect the Status of Super-Priority Charges?
As mentioned, the Timminco Decision purports to affect only the status of existing conventional secured claims. However, as many of the key foundations supporting the White Birch Paper Decision have now been removed, it no longer provides clear guidance regarding the status and rank of super-priority charges (except as regards the issue of res judicata).
In light of the Timminco Decision, Section 49 of the SPPA must now be regarded as sufficient to create a valid deemed trust that protects special contributions and grant them rank ahead of conventional security. What's more, this deemed trust is now said to survive the issuance of an Initial Order pursuant to the CCAA.
In some ways, this brings Quebec in line with the state of the law in Ontario, following the Indalex Decision issued by the Supreme Court (although only the unremitted special contributions are captured by the deemed trust in Quebec, unlike in Ontario). However, the analysis which underpins the conclusions reached in the Timminco Decision is entirely different, due notably to the differences between the relevant provisions of the Ontario and Quebec pension legislation. Furthermore, the fact that the Court reversed itself on key elements of the White Birch Paper Decision casts doubts upon the application of the remaining elements.
As a result, it is our expectation that the Court of Appeal will grant leave and will provide its own analysis of the issues. We are hopeful that this will permit greater clarity to be achieved with respect to the rank of all types of claims.
The Aveos Decision Provides a Better Alternative
In our view, the Aveos Decision, issued by Justice Schrager on November 20th, 2013, merits careful consideration by the Court of Appeal in its deliberations regarding the Timminco Decision. Although the clause of the PBSA that purports to create a deemed trust is different from Section 49 of the SPPA, Justice Schrager's analysis of the criteria applicable to deemed trust provisions is well-reasoned and complete.
More importantly, however, in the Aveos Decision, Justice Schrager addresses the most important issue relating to all deemed trusts, namely, whether such deemed trusts (even if they are validly constituted) continue to apply once a debtor company has availed itself of the protection of the CCAA. This question was addressed by the Supreme Court of Canada in the Indalex Decision. However, it was examined more directly and from a broader standpoint by Justice Fish in his additional reasons in the Century Services matter (the Century Services Decision). In the Aveos Decision, Justice Schrager refers to the reasons of Justice Fish in the Century Services Decision and adopts his reasoning in concluding that the "general rule [is] that deemed trusts are ineffective in insolvency".
In order to continue to apply, the deemed trust provision must be "saved" by an express provision in the CCAA (or the BIA, as the case may be). In this respect, both the Supreme Court in the Century Services Decision and Justice Schrager in the Aveos Decision point to provisions in the CCAA that do save certain statutory deemed trusts, but make no mention of either the SPPA or the PBSA (or any other equivalent pension benefit legislation). They conclude that, as the legislator chose not to include these provisions, it must have intended for the deemed trusts created thereby to cease to apply once a CCAA initial order is granted.
In support of this conclusion, both Justice Schrager and Justice Fish also refer to the fact that in the most recent amendments to the CCAA, the legislator granted protection with respect to certain pension plan benefits, to the specific exclusion of special contributions. As a result, it is contrary to the rules of statutory interpretation to declare that, despite having been denied such protection by virtue of the text of the CCAA, the same protection is nevertheless afforded indirectly by virtue of the survival of a statutory deemed trust.
Unfortunately, the Supreme Court did not seize the opportunity to confirm the rule established by Justice Fish in the context of the Indalex Decision. Nevertheless, we believe the reasoning is well-founded and hope that the Court of Appeal of Quebec will choose to follow Justice Schrager's lead in adopting it.
In the interim, secured lenders and other interested parties will need to exercise caution and ensure that issues of status and rank are dealt with at the very outset of any CCAA proceedings. In so doing, they will be in a position to rely upon the res judicata rule established in the White Birch Paper Decision, as well as the principles set forth in the Supreme Court's Indalex Decision.
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.