In a lengthy decision released yesterday in respect of Indalex Limited, which had been operating under the protection of the Companies' Creditors Arrangement Act (CCAA), the Ontario Court of Appeal found that the Ontario Pension Benefits Act (PBA) imposes a deemed trust over the full amount of any funding deficiency that exists when a pension plan is wound up. Previous court cases had found that such a deemed trust did not arise in respect of any such deficiency on wind-up. In the context of this case, the Court also found that the deemed trust ranked ahead of Indalex's parent company, which was a secured creditor by virtue of its guaranteed repayment of the debtor-in-possession (DIP) facility, even though the DIP had been granted a super-priority charge by the CCAA Court. The Court found that as the issue of "paramountcy" had not been addressed by the CCAA Court when it gave the priority, it could not trump the priority accorded to the deemed trust under provincial legislation.

The Court of Appeal also found that, during the CCAA period, the company had been in breach of its fiduciary obligations as administrator of the pension plans by failing to consider the interests of the plan beneficiaries when liquidating the assets of the company. As a result of this breach, the Court found, in the alternative, that ranking the pension deficiency ahead of the non-arm's-length secured creditor was an appropriate remedy. The Court applied this same equity reasoning to find that the funding deficiency in a second Indalex pension plan should rank ahead of the secured creditor, even though at the applicable time that plan had not been wound up and thus had not given rise to a deemed trust under the PBA.

This case may have significant and far-reaching implications for all lenders and for pension plan sponsors. We are continuing our review of this case and will provide a more detailed analysis shortly.