On August 7, 2015, the Ontario Court of Appeal (ONCA) released its decision in Grant Forest Products Inc. v. The Toronto-Dominion Bank. The decision comments on the ability of a creditor to bankrupt a company subject to a proceeding under the Companies’ Creditors Arrangement Act (CCAA) in order to reverse priorities in its favour. The ONCA confirmed its decision in Ivaco that a supervising judge in a CCAA proceeding has the discretion to lift the stay of proceedings to permit a creditor to bankrupt the debtor company, and that creditor may seek a bankruptcy order under the Bankruptcy and Insolvency Act (BIA) to alter priorities in its favour
In 2009, Grant Forest Products Inc. (GFPI), together with various subsidiaries, sought and obtained protection under the CCAA in response to a bankruptcy petition initiated by a creditor under the BIA. A comprehensive sales process for GFPI’s business and assets generated proceeds that were sufficient to pay the first lien lenders in full; however, there was only a relatively small recovery for second lien lenders and no recovery for unsecured creditors.
GFPI sponsored two defined benefit pension plans (the Plans) both of which were ongoing at the start of the CCAA proceeding. No steps had been taken to wind up the Plans prior to the CCAA proceedings, and following the commencement of those proceedings GFPI continued to make all required contributions to the Plans while they were on-going; however, in 2012, during the CCAA proceeding, the Superintendent of Financial Services (the Superintendent) ordered the Plans wound up, giving rise to the requirement for GFPI to remit significant wind up payments under the Ontario Pension Benefits Act (PBA). GFPI brought a motion seeking an order that it was not required to make the wind-up payments pending the Supreme Court of Canada’s (SCC) decision in Indalex on the applicability of the deemed trust provisions in the PBA in a CCAA proceeding (the Pension Motion) The Superintendent and others opposed the Pension Motion.
After being adjourned by the CCAA judge to provide notice to the second lien lenders, the Pension Motion was ultimately heard in November 2012 together with a motion brought by the second lien lenders to lift the CCAA stay and revive the outstanding bankruptcy petition (the Bankruptcy Motion). The Superintendent, together with the Plans’ appointed administrator, argued that the wind up payments ought to be paid by GFPI prior to any bankruptcy because they were in priority to the second lien lenders under the deemed trust provisions of the PBA.
The SCC’s decision in Indalex was released in February 2013, while the Pension Motion and Bankruptcy Motion were under reserve. In Indalex, a majority of the SCC held that a PBA deemed trust continued to be effective in CCAA proceedings, subject to the doctrine of federal paramountcy.
In September 2013, the CCAA judge ultimately allowed the Bankruptcy Motion without requiring the wind-up payments to be made. The CCAA judge reasoned that the deemed trust provisions of the PBA did not provide the pension beneficiaries with priority over the second lien lenders because, unlike the plan at issue in Indalex, the Plans were wound up after the commencement of CCAA proceedings.
II. On Appeal
The ONCA disposed of the appeal on the sole question of whether the CCAA judge erred in allowing the Bankruptcy Motion without first requiring that the wind-up payments be made. In doing so, the ONCA determined that allowing the Bankruptcy Motion by lifting the stay of proceedings was an exercise of judicial discretion and that the CCAA judge made no error in the exercise of that discretion. In doing so, the ONCA upheld its prior decision in Ivaco that reversing creditor priorities is a legitimate basis for permitting the bankruptcy of a debtor company when its CCAA proceedings have run their course.
The ONCA declined to comment on the CCAA judge’s finding, based on a review of the SCC decision in Indalex, that the deemed trust provisions of the PBA do not prevail over the pre-existing security of other creditors when a pension plan is wound up during – as opposed to before – CCAA proceedings. Instead, the ONCA relied on the doctrine of federal paramountcy, finding that when the Bankruptcy Motion was granted, any provincial deemed trusts would be rendered inoperative by virtue of the priority scheme in the BIA. As a result, the ONCA did not disturb the CCAA judge’s decision that the wind-up payments were not to be paid prior to the stay being lifted for the bankruptcy application.
In its reasons, the ONCA also dismissed the argument advanced by the Superintendent that the CCAA judge made a procedural error in adjourning the Pension Motion on his own initiative to provide the second lien lenders with an opportunity to appear. The ONCA held that the CCAA gives judges “broad discretionary powers that are to be exercised in furtherance of the CCAA’s purposes.” In the circumstances, the ONCA held that the adjournments were not improper because CCAA judge was cognizant that the Pension Motion had the potential to impact the second lien lenders’ interests.
The ONCA sidestepped the issue of the applicability of the deemed trust provisions in a CCAA proceeding when the pension plan is wound up after the date of the initial order, one of the key findings in the court below. However in distinguishing the SCC’s decision in Indalex, the ONCA noted that the pension plan in Indalex giving rise to the PBA deemed trust with priority had been wound-up before the date of the initial CCAA order whereas the pension plans at issue in Grant Forest had not been declared wound up when the initial CCAA order was made. The ONCA did not elaborate on how this fact was implicated in its analysis and it is unclear what significance the ONCA attaches to it. The ONCA also distinguished Indalex on the basis that the BIA was not at issue in Indalex whereas it was clearly implicated in Grant Forest due to the outstanding bankruptcy petition as well as the fact that the Bankruptcy Motion was being argued at a time when the CCAA judge found the CCAA proceeding had no further use.
Although the ONCA did not comment on whether a deemed trust may arise inside a CCAA proceeding, Grant Forest should give lenders renewed comfort on two points. First, it confirms that while a provincial deemed trust may continue in a CCAA proceeding, a provincial deemed trust is rendered ineffective in a bankruptcy; a point on which there should be little doubt. Second, and more importantly, it reiterates the ONCA’s decision in Ivaco that the judicial discretion to lift a CCAA stay to permit a bankruptcy is broad and may reasonably be exercised at the request of a creditor when the CCAA proceedings have run their course and there is nothing left to restructure or liquidate, even where the creditor seeking to lift the stay is doing so to take advantage of the distribution scheme under the BIA to its own advantage and to the disadvantage of pension claimants.
It remains to be seen whether the decision will be appealed or applied in future cases.