The Ontario Court of Appeal dramatically affected commercial lending practice in Ontario in its decision in Re Indalex Limited. Under the decision, the Court held that pension fund deficiencies are ranked as super-priority obligations, and come ahead of secured creditors and the DIP lenders.
As a result, in dealing with both pre-filing credit facilities and DIP financing, lenders will need to carefully navigate through the troubled waters created by Indalex. Secured lenders that provide credit facilities to companies with defined benefit plans are at risk of having their security subordinated to claims of pension beneficiaries, whether or not their debtor seeks insolvency protection. In addition, those companies that wear the dual hat of plan administrator are at risk of being attacked for breach of fiduciary duties to the pension plan.
Indalex Limited (“Indalex”) was a Canadian company with separate pension plans for its executives and salaried employees. Indalex filed for Companies’ Creditors Arrangement Act (“CCAA”) protection on April 3, 2009 and obtained Court approval to post-filing financing (“DIP Financing”) during the CCAA proceeding. Upon approving the DIP Financing, the Court granted a charge to the DIP Financing lender (“DIP Lender”) against all of the assets of Indalex, which was to rank ahead of Indalex’s other creditors.1 In July 2009 Indalex closed a court-approved sale of its assets and sought approval to distribute the purchase proceeds to the DIP Lender. Both sets of former employees objected to the proposed distribution on the basis that the shortfalls in the pensions were subject to a deemed trust that ranked ahead of the DIP Lender’s claim. In overturning the Superior Court’s decision, the Court of Appeal ordered that the sale proceeds be paid to the pension plans in priority to the DIP Lender’s claim.
The salaried employees’ pension plan (“Salaried Plan”) was in the process of being wound up when the CCAA proceeding was initiated. Indalex was the plan administrator of the Salaried Plan. As at the date of the CCAA filing the Salaried Plan had a funding deficiency of $1,795,600 (“Salaried Deficiency”).
Section 75 of the Pension Benefits Act (“PBA”) requires an employer, where a pension plan is being wound up, to pay into the plan all payments that are due immediately or that have accrued and have not been paid. Section 57(4) of the PBA establishes a deemed trust for, among other things, amounts accrued to the date of the wind up but not yet due under the plan or regulations. The Court of Appeal concluded that the entire Salary Deficiency had accrued at the date of wind up and as such was subject to the deemed trust granted under Section 57(4) of the PBA.
The executive employee pension plan (“Executive Plan”, together with “Salaried Plan”, the “Plans”) was still operative at the time the CCAA was initiated. Indalex was also the plan administrator of the Executive Plan. At the time of the CCAA filing the estimated wind-up deficiency was $3,200,000 (“Executive Deficiency”). The PBA deemed trust provisions apply to deficiencies in plans that are being wound up. As a result, the Court of Appeal was not able to conclude that the PBA deemed trust provision applied to the Executive Deficiency. However, the Court did conclude that Indalex, as plan administrator, owed fiduciary duties to the Plans. The Court held that as Plan Administrator Indalex did not protect the best interests of the Plan’s beneficiaries and, accordingly, was in breach of its fiduciary obligations as administrator. The Court held that this breach of fiduciary duty gave rise to a constructive trust on the basis that the breach enabled Indalex to obtain property that should have been held in trust for the pension beneficiaries. The Court consequently imposed a constructive trust over Indalex’s property for the amount of the pension deficiencies. As a result of the application of a constructive trust, the Court ordered that the Plans be paid the full amount of their respective deficiencies, ahead of the DIP Lender.