It’s been almost two years since the Supreme Court of Canada (SCC) decision in Indalex Ltd., Re.1 Currently, Canada’s lower courts are being challenged to interpret the decision in a variety of different contexts. The purpose of this article is to review the Indalex decision within the broader context of pre- and post-Indalex case law and to briefly comment on its impact in the lending marketplace. 

1. Regular payments vs. special payments

Under typical pension benefits legislation, an employer with a defined benefit pension plan will ordinarily be required to make regular payments of the following amounts into the plan: (i) pension amounts deducted from employee wages, and (ii) normal cost contributions, i.e., the cost of plan benefits that accrue during the current plan year.2 If the plan experiences an underfunding of some sort, special payments may also be required.3 Special payments can include additional amounts payable as a result of a plan wind-up.4 

2. Deemed trusts under provincial pension benefits legislation

Under Ontario’s pension benefits legislation, the Pension Benefits Act (Ontario) (the “PBA”), an employer is deemed to hold in trust for its employees, pension monies deducted from employee wages until such monies are paid by the employer into the plan.5 The employer is likewisedeemed to hold in trust for plan beneficiaries, an amount equal to those employer contributions due but not yet paid into the plan. Such contributions include those contributions accrued to the date of a plan wind-up which are not yet due under the plan.6 As security for the employer’s obligations, the pension plan administrator is given a lien and charge over all of the employer’s assets in an amount equal to the amounts deemed to be held in trust.7 Finally, by virtue of Section 30(7) of the Personal Property Security Act (Ontario) (the “PPSA”), any security interest created in the employer’s accounts or inventory is subordinated to the interest of a person who is a beneficiary of a PBA deemed trust.  This combination of deemed trusts, administrator lien and PPSA priority is intended to provide some assurance that employers will fulfil their pension obligations.

Prior to the SCC decision in Indalex, there had been some doubt as to whether the PBA’s deemed trust provisions covered an employer’s special payment obligations in relation to a terminated plan.  In a narrow 4-3 decision, the SCC settled the issue, holding that the PBA’s deemed trust provisions do in fact cover special payment obligations relating to a wind-up deficiency in respect of a terminated pension plan.  On the other hand, the provisions do notcover special payment obligations associated with a plan deficiency where termination of the pension plan has not yet occurred.8 The expansion of the PBA deemed trust to include wind-up deficiencies associated with terminated pension plans significantly expanded the potential priority accorded to plan beneficiaries under Section 30(7) of the PPSA, ultimately casting a pall on many subsequent attempts to refinance employers with potentially large wind-up deficiencies.  

3. The application of federal laws on debtor insolvency

The mere existence of a deemed trust under provincial law is by no means fully determinative of the priority issues that may arise between plan beneficiaries, on the one hand, and the employer’s secured lenders, on the other. Since most priority disputes arise in the context of an employer’s insolvency, federal insolvency laws must also be taken into account. The key federal laws to be considered, of course, are the Bankruptcy and Insolvency Act (Canada) (the “BIA”), which applies on the employer’s bankruptcy, and the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), which is invoked prior to bankruptcy to reorganize the employer’s affairs. 

Generally speaking, in any dispute involving a conflict between a valid federal law and a valid provincial law which otherwise occupies the same legislative field, the federal law will be given precedence by virtue of the doctrine of federal paramountcy.9 Specifically in the field of bankruptcy, since the BIA creates a complete code of priority which otherwise occupies the legislative field, its priority provisions (namely those contained in Section 136 and various related provisions) typically trump any direct or indirect attempt under provincial legislation to alter this priority. That being so, provincial deemed trusts, unregistered provincial liens and other provincial claims which purport to confer a priority inconsistent with the priority provisions of the BIA are usually considered attempts to alter the BIA’s priority scheme and will be rendered inoperative on the employer’s bankruptcy.10 This result has now been codified in the BIA for deemed trusts and other claims, at least insofar as those granted in favour of the federal or provincial Crown are concerned.11

By contrast, the CCAA does not establish a complete code of priority between creditors or otherwise provide for a scheme of distribution.12 This is a vital distinction in terms of the legal analysis, as the Indalex decision serves to illustrate. While, as a result, the paramountcy doctrine plays a less prominent role under the CCAA, the doctrine nevertheless remains relevant, again as the Indalex case serves to illustrate.

4. Super-priority charge to secure regular payments in bankruptcy

On the bankruptcy of an employer, section 81.5 of the BIA creates a super-priority charge over the employer’s assets to secure the payment of the employer’s regular payment obligations, i.e., unremitted employee pension deductions and unpaid normal cost contributions. Importantly, this charge does not cover special payments. Just as importantly, this charge prevails over pre-existing security given by the bankrupt employer to its secured lenders. 

