Earlier this year, the Ontario Court of Appeal ruled that the actuaries being sued in connection with the deficits of two underfunded Slater Steel Corp. pension plans could bring third-party claims against former directors, officers or employees of Slater and a related corporation who served on Slater’s audit committee. In this decision, the court addressed a continuing conundrum of corporate personnel who also aid in the administration of the company’s pension plan, namely, when do directors and officers (D&Os) abandon their duty to the corporation in favour of the duty owed by plan administrators to the plan members?
Slater was granted protection under the Companies’ Creditors Arrangement Act (CCAA). Prior to the CCAA proceedings, the Superintendent of Financial Services of Ontario had alleged that the asset valuation methods used in actuarial reports prepared by third-party actuaries contained improprieties.
In the CCAA proceeding, a charge of up to $17.5 million was made to indemnify Slater D&Os for claims that might be asserted against them. A process to resolve such claims was instituted. A related claims bar order provided that the D&Os would be released from all claims for which they were liable in such capacity and for which no claims notice had been filed by a stated deadline.
Slater did not restructure and instead sold off its assets. The CCAA proceedings terminated pursuant to an order issued in August 2004 that allowed the claims bar process to continue for claims already underway. The termination order released the D&Os from all D&O claims, except for claims where they “actively and knowingly participated in the breach of any related fiduciary duties or [had] been grossly negligent or guilty of wilful misconduct.”
In September 2004, the Financial Services Commission of Ontario appointed a successor administrator of the plans, and in November 2005, the successor administrator initiated a claim against the actuaries for damages of $20 million. This is the amount by which the plans were underfunded as the result of the alleged negligence of the actuaries in preparing actuarial reports for the plan. In response, the actuaries sought to institute third-party claims against Slater personnel in their capacity as agents or employees of the administrator of the plans. They alleged that Slater personnel knew or ought to have known that Slater was near insolvency and followed a deliberate strategy to minimize plan contributions, including instructing the actuaries to prepare an actuarial valuation using a “smoothing” method in order to inflate the value of the assets in the plans.
In April 2007, the Ontario Superior Court of Justice ruled that the actuaries had not asserted a proper cause of action against the Slater personnel. The actuaries appealed to the Court of Appeal.
The Court of Appeal ruled that the claims did disclose a reasonable cause of action and that they were not barred by the claims bar order and the termination order issued in the CCAA proceedings.
The court found that there was a distinction between the successor administrator’s right to pursue claims that Slater might have pursued and the successor administrator’s right to bring suit on behalf of the plan beneficiaries. The court noted that the claims were being brought against the Slater D&Os, not in their capacity as such, but rather in their capacity as employees and agents of the administrators of the plans. The CCAA termination order did not address this status. In comparing the different roles and the importance of distinguishing between them, the court made comments that may be alarming to some:
The Audit Committee had to decide how much money Slater would contribute to the Plans annually. If the Slater Personnel, in the guise of the Audit Committee, made that decision in their capacity as directors and officers of Slater, they did so while owing a duty to Slater. Given the financial difficulties that Slater faced, that duty would have led them to minimize the amount that Slater contributed to the Plan.
However, when the Audit Committee made decisions on the quantum of Slater’s contribution to the Plans, it did so in order to fulfill Slater’s obligation as administrator of the Plans. An administrator owes a fiduciary duty to the members of the Plans.
The Audit Committee “stood in the shoes” of Slater qua administrator when making decisions; therefore it owed a fiduciary duty to the Plans’ members. Fulfillment of that duty would have led to maximizing the contributions that Slater would make to the Plans as that would best protect the Plan members’ pensions. In light of Slater’s precarious financial position – a fact that was known or ought to have been known by the Slater Personnel — this duty was heightened because the need for solvency funding should have been apparent.
McCarthy Tétrault Notes:
This decision is noteworthy on several fronts:
- It drives home the fact that individuals who make decisions regarding pension plan administration cannot take their role lightly. Also, a review of liability insurance coverage for D&Os who assist in the administration of a pension plan may be in order.
- The decision demonstrates that releases ordered within the context of insolvency proceedings may not be as protective as might be desired and that further claims may arise in respect of the same subject matter.
- The court has delivered a clear analysis of the conflicting roles of D&Os of corporations who act as administrators of a pension plan. The analysis includes its views on what interests D&Os should take and not take into account when so acting.
It remains to be seen if, in the determination of the substantive issues, the courts will analyze the interests to be taken into account when pension plan funding decisions are made in the same way and as categorically as the Ontario Court of Appeal.