Today, the Supreme Court of Canada agreed to hear an appeal of the unanimous decision rendered last April by the Ontario Court of Appeal (OCA) in Re Indalex Limited (Indalex). According to many commentators, the Indalex case turns accepted law on the priority of debtor in possession (DIP) and working capital security on its head and introduces new concerns for employers about how to properly discharge their sometimes conflicting duties under corporate law and under pension law.
While the case deals primarily with duties and priorities under the Ontario Pension Benefits Act (PBA) in the context of corporate insolvency events under the federal Companies’ Creditors Arrangements Act (CCAA), the Supreme Court’s decision to hear the appeal reflects the broader national implications of the case. In fact, as discussed in this note, the case has ramifications for lenders and employer-borrowers, both inside and outside Ontario, even when the prospect of insolvency is slight.
Indalex raises three main questions: (i) What is the scope of statutory trusts arising out of contribution obligations to the pension fund (including wind-up funding)? (ii) Where do claims based on such trusts rank in relation to claims of other creditors of an employer in financial distress? Finally, (iii) How can directors properly manage the conflict between their fiduciary duty to the corporation on the one hand, and their fiduciary duty as administrator of a private occupational pension plan on the other? The OCA decision provides that in some cases pension funding obligations can rank ahead of DIP security and security on working capital assets of the employer, and that employers have a duty to plan members to keep them informed of key steps in financial restructurings, to serve them with formal notice of proceedings in CCAA cases, and to defend the priority provided by the PBA to pension claims over other creditor claims. The decision also tacitly suggests that employers should relinquish administration of a plan when insolvency is clearly in sight.
The decision to hear the appeal is hopeful news for employers and lenders; however until a final decision is rendered, lenders should continue to take steps to preserve their usual rights under credit agreements (including for DIP financing). Lenders may also insist that borrowers who find themselves in or approaching insolvency proceedings take the following steps suggested by the OCA:
- Notify plan members of CCAA proceedings;
- Notify plan members of any specific CCAA proceeding in which super priority over statutory trusts for pension funding claims is being sought;
- Obtain CCAA orders expressly granting super priority over the deemed trusts under pension standards legislation; and
- Consider relinquishing the role of administrator where the interests of the employer conflict with the interests of plan members, by asking the regulator to assume administration or appoint a third party. In some jurisdictions this may only be possible if the plan is being wound up. In other jurisdictions it may be necessary to find alternative "administrative" representation for plan members pending the outcome of the restructuring in order to allow their interests to be properly represented in the proceedings.