5. The relegation of deemed trust claims and certain statutory liens on bankruptcy

Because most deemed trusts and unregistered statutory liens in favour of the Crown will effectively be disregarded under the BIA13 and most provincial deemed trusts and unregistered statutory liens in favour of non-Crown third parties will typically be considered inoperative on bankruptcy by virtue of the paramountcy doctrine, the underlying claims of creditors reliant on such claims will typically be considered unsecured claims in the context of an employer’s bankruptcy.  In the same way, the deemed trust claims of pension plan beneficiaries (and the supporting lien claims of plan administrators) for unremitted or unpaid pension amounts will effectively be relegated to unsecured status on the employer’s bankruptcy, subject to Section 81.5 of the BIA.14 A corollary of this of course is that secured lenders can avoid the security aspects of such Crown and non-Crown deemed trust and other claims simply by petitioning the insolvent employer into bankruptcy. Indeed, prior to the SCC decision in Indalex, Canadian courts routinely permitted secured lenders to petition an employer into bankruptcy in order to relegate such claims to unsecured status on bankruptcy.15 Notably, nothing in the SCC decision in Indalex appears to have explicitly altered this pre-Indalex case law. 

Of course, ongoing CCAA proceedings impose a stay on a secured lender’s ability to petition an insolvent  employer into bankruptcy. Nevertheless, at the appropriate time  ̶  for example, if all hope for a plan of compromise or arrangement vanishes or if the assets of the debtor have been disposed of  ̶  Canadian courts have usually been prepared to allow a secured lender to bring an application to lift the CCAA stay and to allow a bankruptcy petition to proceed, including for the express purpose of relegating possible deemed trust and other provincial claims to unsecured status.  Again, nothing in the SCC decision in Indalex appears to have explicitly altered this pre-Indalex case law.16

6. Competing priority arguments pre-bankruptcy

Prior to Indalex, the status of provincial deemed trusts, unregistered statutory liens and similar claims in favour of non-Crown third parties had been significantly less clear under the CCAA. Since the insolvent employer’s bankruptcy had not yet occurred, the BIA could not be relied upon to relegate such claims to unsecured status. Furthermore, because the CCAA does not contain its own complete code of priority and does not otherwise occupy the same legislative field as the competing provincial law, there seemed no reason to invoke the paramountcy doctrine so as to render the underlying provincial legislation (and therefore the corresponding deemed trust and other claims) ineffective in the CCAA context. 

Proponents of claim relegation argued that such claims should be treated as unsecured claims in CCAA proceedings in the same way that they were treated in bankruptcy. Doing so, they argued, would ensure consistency of treatment between the two federal insolvency statutes and would remove any incentive a secured lender might otherwise have to seek the employer’s premature bankruptcy. In fact, consistency of treatment between the two federal insolvency statutes had already been promoted by the SCC as a desirable objective just two years earlier in Ted Leroy Trucking Ltd.17

Opponents of claim relegation, on the other hand, argued that the differences between the two federal statutes were such that consistency of treatment was not always warranted. That being the case, non-Crown third party deemed trusts, unregistered statutory liens and similar claims should remain effective in CCAA proceedings. And, in Ontario at least, Section 30(7) of the PPSA should remain operative so as to confer priority upon pension plan beneficiaries (over the security interests of other creditors) in the insolvent employer’s accounts and inventory. Absent the employer’s bankruptcy, there was simply no reason for such non-Crown third party claims to give way in a CCAA proceeding. These were the arguments that existed immediately before the SCC decision in Indalex.

7. The SCC decision in Indalex

As is well known, the contest in Indalex was between the deemed trust claims (and related statutory lien and priority claims) of pension plan beneficiaries, on the one hand, and the secured claims of a debtor-in-possession (DIP) lender, on the other. One pension plan had already been terminated, resulting in a large wind-up deficiency, while the other plan remained alive. All of the employer’s assets had been sold during the pendency of the CCAA proceedings, leaving a pool of cash awaiting distribution amongst the employer’s creditors. Importantly, the employer had not yet been petitioned into bankruptcy. 

