If your company is both the sponsor and administrator of a pension plan you should take note of the recent Ontario Court of Appeal decision in Re Indalex. Although the case deals with competing claims in insolvency and deficits in wound up pension plans, it highlights the need for a well articulated governance structure making it clear whether the organization acts as employer, as administrator, or as both.  Although the case has many issues, this article focuses on high level implications for sponsors of ongoing pension plans.

Indalex Pension Plans

The facts in the case are quite complicated. Indalex was the sponsor and administrator of two defined benefit pension plans.  It started winding up one of the plans prior to insolvency proceedings under the Companies Creditors Arrangements Act ("CCAA").  The other plan was wound up after CCAA proceedings started.  With court approval, Indalex borrowed funds on a "debtor in possession" or "DIP" basis to allow it to continue operating.  The DIP lenders' claims were granted a super-priority over all other creditors.  When Indalex subsequently sold its assets, members in each plan objected to the distribution of the sale proceeds to the lenders.  They argued that the deficits in the pension plans should have priority over the DIP lenders even though the DIP lenders had a "super-priority". 

The Ontario Court of Appeal decided that:

  • The entire windup deficit in one of the plans was subject to a deemed trust in favour of the members pursuant to the Ontario Pension Benefits Act ("PBA"); and
  • Indalex had breached its fiduciary obligations to the pension plans' beneficiaries as administrator of the plans, for which the remedy was imposition of a constructive trust (meaning the court created a trust) for the amount of the wind up deficit.

The Court's Rationale

How did the Court make its decisions?  It relied on the "two hats" theory that is embedded in pension standards legislation of most Canadian common law jurisdictions – that an employer can be both the sponsor and administrator of a pension plan.  Although the company does not have a fiduciary duty when it acts as employer/sponsor of the plan, it does when it acts as administrator.

The Court said that for much of the CCAA proceedings, Indalex was acting as employer and was not subject to fiduciary duty.  However, as administrator of the pension plans, Indalex had to act in the best interests of the plan members.  This conflicted with its role in the CCAA proceedings.  Indalex addressed the conflict by ignoring its role as administrator (including by not funding the plans, and by seeking a court order to approve payment of the sale proceeds to the DIP lenders). For that reason it was found to have breached its fiduciary duties to the plan members. 

Implications For Other Pension Plans

What does this all mean?  It means that if your company is a plan sponsor, you should look at the documents and structures that are currently in place for your pension plans.  You need to know what actions are being performed by the employer/sponsor and what actions by the administrator.  Many pension plans and governance structures do not distinguish between these functions.  The result is that the decision makers may risk personal and organization liability because they do not know if they have to consider only member interests (when they are acting as administrator, for example) or whether they may consider the organization's business interests (when they are acting as employer/sponsor). 

Although Indalex is not binding outside of Ontario, we expect that courts in other provinces will consider it, subject to differences in governing pension standards legislation and subject to any appeal to the Supreme Court of Canada (which we understand is in process).