On April 7, 2011, in the context of a liquidating CCAA that achieved a going concern sale of the debtor’s business, the Ontario Court of Appeal held that:
- an Ontario statutory pension deemed trust has priority over a court-ordered DIP charge even though the order said that the DIP charge primed statutory trusts;
- the deemed trust is for the entire pension plan deficiency where the plan is in wind-up, dramatically increasing the amount of the priority deemed trust; and
- the debtor company, as administrator of the pension plans, breached its fiduciary duty as pension plan administrator such that, even if the deemed trust did not have priority, the court determined that an equivalent remedy was appropriate and effectively imposed a constructive trust.
The result would have been fundamentally different if the sale had been achieved through receivership and/or bankruptcy proceedings.
Doubtless, the order will be the subject of an application for leave to appeal to the Supreme Court of Canada. In the meantime, the decision raises important legal and economic issues in any case where there is or may be a significant deficiency in a defined benefit pension plan. The issues will affect debtor companies, their boards of directors, DIP lenders, pre-filing secured creditors, employees and pensioners. The decision should fundamentally affect the willingness of senior secured lenders to support liquidating CCAA proceedings. A collateral effect may be the reduction of opportunities for balance sheet or other consensual restructuring efforts. The case also will affect the use of the CCAA, the use of bankruptcies and receiverships and the procedures followed in each kind of proceeding.
SUMMARY OF THE FACTS
On April 3, 2009, Indalex Limited (Indalex Canada), the sponsor and administrator of two registered pension plans (the Salaried Plan and the Executive Plan) obtained an Initial Order under the CCAA from the Ontario Superior Court of Justice. On April 8, 2009, Indalex Canada obtained a further Order from the Court approving a DIP Credit Agreement and granting a super-priority charge for all borrowings on Indalex’s property. The Order provided that the DIP lender’s charge “shall rank in priority to all other security interests, trusts, liens, charges and encumbrances, statutory or otherwise”. The DIP facility was guaranteed by Indalex U.S., a Chapter 11 debtor. On July 20, 2009, Indalex Canada obtained an Order approving the sale of its assets on a going concern basis and moved for an Order to distribute the sale proceeds to the DIP Lenders. The proceeds from the sale of assets were not sufficient to repay the DIP facility in full. At the sale approval motion, the USW (on behalf of certain beneficiaries of the Salaried Pension Plan) and beneficiaries of the Executive Pension Plan objected to the distribution of the sale proceeds on the basis that the deemed trust provisions in the Pension Benefits Act (PBA) applied to all unpaid amounts owing to the pension plans by Indalex Canada. The Court approved the sale. However, the Monitor was directed to retain $6.75 million of the sale proceeds as a “Reserve Fund” to address the estimated deficiencies in the Salaried Plan and the Executive Plan. After the sale closed, Indalex U.S. paid the shortfall on the DIP facility of approximately $10.75 million pursuant to its obligations under the Guarantee and sought recovery from the Reserve Fund.
The Ontario Court of Appeal, directed the Monitor to pay the Reserve Fund into each of the Salaried Plan and the Executive Plan to satisfy the deficiencies. In doing so, the Court effectively overrode the superpriority provided to the DIP Charge, notwithstanding that the Order approving the DIP Charge had not been varied or appealed and that funding under the DIP facility had been provided in reliance on the superpriority granted by the Court. In doing so, the Court of Appeal expanded the scope of the deemed trust established by previous decisions of the Court to all amounts owing to the Salaried Plan, including any deficiency claim. The Court also found that Indalex Canada had breached its fiduciary obligations as administrator of the Pension Plans and, accordingly, fashioned a remedy of a constructive trust over the Reserve Funds in favour of the Executive Plan.
PROCESS AND PRIORITY
It must be noted that the Court clearly stated that it was important not to address the interests of pension plan beneficiaries in a manner that thwarts or even discourages DIP funding in future CCAA proceedings. The Court fully accepted that CCAA judges can make orders granting super-priority charges that have the effect of overriding provincial legislation, including the PBA. The Court also acknowledged that, without such a charge, DIP Lenders would be unwilling to provide financing to companies under CCAA protection. The Court did not interpret the granting of the superpriority charge in priority over “trusts, statutory or otherwise” as the effect of the Initial Order because “the deemed trust was not identified by the Court at the time the charge was granted and the affidavit evidence suggested such priority was unnecessary”. As no finding of paramountcy was made, valid provincial laws continued to operate and the super-priority charge did not override the PBA deemed trust. The Court held that there was nothing in the record to suggest that giving the deemed trust priority would have frustrated Indalex’s efforts to sell itself as a going-concern business.
