In Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, the Supreme Court of Canada overturned a decision of the Ontario Court of Appeal and held that members of an underfunded pension plan did not have priority over “debtor in possession” (“DIP”) creditors in a proceeding under the Companies Creditors Arrangement Act (“CCAA”).
Indalex was a sponsor and administrator of the underfunded pension plan. The Company became insolvent and sought protection under the CCAA. In the course of these proceedings, the CCAA court authorized the Company to enter DIP financing so that it could continue its business. The CCAA court granted the DIP creditors “super priority” over the claims of all other creditors including the pension plan members.
The pension plan members challenged this priority. They argued that they had priority by virtue of a statutory deemed trust under s. 57(4) of the Pension Benefits Act and a constructive trust arising from the breach of Indalex’s fiduciary duties to the plan members. At first instance, the judge dismissed the motion. However, the Court of Appeal reversed this ruling and held that the pension plan wind-up deficiencies created deemed and constructive trusts that had priority over the DIP financing priority.
The Supreme Court of Canada overturned the Court of Appeal’s decision. While the Court held that there was a deemed trust under the Pension Benefits Act for the deficiency, this trust was subject to the doctrine of federal paramountcy. As a result, the priority granted to the DIP lenders in the CCAA proceedings under federal statute had priority.
The Supreme Court of Canada was unanimous that Indalex had a fiduciary duty to pension plan members and that the Company failed to address a conflict of interest that arose during the CCAA proceedings. The conflict in this case arose when the Company sought the DIP orders without notice to the plan members. The Company failed to take steps to ensure that plan members had the opportunity to protect their interests in the CCAA proceedings. The Company also failed to bring the conflict of interest to the attention of the CCAA judge.
Notwithstanding the Court’s decision that the Company breached its fiduciary duties, it did not grant a remedy. The breach was not related to a specific identifiable asset that would be unjust for the Company to retain. As a result, the remedy of constructive trust was inappropriate.
This decision highlights the importance of proper notice and communications to employees in the course of restructuring proceedings.