In a ruling that set aside the Ontario Court of Appeal’s controversial decision in Re Indalex Ltd., the Supreme Court of Canada has put pensioners back behind other creditors waiting for payment from troubled companies.
On Friday, the top court granted most of the appeals by Indalex, a company that had filed for protection under the Companies Creditors Arrangement Act in 2009.
The landmark decision will have implications for all pension plans.The issue was whether Indalex should set aside assets for its pensioners while the CCAA proceedings continued.
In April 2011, the appeal court surprised insolvency lawyers when it put pensioners ahead of debtor-in-possession lenders during the restructuring process. The appeal court said the pensioners’ clams were protected under the Pension Benefits Act as “deemed trusts” and should take priority.
The Pension Benefits Act is incompatible with federal laws that rank debtor-in-possession lenders first in the contest for creditor primacy. On Friday, the Supreme Court unanimously agreed that the federal law supersedes the provincial one.
Although the deemed-trust argument applies, “the debtor-in-possession (“DIP”) super priority prevails by reason of the application of the federal paramountcy doctrine,” the court stated.
Yet, the court’s decision doesn’t dismiss the notion of a deemed trust under the Pension Benefits Act, says Ed Sellers, an insolvency and restructuring lawyer at Osler Hoskin & Harcourt LLP.
“The case also affirms a much broader view of the scope of the provincial statutory deemed trust to include the full value of all pension deficiencies on windup,” he says.
Because the top court agreed with the appeal court that a deemed trust arises in respect of the windup deficiency, the legislation “continues to exist in insolvency,” Sellers adds. “It’s just a question of, ‘Well then, how does one deal with it?’” he says. “And that question isn’t fully answered in this case.”
In Friday’s ruling, the Supreme Court also provided some guidance as to what constitutes a conflict of interest and breach of fiduciary duty in insolvency.
The top court agreed with the appeal court that Indalex was acting in a conflict of interest when it began contemplating putting itself under CCAA protection and proposing an arrangement to its creditors while still in a fiduciary relationship with the pensioners.
“Indalex not only neglected its obligations towards the beneficiaries but actually took a course of action that was actively inimical to their interests,” the top court stated.
That finding will bring procedural changes in insolvency proceedings, says Andrew Harrison, a partner at Borden Ladner Gervais LLP.
“It opened people’s eyes to the fact that where there is a pension plan involved in the bankruptcy, there are definitely some procedural steps that have to be taken,” he says.“The Supreme court has essentially endorsed the approach that you really got to be sensitive to these conflicts.”
But imposing constructive trust isn't a suitable remedy for breach of fiduciary duty, the Supreme Court ruled.
In the Ontario Court of Appeal decision, Justice Eileen Gillese had written: “Without the proprietary remedy, the plans’ beneficiaries have no meaningful remedy.”
She added: “The assets that would flow to Indalex U.S., absent the constructive trust, are directly connected to the process in which Indalex committed its breaches of fiduciary obligation.”
Lawyers for Indalex had argued that shuffling creditor priority goes against the purpose of the CCAA, which is meant to protect troubled companies from creditor pressures.
They also argued companies facing insolvency would struggle to get loans to keep them afloat if debtor-in-possession lenders aren’t sure their repayment takes precedence.
Friday’s decision “probably puts people back in the sort of practical position we were in before the Ontario Court of Appeal decision,” says Harrison.