Canada: Focus On Financial Services - June 2009

Last Updated: June 17 2009

Lender Strategy In Light Of New Pension Priorities
By Heather Chu and Ross Walker

Recent changes to the Bankruptcy and Insolvency Act have given certain unpaid pension plan contributions priority over a lender's security if the employer is bankrupt or in receivership. How can a lender monitor the debtor's pension arrears to assess the extent of the lender's loss of priority?

The Bankruptcy and Insolvency Act now provides that certain unpaid pension plan claims rank ahead of a lender's security in bankruptcy or receivership proceedings. Effective July 7, 2008, sections 81.5 and 81.6 give super-priority status to:

(a) amounts that were deducted from the employee's remuneration for payment to the pension fund,

(b) amounts that were required to be paid by the employer to the pension fund under a defined contribution provision, and

(c) "normal cost" amounts that were required to be paid by the employer to a defined benefit pension fund.

These unpaid amounts owing by an employer to a pension fund are now secured by all of the assets of the employer. The new priority status does not apply to "special payments" required to be made by an employer to a defined benefit pension fund to reduce unfunded liabilities and solvency deficiencies.

What does this mean to lenders?

If a debtor is bankrupt or in receivership, the unpaid pension plan contributions referred to above will be paid before secured lenders can collect amounts owed to them. This will reduce the amount available for lenders.

How can lenders protect themselves?

Lenders should monitor their debtors' pension plan contributions to confirm that the amounts listed above are paid when due and, where applicable, include any arrears of these amounts in their margining calculations. One way to monitor these contributions in Ontario is for the lender to obtain from its debtor a completed Form 7: Summary of Contributions / Revised Summary of Contributions each time the debtor is required to file the Form 7 under Ontario Pension Benefits Act. Form 7 is only available for Ontario-registered pension plans. However, other provinces may have similar forms that could be obtained by lenders to accomplish the same goal.1 References to Form 7 in this article should be interpreted to include such other applicable forms.

Administrators of Ontario-registered pension plans are required to submit Form 7 to the applicable pension fund holder, usually a trustee or an insurance company, each fiscal year and whenever there is a material change to the required contribution levels. The form shows reasonable estimates of employee and employer contributions required to be remitted to the pension fund holder during each fiscal plan year. Estimated employer contributions include normal cost contributions to a defined benefit plan and special payments to reduce going concern unfunded liabilities and/or solvency deficiencies. However, as mentioned above, only "normal cost" contributions, employee contributions and defined contribution plan employer contributions are subject to the super-priority.

Recognizing the specific funding information that Form 7 requires pension plan administrators to disclose can be of significant assistance to lenders. In their loan agreements, lenders can stipulate that the debtor provide a copy of its completed Form 7 to the lender whenever it is required to be submitted to the plan fund holder. In appropriate circumstances lenders could go further by requiring the debtor to remit periodic confirmation from the pension fund holder that the fund holder has in fact received the amounts shown on the most recent Form 7. In jurisdictions where the type of disclosure provided by Form 7 is not required, lenders could require their debtors to disclose such information and provide periodic payment confirmations from the pension fund holder.

A Financial Institution's Power To Investigate A Lawyer: Perpetrated Fraud Upheld By The Court Of Appeal
By Kori Williams

Under Ontario privacy law, private organizations may disclose personal information about an individual without their consent if the organization reasonably believes the individual has breached an agreement or the laws of Canada. Recently, under Ontario privacy law, the Ontario Court of Appeal affirmed a bank's power to disclose personal information to another bank despite assertions of solicitor-client privilege and Canadian Charter of Rights and Freedoms violations.

Solicitor-client privilege is a right that belongs to a lawyer's client. The right is intended to keep communications between a lawyer and the lawyer's client or prospective client strictly confidential. Section 8 of the Charter states that "everyone has the right to be secure against unreasonable search or seizure." However, section 7(3) of Ontario's Personal Information Protection and Electronic Documents Act (PIPEDA) provides for disclosure of personal information by an organization without the knowledge or consent of the individual if the organization reasonably believes the information relates to a breach of an agreement or the laws of Canada.

