Bid to secure pensions during CCAA proceedings fails

The Ontario Court of Appeal has rejected the superintendent of financial services’ bid to provide greater security for pension provisions during the restructuring proceedings of an Ontario wood manufacturing company.

The case once again raised questions about the deemed-trust provisions in Ontario’s Pension Benefits Act that the superintendent argued works in combination with the Personal Property Security Act to create a priority over the claims of secured creditors during Companies’ Creditors Arrangement Act proceedings.

“The Superintendent submits that the CCAA judge erred in concluding that no wind up deemed trusts arose during the CCAA Proceeding,” wrote Ontario Court of Appeal Justice Eileen Gillese in setting out one of the key issues in Grant Forest Products Inc. v. The Toronto-Dominion Bank on Friday.

“He contends that where a pension plan is wound up after an initial order is made under the CCAA, but before distribution is complete, unpaid contributions to the pension plan constitute a wind up deemed trust under the PBA.”

The case dealt with Grant Forest Products, a manufacturer with facilities in Ontario, Alberta, and the United States. It sought protection under the federal restructuring act after GE Canada Leasing Services Co. applied for a bankruptcy order against it in 2009.

During the ensuing years, the company sold off the bulk of its assets and was able to pay off its first lien lenders in full in January 2012. But there was little left for the second lien lenders and growing deficits in the pension plans for both salaried employees and executives.

In early 2012, the superintendent ordered the wind up of both plans with an effective date of June 10, 2010, for the executive plan and March 31, 2011, for the salaried plan. Later that year, Grant Forest Products and related companies brought a motion for a declaration that they no longer had to make contributions to the pension plans.

In the meantime, one of the creditors, West Face Capital Inc. sought to petition Grant Forest Products into bankruptcy. In 2013, former Ontario Superior Court justice Colin Campbell issued a transition order adjudging the companies to be bankrupt. The order stated that none of the companies’ funds were subject to a deemed trust under the Pension Benefits Act.

In deciding whether Campbell had erred, the appeal court returned to a familiar them: federal paramountcy under the Bankruptcy and Insolvency Act. “As I have explained, at the time that the Motions were heard, it was open to the CCAA judge to order the Remaining Applicants into bankruptcy,” wrote Gillese.

“Once the CCAA judge exercised his discretion and made that order, the priorities established by the BIA applied to the Remaining Funds and rendered the wind up deemed trust claims inoperative.

“Because wind up deemed trusts are created by provincial legislation, their payment could not be ordered when the Motions were heard because payment would have had the effect of frustrating the priorities established by the federal law of bankruptcy.”

As part of Friday’s ruling, Gillese included some comments about the merits of Companies’ Creditors Arrangement Act proceedings versus the bankruptcy process when it comes to pension funds. As she noted, all pension contributions continued to the plans during the bulk of the restructuring proceedings. Second, she pointed out that the company that bought some of the assets continued one of the pension plans. And third, she said the restructuring proceedings bought the company “breathing space” to ensure proper administration of the pension plans with orders authorizing the monitor to hold back some funds for pension claims.

“I hasten to add that these remarks are not intended to suggest a lack of sympathy for the position of pension plan beneficiaries in insolvency proceedings,” wrote Gillese.

“Rather, it is to recognize that while no panacea, at least there is some prospect of amelioration of that position in a CCAA proceeding.”

While the appeal court rejected the superintendent’s position, Andrew Hatnay, a partner at Koskie Minsky LLP who acted for an intervener in the case, says he was very happy with the decision.

While “it certainly disadvantages the Grant Forest pension plan members,” the decision was a narrow one that doesn’t create new law, says Hatnay, whose clients include non-union active employees and retirees of U.S. Steel Canada Inc. in its own restructuring proceedings.

The appeal court, he adds, dealt with the narrow issue of whether Campbell had erred in granting the bankruptcy application.

“Timing is always critical in CCAA proceedings,” he says.

“The courts have always made clear that creditors should make the rights on which they intend to rely known early in a CCAA proceeding.”

As for the court’s comment on the advantages of the restructuring legislation in general, Hatnay says he largely agrees. “Generally, we agree with the courts’ comments because the CCAA permits greater flexibility than a bankruptcy proceeding and encourages stakeholders to reach resolutions and settlements,” he says.

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