On Thursday, December 1, 2011, a three-judge panel of the Supreme Court of Canada granted leave to appeal from the decision of the Court of Appeal for Ontario in Re Indalex.

The Ontario Court of Appeal released its landmark decision on April 7, 2011. The case involved a priority dispute over the proceeds from the sale of the assets of Indalex Limited (Indalex). The sale was approved by an order of the Ontario Superior Court of Justice in Indalex’s proceedings under the Companies’ Creditors Arrangement Act (Canada) (CCAA). The United Steelworkers (USW), which represented Indalex’s unionized workforce and certain pension beneficiaries, and a group of former executives receiving pension benefits, argued that Indalex’s obligation to fund its pension wind-up deficiencies ranked in priority to Indalex’s obligation to repay its debtor in possession (DIP) financing. In holding for the USW and the former executives, and departing from earlier case law, the Ontario Court of Appeal made the following key findings:

  • The deemed trust (a form of statutory security interest) provided for under the Pension Benefits Act (Ontario) (PBA) not only secured payment of normal course contributions and special payments into a registered pension plan but also secured an employer’s obligation to fund the entire wind-up deficiency on the wind-up of a defined benefit pension plan;
  • Although a court-ordered charge securing DIP financing could have priority over the PBA deemed trust, the DIP charge granted in Indalex’s CCAA proceedings did not enjoy this priority. The Court of Appeal noted that the doctrine of federal paramountcy was not expressly invoked at the time of the initial application under the CCAA. This doctrine provides that federal legislation such as the CCAA has priority over provincial legislation such as the PBA (where the two statutes are incompatible). The Court of Appeal also noted that each of the pension beneficiaries was not provided with prior notice of Indalex’s request for DIP financing; and
  • Based on the Court of Appeal’s interpretation of the facts before it, Indalex breached its fiduciary duty to beneficiaries of the pension plans, by allowing its role as administrator of the pension plans to conflict with its role as employer and sponsor of the pension plans. The Court of Appeal imposed a constructive trust in favour of the pension beneficiaries over the sale proceeds. The constructive trust ranked in priority to the DIP Charge.

Since its release, the Indalex decision has led to extensive discussion and debate among professionals who practice in the insolvency, pension and financial services area. Now that the Supreme Court of Canada has granted leave to appeal, it is hoped that Canada’s highest court will clarify the scope and application of the PBA deemed trust and provide guidance to a CCAA debtor company in circumstances similar to Indalex. It is expected that the Supreme Court of Canada, in the normal course, will hear the case sometime in late 2012 or early 2013.