The Indalex decision, released by the Ontario Court of Appeal earlier this year, gave priority to pension plan members over other secured creditors that had advanced funds to keep Indalex from bankruptcy. This case came as a surprise to many practitioners and may have far-reaching implications for pension plan administrators and creditors alike.
Indalex Limited filed for protection under the Companies' Creditors Arrangement Act (CCAA) in 2009. The CCAA Court authorized a loan to Indalex and, in exchange, gave the debtor-in-possession (DIP) lender a super priority over “all other security interests, trusts, liens, charges, and encumbrances, statutory or otherwise.” This loan was guaranteed by Indalex U.S., Indalex’s parent organization. When the sale of Indalex was subsequently approved by the CCAA Court, the DIP lender understood that it would have priority over other creditors.
Indalex was the sponsor and administrator of two underfunded pension plans. The pension plan members argued that the sale proceeds should first fund the pension plans’ deficiencies, which amounted to $6.75 million. The first plan, the Executive Plan, had not been wound up as of the date of the CCAA filing. The second plan, the Salaried Plan, was wound up in 2006 – prior to the filing of CCAA. The CCAA Court ruled that the sale assets were properly paid to the DIP lender.
Key Findings of the Court of Appeal
- Employer Contributions for Wound-Up Plan Held in Statutory Deemed Trust
The Pensions Benefits Act, like most other jurisdictions, creates a deemed trust in favour of plan beneficiaries equal to employer contributions accrued to the date of the wind-up, but not yet due under the plan. Furthermore, Ontario’s Personal Property Security Act creates a specific priority for deemed trusts under pension legislation over all secured creditors.
Taken together, the Court of Appeal concluded that there was a deemed trust over the deficiencies of the wound-up Salaried Plan that had priority over the DIP lender. The Executive Plan, in contrast, had not been wound up, however, the Court determined that it was unnecessary to determine whether the deemed trust would apply.
- Indalex Breached its Fiduciary Duties as Plan Administrator
The Court found that Indalex’s initial decision to commence CCAA proceedings was a corporate decision. However, once this decision was made, the Court found that Indalex had fiduciary duties towards plan members in its role as administrator of the plan. The Court found that Indalex had breached this duty by knowingly negotiating super-priority for the DIP lender when the pension plans were underfunded. This knowledge also gave rise to a conflict of interest between Indalex’s corporate duties and its duties to pension plan members.
Significant implications of the decision include:
- More difficulty for employers that sponsor defined benefit pension plans to obtain needed financing
- Uncertainty for DIP lenders and guarantors
- Preference for proceedings under the Bankruptcy and Insolvency Act in order to avoid preference being given to statutory deemed trusts
- Uncertainty as to the extent of an employer’s fiduciary obligations in the role as pension plan administrator