Pension and insolvency lawyers have been waiting with great anticipation for the Supreme Court of Canada to rule in Indalex. The decision was released on February 1, 2013 and represents a major statement by Canada’s top court on the intersection of pension and insolvency law.
Indalex was the sponsor and administrator of two pension plans. It sought protection from its creditors under the Companies Creditors Arrangement Act, a federal statute (“CCAA”). During that process, it was authorized to obtain debtor in possession (“DIP”) financing and that financing was granted a priority over all other liabilities. Indalex sold its business during the court supervised process with the proceeds used to satisfy the DIP financing. The pension plan members challenged the priority of the DIP financing and argued that they had priority in the amount of the wind-up deficiency by virtue of a statutory deemed trust under the Pension Benefits Act (Ontario) (the “PBAO”) and a constructive trust arising from breaches of fiduciary duty by Indalex as administrator of the pension plans. The Ontario Court of Appeal ruled in the members’ favour and ordered that the plan wind-up deficiencies had priority over the DIP financing by reason of the deemed statutory and constructive trusts.
The Supreme Court of Canada allowed the appeal. In doing so, it held that with respect to one of the pension plans, the salaried plan, that a deemed trust arose for the wind-up deficiency under the PBAO. However, the priority granted for the DIP financing in the CCAA proceedings was made under a federal statute and thus was paramount over the deemed trust, which arose under a provincial law.
The Court went on to consider whether a breach of fiduciary duty occurred because the employer, acting in its management capacity, did something that had the potential to affect the beneficiaries of the pension plans of which it was the administrator. The Court held that employer was allowed to wear these “two hats’ by statute so that there was not a conflict of interest by simply acting in both roles. However, in this case, while seeking an order for CCAA protection did not on its face give rise to a conflict of interest, Indalex did act in a conflict of interest when is sought DIP financing without providing notice to the plan members. The failure to give notice meant the plan members did not have the opportunity to protect themselves with respect to the priority granted for the DIP financing. In the end, the court held that Indalex had a duty to advise the court of its potential conflict of interest in these circumstances and should have taken steps to address the conflict by, for example, appointing an independent administrator for the pension plans with respect to the DIP financing approval as well as the sale of the corporate assets and the order to enter bankruptcy.
While the Court’s statements on the law regarding conflicts in the CCAA context were meaningful, they did not ultimately lead to a remedy for the plan members as the Court ruled that the breach was not tied to any particular asset and, as a result, the remedy of a constructive trust was not appropriate.
In the end, the Court appears to have answered the question of how the DIP financing priority issue will be addressed when there are deemed statutory pension trusts or constructive trusts created in insolvency situations. In addition, the application of the conflict of interest duty and the procedures identified to address conflict facing pension plan administrators are sure to have an immediate impact on business in Canada and will likely extend beyond the insolvency context.