The Court held that the determination of the super-priority charge for DIP financing must be made on a case-by-case basis. The Court indicated that there may well be situations in which paramountcy is invoked and the record satisfies the CCAA judge that the application of the provincial legislation would frustrate the company’s ability to restructure and avoid bankruptcy. But, they continued, this depends on the applicant clearly raising the issue of paramountcy in a manner that alerts affected parties to the risks to their interest and put them in a position where they can take steps to protect their rights. Exclusion of the provincial deemed trust is dependent on the CCAA judge engaging in a factual examination and the determination of whether the preservation of pension rights to the deemed trust would frustrate the purpose of the CCAA proceedings. If the CCAA judge found that recognition of the PBA deemed trust would frustrate the purpose of the CCAA proceeding and paramountcy had been invoked, the CCAA judge would be free to make a super-priority charge that overrode the deemed trust. This approach, the Court of Appeal stated, leaves the CCAA Court with greater flexibility and the ability to be “cognizant of the various interests at stake in the reorganization which can extend beyond those of the debtor and creditors to include employees”.
The conclusions made by the Court of Appeal appear to have been made without a full appreciation of the issues or facts presented to the CCAA judge that made the Initial Order or the DIP Approval Order. It is clear from the Monitor’s reports that, unless DIP financing was provided (which required the superpriority granted by the Order), operations could not continue and a going concern sale would not be possible. It also appears to disregard the endorsements of the CCAA judge that approved the DIP facility and the increase in the DIP amount and raised concerns with the Plan beneficiaries “reservation of rights”. The decision also raises concern about the seemingly unlimited amount of time for the “come-back” provision in the Initial Order to be utilized.
Perhaps, in the future, DIP provisions and DIP charges will be contained in stand-alone orders, the comeback clause will be time limited (at least as regards DIP provisions) or will not apply to the priority of amount advanced pending any challenge. DIP lenders will want to be in a position to rely on court orders.
While the focus of the priority issues in Indalex were between a provincial deemed trust claim and a DIP charge, the decision obviously has wider implications than that. Imagine, as is usually the case, that there had been all asset senior secured lenders. They could not have avoided this priming result unless Indalex was placed in bankruptcy or receivership. For them, it is not the process point that is fundamental but the expansion of the deemed trust and the imposition of a constructive trust subordinating their charges. These points are discussed below.
GOVERNANCE AND FIDUCIARY OBLIGATIONS
The court was critical of the debtor companies and their management. The Court found that Indalex Canada had breached its fiduciary obligations under the PBA and at common law as administrator of the Plans. The facts cited in support of this conclusion are quite ordinary. The breach was concluded as a result of factors such as: (i) Indalex did nothing in the CCAA proceedings to fund the deficit in the underfunded plan; (ii) Indalex Canada took no steps to protect the vested rights of the Plan’s beneficiaries to continue to receive their full pension entitlement; (iii) Indalex Canada took active steps which undermined the possibility of additional funding to the Plans; (iv) Indalex Canada applied for CCAA protection without notice to the Plan’s beneficiaries; (v) Indalex Canada obtained a CCAA order to get priority to the DIP Lenders’ over the “statutory trust” without notice to the Plan’s beneficiaries; and (vi) Indalex Canada sold its assets without making any provision for the Plans. It is difficult to understand how Indalex could have taken any of these steps without being in breach of the terms of the Initial Order made in the CCAA proceedings.
While it may be an oversimplification, it appears that the court was of the view that the debtor company should have acted differently and in a way that would have seen the pension plan deficiencies eliminated as part of the CCAA filing and the sales process. From the perspective of other stakeholders this is concerning. If the debtor company and its management have a fiduciary duty to see that one stakeholder group is taken care of at the expense of others, then those others (the mass of creditors) will lack confidence in the company and its management. In that context, should the company continue to be the administrator of a pension plan where CCAA proceedings are commenced or are contemplated? Will other stakeholders insist on a regime in which someone other than the company plays the central role in the process?
THE SCOPE OF THE DEEMED TRUST
Since the decision of Farley J. in Usarco in 1991, it has generally been accepted that the deemed trust established by the PBA extends only to regular contributions and unpaid special contributions to the date of wind-up. The pension priorities contained in the BIA in the case of bankruptcies and receiverships follow that model.
In Indalex, at first instance, the supervising CCAA judge had concluded that, because Indalex Canada had made the going-concern and special payments to the Salaried Plan during the CCAA proceeding, there were no amounts due to the Salaried Plan. The Court of Appeal disagreed, holding that the deemed trust in section 57(4) of the PBA is not limited to the payment of amounts contemplated by section 75(1)(a) of the PBA – it applies to all payments required by section 75(1), including payments mandated by section 75(1)(b), effectively including the entire unfunded deficiency in the plan. (Previously, paragraph 75(1)(a) had been read as restricted to amounts owing and accruing due to the date of wind-up, but not thereafter. Hence, it was not considered to include payments due after the date of wind-up, except for pre-wind-up daily accruals. Whatever the correct reading of paragraph 75(1)(a), paragraph 75(1)(b) includes amounts sufficient to pay virtually all benefits payable under the pension plan.)
