The rights of pensioners have priority over those of secured creditors in an insolvent company, the Ontario Court of Appeal has ruled in a case that could radically shift how companies and their lawyers deal with credit agreements and registered pension funds.
In Re Indalex Ltd., the court ruled underfunded pension plans must be taken care of before secured creditors are paid under the Companies’ Creditors Arrangement Act proceedings.
The United Steelworkers union and a group of former Indalex executives appealed the case to Ontario’s highest court as they were left with underfunded defined pension plans when the company went into CCCA proceedings. The sale of the insolvent company did not provide enough funding to repay loans Indalex had taken under a debtor-in-possession agreement with its U.S. parent company.
“The claims of USW and the former executives take priority over the claim asserted by Indalex U.S./Sun Indalex,” Justice Eileen Gillese wrote in the unanimous April 7 decision, with justices James MacPherson and Russell Juriansz agreeing.
In addition, Gillese came down hard on Indalex, saying it breached its fiduciary duty as administrator of the pension plans.
“Indalex did nothing in the CCAA proceedings to fund the deficit in the under-funded plans,” she wrote in the decision. “In fact, Indalex took active steps which undermined the possibility of additional funding to the plans. It applied for CCAA protection without notice to the plans’ beneficiaries. It obtained a CCAA order that gave priority to the DIP lenders over ‘statutory trusts’ without notice to the plans’ beneficiaries. It sold its assets without making any provision for the plans. It knew the purchaser was not taking over the plans.”
Because of the company’s conduct and the uniqueness of the circumstances of the case, the court noted its decision should be seen as particular to this case.
But Jane Dietrich, an insolvency partner at Fraser Milner Casgrain LLP, tells InHouse the decision will still raise significant uncertainty for companies that need to reorganize under the protection of the CCAA. And from an insolvency lawyer’s perspective, she says this decision is problematic.
“For companies with a defined-benefit pension plan where the deficit is very large, it takes away the ability to have a lender and go forward with them to help restructure their company to save jobs,” she says.
Dietrich adds it looks like the secured creditor will apply for leave to appeal Indalex to the Supreme Court of Canada, which she hopes will take on the case and clarify the issue. “There is a lot of uncertainty,” she says. “Hopefully the Supreme Court will grant leave.”
Rupert Chartrand, a partner at Osler Hoskin & Harcourt LLP, agrees that by granting the pensions’ deemed trust priority over the debtors in possession, the court has likely made it more difficult for future debtors to secure DIP financing.
Because the court determined Indalex also breached its fiduciary obligations as administrator of the plans during the CCAA proceeding, Chartrand says the ruling has opened the door for increased obligations and liabilities on CCAA debtors.