Subsequent holders of the DIP lender’s claims brought an application to lift the CCAA stay and to petition the employer into bankruptcy. The beneficiaries resisted, arguing that the paramountcy doctrine should not apply in the CCAA context and that claim relegation should not otherwise occur prior to bankruptcy. The pension plan beneficiaries claimed priority in the CCAA proceedings, including by reason of Section 30(7) of the PPSA.18 Rejecting the beneficiaries’ arguments, the SCC held that, even though the employer had not yet been petitioned into bankruptcy, the new DIP security had priority by virtue of the paramountcy doctrine.19

8. Elements of the decision

The essential determinations in Indalex were as follows: (a) that the PBA deemed trust coversspecial payments due in connection with a wind-up deficiency, (b) that the PBA deemed trust does not cover special payments potentially due in connection with a wind-up deficiency where the plan has not yet been terminated, (c) that consistency of treatment between the BIA and the CCAA is not always requisite, and therefore provincial non-Crown third party deemed trust and lien claims are not automatically relegated to unsecured status in the context of pre-bankruptcy CCAA proceedings, and (d) that a DIP lender’s secured claims have priority over provincial non-Crown third party deemed trust and lien claims in the pre-bankruptcy CCAA context by virtue of the paramountcy doctrine. 

Furthermore, based on important dicta in Indalex, it now seems that, at least in those provinces where provincial legislation confers express priority in certain asset classes in favour of the deemed trust and statutory lien claims of pension plan beneficiaries over non-DIP secured lenders, that this priority will now persist during the pendency of on-going CCAA proceedings. Specifically, in this regard, Justice Deschamps, writing for the majority in Indalex, wrote:

“[51]   In order to avoid a race to liquidation under the BIA, courts will favour an interpretation of the CCAA that affords creditors analogous entitlements [i.e., consistency of treatment between the CCAA and the BIA will generally be preferred].  Yet this does not mean that courts may read bankruptcy priorities into the CCAA at will.Provincial legislation defines the priorities to which creditors are entitled until that legislation is ousted by Parliament [i.e., until the full BIA code of priority is invoked on bankruptcy].  Parliament did not expressly apply all bankruptcy priorities either to CCAA proceedings or to proposals under the BIA.  Although the creditors of a corporation that is attempting to reorganize may bargain in the shadow of their bankruptcy entitlements, those entitlements remain only shadows until bankruptcy occurs.

[52]  ... The provincial deemed trust .... continues to apply in CCAA proceedings, subject to the doctrine of federal paramountcy  ...  The Court of Appeal therefore did not err in finding that at the end of a CCAA liquidation proceeding, priorities may be determined by the PPSA's scheme rather than the federal scheme set out in the BIA.” (emphasis and notes in square brackets added by the author)

This being the case, in Ontario at least, Section 30(7) of the PPSA would confer priority in favour of plan beneficiaries over the claims of non-DIP secured lenders in an employer’s accounts and inventory during the pendency of on-going CCAA proceedings.  Furthermore, and more problematically for the market, this priority now includes wind-up deficiencies associated with pension plans that have been terminated prior to the commencement of CCAA proceedings.20

9. Lifting the stay; getting to bankruptcy

As noted above, prior to Indalex, secured lenders were generally able to bring an application to lift a CCAA stay once a CCAA proceeding had run its course in order to petition an insolvent employer into bankruptcy, and thereby relegate provincial non-Crown third party deemed trust, lien and other claims to unsecured status.21 Indeed, such applications could even be brought near the end of an ongoing CCAA process. As noted above, nothing in the Indalex decision appears to explicitly alter this earlier case law.  In fact, in a post-Indalex decision, Justice Campbell in Grant Forest Products22 lifted a CCAA stay pursuant to an application brought by a non-DIP secured lender, thereby permitting the insolvent employer to be petitioned into bankruptcy and relegating the claims of pension plan beneficiaries to unsecured status.23

Accordingly, one key factor for secured lenders to consider, in assessing the “additional risk” posed by the newly expanded, pre-bankruptcy priority recognized in Indalex, is the likelihood that they will still be able to defeat the new priority by lifting the CCAA stay and petitioning the insolvent employer into bankruptcy. While this might seem a little like pulling the rug out from under the feet of plan beneficiaries, the transitional, and sometimes transient, nature of certain CCAA entitlements is already well understood. In fact, just two years earlier, Justice Deschamps, writing for a much stronger 8-1 majority in Ted Leroy Trucking Ltd., explained as much:

“[14]  ... Unlike the BIA, the CCAA contains no provisions for liquidation of a debtor's assets if reorganization fails.  There are three ways of exiting CCAA proceedings.  The best outcome is achieved when the stay of proceedings provides the debtor with some breathing space during which solvency is restored and the CCAA process terminates without reorganization being needed. The second most desirable outcome occurs when the debtor's compromise or arrangement is accepted by its creditors and the reorganized company emerges from the CCAA proceedings as a going concern.  Lastly, if the compromise or arrangement fails, either the company or its creditors usually seek to have the debtor's assets liquidated under the applicable provisions of the BIA or to place the debtor into receivership.

