This week, the Ontario Court of Appeal surprised many by deciding that in the context of the CCAA proceedings of Indalex, pension plan deficiency claims can have priority over security held by secured DIP lenders. The Court granted priority for the entire wind-up deficiency of two pension plans over the DIP lender’s security. If not reversed on appeal, the ruling creates a potential worst case scenario for secured lenders in Ontario and could affect availability of credit for all employers who provide defined benefit pension plans for their employees.
At the heart of the decision is the Court’s conclusion that all rights of the beneficiaries of a pension plan accrue as of the date the plan is wound up. Therefore, the statutory deemed trust created by Ontario’s Pension Benefits Act applies to the entire deficiency at that date even though the deficit-related contributions are not then due and the employer had made all contributions when due. This decision overturns the decision of the lower court judge who held that, since the amount of the deficiency may be paid over time and was not due at the relevant time, it was not subject to the deemed trust.
The Court also discusses the concurrent and sometimes conflicting duties that face a company when it is, on the one hand, the employer providing the pension plan as part of operating its business and, on the other, acting as the administrator of the pension plan with fiduciary duties to the pension plan members.
One implication of the decision is that employers should seriously consider resigning as pension plan administrator prior to insolvency to avoid conflicts of interest. In its ruling, the Court suggests that the fiduciary duty to plan members owed by the debtor in its capacity as administrator may require its managers to advocate the interests of the pension plan against the interests of its creditors and other stakeholders in insolvency cases. This conflict would put the managers of an insolvent debtor’s business in an impossible position. The easiest solution may be the appointment of an independent administrator.
The Court was also critical of the degree to which orders in CCAA proceedings are made on little or no notice to affected parties. Indalex as administrator of the pension plan did not notify the members of the pension plans of its motion for a court order to approve a DIP secured loan that would rank in priority to pension claims and, according to the ruling, did not advise the CCAA Court of the potential pension deficit. As a result, the Court of Appeal gave no effect to provisions in the order approving the DIP loan that granted it priority over the statutory deemed trust for pension obligations.
The Indalex decision is a surprising about-face from the Ontario Court of Appeal’s decision in Ivaco and the very recent Supreme Court of Canada decision in Century Services v. Canada. In both of those cases, Courts treated the priority scheme in the Bankruptcy and Insolvency Act as appropriate for the distribution of the sale proceeds when the debtor’s assets are sold in a CCAA case. These decisions permitted easy transition from sales under the CCAA to distributions under the BIA where statutory deemed trusts are often unenforceable. By giving a narrow reading to Century Services and Ivaco, the Court in Indalex resurrects the argument, thought to have been dead and buried, that insolvent companies with pension plans cannot file voluntary proceedings under the BIA without risk of breaching fiduciary duties as plan administrators.
The somewhat unusual circumstances of the Indalex case had a significant impact on the Court’s decision. Certainly, the fact that Indalex’s parent company was holding and asserting the DIP lender claims and had taken a direct role in managing Indalex affected the equities of the case and implicated the DIP lender with the fiduciary duties of Indalex as plan administrator. Additionally, the Court’s strong criticisms of the lack of notice given to pension plan members should lead to changes of practice in CCAA courts. An important message from the Court of Appeal is that orders made in CCAA proceedings on inadequate or incomplete notice may be amended or set aside later.
Observers from each of the commercial lending, insolvency and pension industries will be watching eagerly to see whether or not this decision is appealed, whether there is a legislative response to the decision which enables current practices to continue or both.