April 07, 2011
Employees of insolvent companies will have a better chance of collecting their pensions after a surprise court decision transformed the law around corporate bankruptcies in Ontario.
The Ontario Court of Appeal on Thursday ruled in favour of the former staff of a failed manufacturer that was seeking to use the proceeds from the sale of the company's assets to cover shortfalls in their under-funded pension plans.
Pension plan members are usually last in the lineup of creditors when an employer goes under, and often lose their retirement nest eggs. But the court upset that traditional pecking order. Its decision has ramifications beyond Ontario and beyond the aluminum company Indalex, which had a $6.75 million pension plan shortfall when it filed for creditor protection under Canada's federal Companies' Creditors Arrangement Act in 2009.
Indalex's descent into court proceedings is one that has played out for embattled companies across the country. The Toronto-based company, battered by the collapse of the U.S. housing market and a slump in the price of aluminum, filed for court protection from its creditors in April 2009. Both its employee and executive pension plans had massive shortfalls, leaving workers facing sharp reductions to their pensions as the plans were being wound up.
As is common in such proceedings, Indalex arranged a loan known as debtor-in-possession (DIP) financing to help cover its costs while it was shutting down its operations under the creditors arrangement act. A condition of the loan gave the lender priority over the rest of the company's other creditors – including the pension funds.
Pension plan members challenged the arrangement in court, arguing they should have the right to any remaining assets of the company, which has since been sold.
The ruling caught Ontario's pension community by surprise because insolvent companies typically pay secured creditors ahead of the claims in their pension plans.
The decision raises questions about how companies will be able to secure debtor-in-possession financing, said Mitch Frazer.
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