[23]  ...  Because the CCAA is silent about what happens if reorganization fails, the BIA scheme of liquidation and distribution necessarily supplies the backdrop for what will happen if a CCAA reorganization is ultimately unsuccessful.

[80]  ...  the comprehensive and exhaustive mechanism under the BIA must control the distribution of the debtor's assets once liquidation is inevitable.  Indeed, an orderly transition to liquidation is mandatory under the BIA where a proposal is rejected by creditors.  The CCAA is silent on the transition into liquidation but the breadth of the court's discretion under the Act is sufficient to construct a bridge to liquidation under the BIA.  The court must do so in a manner that does not subvert the scheme of distribution under the BIA. Transition to liquidation requires partially lifting the CCAA stay to commence proceedings under the BIA.  This necessary partial lifting of the stay should not trigger a race to the courthouse in an effort to obtain priority unavailable under the BIA.”  (emphasis added by the author)

In furtherance of this and similar judgments, Justice Campbell subsequently confirmed in Grant Forest Products (i.e., a post-Indalex case), at paragraph 121, that “ in the absence of provisions in a Plan under the CCAA or a specific court order, any creditor is at liberty to request that the CCAA proceedings be terminated, if that creditor’s position may be better advanced under the BIA” (emphasis added).

Indeed, if the SCC is to weave a consistent and coherent approach to the law here, based on its twin decisions in Indalex and Ted Leroy Trucking Ltd., then the essence of both SCC decisions must surely be: that all other things being equal, secured lenders will remain just as able to petition an insolvent employer into bankruptcy post-Indalex as they could pre-Indalex. Indeed, in this respect, Justice Deschamps, also in Ted Leroy Trucking Ltd., and referring approvingly of an earlier decision by the Ontario Court of Appeal in Ivaco, intimated as much:

“[78]  Tysoe J.A. [of the B.C. Court of Appeal in Ted Leroy Trucking Ltd.] therefore erred in my view by treating the CCAA and the BIA as distinct regimes subject to a temporal gap between the two, rather than as forming part of an integrated body of insolvency law.  Parliament's decision to maintain two statutory schemes for reorganization, the BIA and the CCAA, reflects the reality that reorganizations of differing complexity require different legal mechanisms.  By contrast, only one statutory scheme has been found to be needed to liquidate a bankrupt debtor's estate.  The transition from the CCAA to the BIA may require the partial lifting of a stay of proceedings under the CCAA to allow commencement of the BIA proceedings.  However, as Laskin J.A. for the Ontario Court of Appeal noted [in the Ivaco case24] in a similar competition between secured creditors and the Ontario Superintendent of Financial Services seeking to enforce a [pension beneficiary] deemed trust, "[t]he two statutes are related" and no "gap" exists between the two statutes which would allow the enforcement of property interests at the conclusion of CCAA proceedings that would be lost in bankruptcy.” (emphasis and notes in square brackets added by the author)

Both the Ivaco and Grant Forest Products cases of course involved failed attempts by plan beneficiaries to resist the partial lifting of a CCAA stay.25

In truth, it would go a long way towards alleviating some of the business and legal uncertainty currently in the marketplace, if the SCC were to simply confirm that its decision in Indalex was not intended in any way to alter previously understood case law concerning the lifting of CCAA stays of proceedings, notwithstanding the expansion of the deemed trust that has been effected.

10. Conclusion

The unfortunate consequence of the newly expanded deemed trust in Indalex has been to make it much more difficult for companies with potentially large wind-up deficiencies to secure financing and to increase the cost of financing that is otherwise available, all very much to the detriment of such companies and their stakeholders. In particular, for mature companies in sunset industries with potentially large wind-up deficiencies, it may be that the potential loan loss provisioning and treatment that could arise on loan default due to the newly-expanded priority claim recognized in Indalex, will prove so undesirable that otherwise willing lenders that would have extended financing to such companies pre-Indalex will now no longer consider extending financing, even if the SCC were to eventually confirm that the newly-expanded priority claim can later be avoided upon bankruptcy.

For those secured lenders choosing to move forward, arguably secured lenders and pension beneficiaries are likely to remain cooperative in any subsequent CCAA process, since by doing so, plan beneficiaries in particular are likely to maximize the chances of resurrecting the employer’s business and effecting a  resumption of special payments to the pension plan. Moreover, post-Indalex case law suggests that plan beneficiaries will likely not be able to use their new pre-bankruptcy CCAA entitlement to resist the initial imposition of a stay of proceedings or the suspension of special payments during the pendency of ongoing CCAA proceedings, in either case so as to facilitate a DIP financing for the insolvent employer.26

Two years since the Indalex decision is but a small snippet of time. It promises to be more interesting to watch the on-going development of post-Indalex case law over the longer term.