July 31, 2012
Eerily reminiscent of recent notable insolvencies at companies such as CanWest Global Communications Corp., Fraser Papers Inc. and Nortel Networks Corp. that left employees with slashed pensions, Indalex once again drew attention to the vulnerability of pensioners in insolvency proceedings when it obtained court protection from creditors under the Companies’ Creditors Arrangement Act (CCAA) in April 2009.
At first, court protection seemed hardly promising for the pensioners. Indalex was the sponsor and administrator of two registered – and underfunded – pension plans. As is common practice in insolvency proceedings, the CCAA court authorized an emergency operational loan known as debtor-in-possession (DIP) to help Indalex cover costs while it was shutting down its operations. Indalex’s U.S. parent company guaranteed the DIP, secured by a super-priority charge that gave it priority over the rest of the company’s other creditors including the pension plans, as is customary. The court-appointed monitor set aside $6.75-million from the proceeds of the sale, an amount representing the pension shortfall. The U.S. parent company claimed the money as did plan members who asserted statutory deemed trust claims under the Ontario Pensions Benefit Act (PBA).
But the Ontario Court of Appeal held instead that pension plan deficiency claims can have priority over security held by DIP lenders. In coming down with its ruling, the appellate court expanded deemed trust rights and underscored an employer’s duty to plan members to keep them informed of key steps in financial restructuring. “The CCAA was not designed to allow a company to avoid its pension obligations,” the court noted succinctly in a decision penned by Justice Eileen E. Gillese, recognized as one of Canada’s foremost pension law experts.
The ramifications and merits of the ruling are still hotly debated a year later. Was it simply a case of "bad facts make for a bad law?" Or are pensioners finally getting their due in insolvency proceedings? "The ruling has created uncertainty in restructuring," says Mitch Frazer, chair of the pensions and employment practice at Torys and chair of the CBA national pensions and benefits law section. "When court decisions come out that are radically different from the status quo, it takes a lot of time for individuals who practice in the area to figure out how this is going to work."
Many questions still linger around the scope of the appellate court ruling, such as its findings on the deemed trust issue. The appeal court found that winding up a pension plan creates a deemed trust – a form of security interest – over the employees assets to cover any deficiencies in the plan's funding. What’s more, the statutory deemed trust applies to amounts set to become due at the time of windup. "This finding theoretically makes the process of bailing out companies that have large defined benefit plans much more challenging because typically the deemed trust was viewed to apply on current contributions and not the large solvency deficiencies," says Frazer.
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