In Royal Bank of Canada v. Welton et al., Royal Bank (RBC) determined that it had been the victim of a series of fraudulent mortgage transactions involving a lawyer retained by RBC for these transactions. Accordingly, without notice to the lawyer, RBC asked The Toronto-Dominion Bank (TD) to trace a series of mortgage advances made by RBC into the lawyer's trust account with TD. As a result of the information gathered, RBC was able to obtain orders freezing the lawyer's assets and allowing RBC to search the lawyer's premises without notice. The Superior Court of Justice held that RBC's actions were justified.

Justice Cumming dismissed the lawyer's claim that his trust account was protected by solicitor-client privilege, reasoning that a mere banking relationship, in the form of a lawyer's trust account, does not necessarily mean a solicitor-client relationship. Furthermore, solicitor-client privilege applies to communications and not actions (as in the use of a conduit of funds) and cannot apply to communications where a lawyer knowingly participates in a fraudulent scheme. Finally, solicitor-client privilege belongs to the client, not the lawyer so the lawyer could not raise it against his own client, RBC.

With respect to the Charter, Justice Cumming reasoned that the Charter does notapply to private organizations, such as financial institutions, unless their actions are geared toward implementing a specific governmental policy or program. The fact that the enforcement of RBC's private rights related to criminal offences, did not make RBC an agent of the state for Charter purposes.

On appeal, the Ontario Court of Appeal affirmed Justice Cumming's conclusions and, among other things, noted that PIPEDA is a privacy statute and, as such, it does not grant search and seizure powers to private entities, as contemplated by the Charter. Rather, PIPEDA restricts disclosure of private information subject to certain exemptions, such as the detection and prevention of fraudulent activity. Under PIPEDA, sharing information without consent is permitted for the purpose of protecting the economic interests of the business in jeopardy, a right which has been recognized for many years before the enactment of PIPEDA.

Security Interest In Royalty Distributions Survives Bankruptcy Of Composer
By Jane Dietrich and Jarvis Hetu

In a recent decision of the Ontario Superior Court of Justice, the Court rejected a bankrupt music composer's argument that a security interest the composer had granted in royalty based distributions should be ineffective following his bankruptcy. The bankrupt unsuccessfully argued that a security interest in distributions from the Society of Composers, Authors and Music Publishers of Canada was equivalent to an assignment of accounts receivable as payment for a commission or professional fees in respect of services rendered under section 68.1 of the Bankruptcy and Insolvency Act.

Prior to his bankruptcy, Mr. Friedman, a music composer, entered into a loan agreement with OLE Media Management L.P. (OLE), whereby OLE loaned more than $4 million to Mr. Friedman. As security for the loan, Mr. Friedman granted OLE a security interest in his right to future distributions from SOCAN. The distributions represented royalty payment revenue relating to works composed by Mr. Friedman.

Following Mr. Friedman's bankruptcy, he argued that the security he had granted to OLE should be of no effect pursuant to section 68.1 of the BIA. Section 68.1 provides that an assignment of wages, or an assignment of commissions or professional fees by a natural person for services rendered, is of no effect following a bankruptcy in respect of amounts earned or generated after the bankruptcy.

The Court held that section 68.1 of the BIA is intended to assist individual bankrupts in obtaining a fresh start. The Court, however, found that it would be against the spirit and intent of the BIA to use an expanded interpretation of section 68.1 so as to encompass the royalty distributions. In the Court's view, since the remuneration arising in respect of the bankrupt's SOCAN distributions resulted from activity conducted and completed prior to his bankruptcy, the security interest in the SOCAN distributions was outside of the scope of section 68.1.

The fruits of Mr. Friedman's labour which generated the SOCAN distributions pre-dated the bankruptcy, and therefore the Court held Mr. Friedman's 'fresh start' was not precluded by recognizing OLE's security interest. Rather, the Court recognized that Mr. Friedman could earn income as a composer separate and apart from the SOCAN distributions or could earn other income from other activities, as he had in the past.


1. Two other provinces have similar forms to Ontario's Form 7 that can help lenders monitor pension plan contributions: Form 7: Schedule of Contributions in Alberta and the Pension Plan Financial Information Return in British Columbia. If the debtor's pension plan is registered elsewhere, information about pension plan contributions and funding can be obtained by reviewing the pension plan's annual information form.

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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