The Supreme Court of Canada’s decision in (Re) Indalex has changed the landscape for both lenders and borrowers in Canada who sponsor registered defined benefit pension plans. For lenders, carefully drafted loan documentation and effective planning can enhance the protection of a secured lender’s position in the face of the broadened scope of a deemed trust applicable to a borrower’s defined benefit pension obligations. Borrowers considering a restructuring or bankruptcy should give serious consideration to newly clarified fiduciary duties applicable in their roles as plan administrators of defined benefit pension plans.

In (Re) Indalex, the Supreme Court of Canada (SCC) affirmed the super-priority of the security granted to a debtor-in-possession (DIP) lender, over the priority of a deemed trust created under Ontario pension legislation in the context of a Companies’ Creditors Arrangement Act (CCAA) proceeding. In addition, the SCC broadened the scope of deemed trusts created under the Ontario Pension Benefits Act (PBA), by concluding that the deemed trust attaches not only to current contributions that are due and payable, but also to funding deficiencies that crystallize when the employer as plan sponsor, or the pension regulator, has declared the wind-up of the pension plan. The SCC decision also recognized that the employer, in its role as plan administrator of an underfunded pension plan, clearly has to consider its fiduciary duties to plan members; however, how the employer undertakes such fiduciary duties can conflict with its right to act in the best interests of the corporation that is subject of the CCAA proceedings.

While the SCC has clarified that the priority of deemed trusts can be subjugated by a court-ordered priority of the DIP financing to the DIP lenders, much uncertainty remains with respect to other issues from both a lender and borrower perspective.

Lenders’ perspective

Loan Documentation

Based on the fact that the deemed trust could apply to both current costs and total solvency deficiency amounts upon “wind-up” of any underfunded defined benefit (DB) pension plan, it is imperative lenders ensure that effective disclosure, monitoring, and early trigger and default provisions are built into their loan documentation. To that effect, loan documents should require, amongst other things, (i) that a loan party employer not be permitted to wind-up and terminate any DB pension plan without the consent of the agent/lender, and (ii) agent’s/lender’s receipt of notice of any (a) defaults in DB pension plans, (b) actions on behalf of plan administrators that could lead to, or have the effect of, winding up DB pension plans, or (c) notices from regulators (in Ontario, the FSCO, and OSFI for federally regulated plans) that could lead to a declaration to wind-up a DB pension plan.

Each loan (at inception) will require careful analysis on timing and the ultimate action plan required for the lender to assess such early triggers and elevate its risk management responses (i.e., reserves, default, acceleration).

Our view is that as an initial step serious consideration should be given to reserving (against availability) monthly contribution amounts (that are due and owing but not yet paid) and possibly (to be determined) monthly special payments (that are due and owing but not yet paid).

Maintaining Priorities

The broadened scope of the Ontario PBA deemed trust necessitates further consideration of the different recovery mechanisms available to lenders.

In Ontario, the Personal Property Security Act (PPSA) provides a clear priority in favour of the PBA deemed trust over security charging inventory and account receivables. (Re) Indalex does not really change this priority rule per se, but certainly changes what many thought was its scope.

Prior cases in Ontario have, however, suggested that in a bankruptcy liquidation (Chapter 7-type liquidation), a deemed trust ranks behind secured creditors.

In a CCAA (Chapter 11-type restructuring) context, the answer is less clear. It appears that, absent a bankruptcy, this “reversal of priorities” does not occur.

A CCAA stay of proceedings will stay all civil proceedings, including bankruptcy proceedings. However, creditors can, and do, successfully request leave from the court to pursue bankruptcy proceedings against a debtor where such proceedings are appropriate. Where CCAA proceedings are a stalling tactic by the debtor and a restructuring by the debtor (on terms satisfactory to the secured lender) is demonstrably unlikely, a secured lender’s motion to lift or terminate the CCAA proceedings, and commence bankruptcy proceedings, will normally be accepted by the court, which would have the effect of the deemed trust ranking behind secured creditors.

We can help you understand the scenarios in which such leave should be sought and the likelihood of success in each case.

Borrowers’ perspective

The SCC confirmed that employers acting as plan administrators have a fiduciary duty to act in the best interest of plan members in the administration of the plan. In light of (Re) Indalex, borrowers are cautioned that, in the context of initiating insolvency proceedings, they should be mindful of their duties as plan administrators, and they cannot abandon their fiduciary duties in the face of potential conflicts with respect to their corporate responsibilities in a CCAA proceeding or a bankruptcy. While the SCC’s decision did not attempt to enumerate all situations where a conflict could arise, it did offer the following guidelines in respect to conflicts:

  • once a conflict is identified, the plan administrator must advise the CCAA judge of the conflict and that the plan administrator is in a conflict of interest;
  • the CCAA judge can decide how best to ensure the interests of plan beneficiaries are fully represented, including the possibility of appointing an independent administrator or independent counsel as appropriate to the particular case; and
  • where feasible, the CCAA judge should require notice be given directly to pension beneficiaries or consider limiting draws on the DIP facility until notice can be given to beneficiaries.

At a minimum, the borrower should be mindful of its fiduciary duties as pension plan administrator when considering the following: (i) commencing CCAA proceedings; (ii) pursuing DIP financing as part of CCAA proceedings; and (iii) considering whether to make an assignment into bankruptcy.

In particular, the reversal of priorities within a bankruptcy, whereby claims of secured creditors are elevated above those of a deemed trust, creates a conflict for borrowers who administer employee pension plans.