If Indalex had been placed in bankruptcy or receivership the priority claim should have been restricted to the Usarco type calculation codified in the BIA.
FIDUCIARY DUTY AND CONSTRUCTIVE TRUST
The Court held that the unpaid amounts owing to the Executive Plan were not subject to a section 57(4) deemed trust as the pre-condition to the application of the section was “where a pension plan is wound-up”. The Executive Plan was not in wind-up. Having said that, the Court was troubled by the suggestion that Indalex Canada could rely on its “inaction” to avoid the consequences that flowed from the wind-up and the application of the deemed trust. The Court seized on the Monitor’s confirmation during the CCAA proceedings that the Executive Plan would be woundup and indicated that finding that the deemed trust did not apply to the Executive Plan would be a “triumph of form over substance”.
Having found a breach of fiduciary duty, the court concluded that it was not restricted to awarding a money judgement but could, and did, look to equity for a remedy. Following the law related to constructive trusts, the court ordered that a portion of the Reserve Fund (which would otherwise have been paid to the DIP lender) be paid into the Executive Plan.
THE RELATIONSHIP BETWEEN THE CCAA AND THE BIA
In 2006 in Ivaco, the Superintendent of Financial Services and others argued that provincial pension deemed trusts should be recognized and given effect to in a liquidating CCAA and should not be reversed by permitting the debtor company to be placed in bankruptcy. The Ontario Court of Appeal resoundingly rejected that argument. In that case the court concluded that, with the completion of sales of assets in a liquidating CCAA, the CCAA proceedings were spent and that it was appropriate that bankruptcy proceedings move forward and that distributional issues be dealt with in that context. In Ivaco, Laskin J.A. for the Court, said:
62 The federal insolvency regime includes the CCAA and the BIA. The two statutes are related. A debtor company under the CCAA is defined in s. 2 by the company’s bankruptcy or insolvency. Section 11(3) authorizes a thirty-day stay of any current or prospective proceedings under the BIA, and s. 11(4) authorizes an extension of the initial thirty-day period. During the stay period, creditor claims and bankruptcy proceedings are suspended. Once the stay is lifted by court order or terminates by its own terms, simultaneously the creditor claims and bankruptcy proceedings are revived and may go forward.
63 For the Superintendent’s position to be correct, there would have to be a gap between the end of the CCAA period and bankruptcy proceedings, in which the pension beneficiaries’ rights under the deemed trusts crystallize before the rights of all other creditors, including their right to bring a bankruptcy petition. That position is illogical. All rights must crystallize simultaneously at the end of the CCAA period. There is simply no gap in the federal insolvency regime in which the provincial deemed trusts alone can operate. That is obviously so on the facts in this case because the Bank of Nova Scotia had already commenced a petition for bankruptcy, which was stayed by the initial order under the CCAA. Once the motions judge lifted the stay, the petition was revived. In my view, however, the situation would be the same even if no bankruptcy petition was pending.
64 Where a creditor seeks to petition a debtor company into bankruptcy at the end of CCAA proceedings, any claim under a provincial deemed trust must be dealt with in bankruptcy proceedings. The CCAA and the BIA create a complementary and interrelated scheme for dealing with the property of insolvent companies, a scheme that occupies the field and ousts the application of provincial legislation. Were it otherwise, creditors might be tempted to forgo efforts to restructure a debtor company and instead put the company immediately into bankruptcy. That would not be a desirable result.
65 Also, giving effect to the Superintendent’s position, in substance, would allow a province to do indirectly what it is precluded from doing directly. Just as a province cannot directly create its own priorities or alter the scheme of distribution of property under the BIA, neither can it do so indirectly. See Husky Oil, supra, at paras. 32 and 39. At bottom the Superintendent seeks to alter the scheme for distributing an insolvent company’s assets under the BIA. It cannot do so.
It is less than clear how circumstances in Ivaco differ in any material respect from the circumstances in issue in Indalex and hence how much, if any, reliance can now be placed on the court’s decision in Ivaco.
The Court of Appeal’s decision in Indalex creates uncertainty for significant groups of stakeholders in insolvency and restructuring proceedings. It is less than clear whether the decision will benefit pension plan beneficiaries in other cases or whether it will motivate other stakeholders to choose a more certain liquidation path earlier in the process to avoid the possibility of substantial priming deemed trusts in CCAA cases and criticism for breach of fiduciary obligations.