The Supreme Court of Canada released its highly anticipated decision in Indalex Limited (Re) this morning. The ruling stemmed from an appeal of an Ontario Court of Appeal decision that had created commercial uncertainty among many participants in the financial services, pensions and restructuring industries.
At issue was a priority dispute between a court ordered super-priority charge granted to a lender under the Companies’ Creditors Arrangement Act (Canada) (CCAA) and deemed trusts, including under the Ontario Pension Benefits Act (PBA), in respect of the deficit in a defined benefit pension plan.
The Supreme Court of Canada:
- Unanimously affirmed the priority of a court ordered charge in insolvency proceedings over the interests of provincial pension claims.
- Affirmed the broad scope of a provincial statutory deemed trust over the full value of a pension wind up deficiency.
- Left governance challenges for plan sponsors and administrators unresolved.
The full text of the Supreme Court’s decision can be found here.
We will be circulating an additional Osler Update with more detailed analysis of the Court’s reasons in the coming days.
Indalex had obtained creditor protection under the CCAA. In the CCAA proceedings, beneficiaries of two underfunded defined benefit pension plans sponsored and administered by Indalex opposed a motion to distribute the proceeds from the sale of the company’s assets to satisfy a secured claim. The secured claim was held by Indalex’s U.S. based parent after it satisfied a guarantee obligation to an arm’s length lender that had advanced interim financing directly to Indalex relying on a court ordered superpriority charge.
The beneficiaries argued that assets of Indalex with value equal to the full funding deficiencies (not just unpaid amounts due to be paid) were deemed to be held in trust pursuant to provisions of the PBA, and equivalent proceeds of sale should be remitted to the plans on a priority basis, regardless of the court ordered super-priority of the secured claim. The beneficiaries also argued that there were governance, fiduciary duty and notice issues inherent in Indalex’s CCAA process, and the treatment of pension interests therein that justified the imposition of the equitable remedy of a constructive trust. The CCAA court nevertheless approved the distribution to satisfy the secured claim.
The Ontario Court of Appeal overturned the CCAA court’s decision and found that the deemed trust provisions of the PBA apply to all amounts required to liquidate pension plan wind up liabilities, even if those amounts are not yet due under the plan or regulations. The Court of Appeal held that the deemed trust amount should be paid in priority to the holder of a superpriority “debtor-in-possession” charge over the assets of Indalex, despite the CCAA court order creating the charge specifying that it ranked in priority over trusts “statutory or otherwise”. Though one of the two pension plans had not been wound up and the PBA deemed trust provisions did not apply, the Court of Appeal found that there was an intention to wind up the plan and awarded priority to that plan on the basis that Indalex had breached its fiduciary obligations in the course of acting as administrator of the plans (in part through steps taken within the CCAA proceedings), resulting in the imposition of a constructive trust by the Court of Appeal over Indalex’s assets.
The Supreme Court of Canada was asked to consider and bring clarity to several points of law in Indalex that directly affected the interests of pensioners, pension sponsors and administrators, and financiers in the aftermath of insolvency. However, the scope and importance of many of the issues raised in Indalex apply equally in non-insolvency circumstances and a number of interested parties sought to intervene at the Supreme Court of Canada as a result, including the Canadian Bankers Association, the Superintendent of Financial Services (Ontario), the Canadian Labour Congress, the Canadian Federation of Pensioners and the Insolvency Institute of Canada.