The Supreme Court of Canada overturned the Ontario Court of Appeal today in what is one of the most highly-anticipated cases for the pension and insolvency bars pending before the courts. In Indalex (Re) 2013 SCC 6, the court provided clarity regarding some key questions relating to the governance of an employer-administered pension plan during a proceeding under the Companies’ Creditors Arrangement Act (CCAA). The judges split on some of the issues, but here is our brief round-up:
- Priority. The full amount of a deficit in an Ontario pension plan will rank ahead of secured creditors (as a deemed trust), provided that the plan is wound up and the employer is not in bankruptcy. The SCC upheld the Court of Appeal on this issue.
- DIP Facilities Can Come First. A judge may order that court-approved debtor-in-possession financing in a CCAA proceeding ranks ahead of pension deficit deemed trusts. The SCC upheld the Court of Appeal on this issue.
- Fiduciary Duties Owed. Employers who administer pension plans owe a “fiduciary duty” to the members of the plans. This means that such employers must manage conflicts of interest. These conflicts will arise when there is a substantial risk that the employer-administrator’s representation of the plan members would be materially and adversely affected by the employer-administrator’s duties to the corporation. In these circumstances, separate representation (among other things) might be appropriate to protect plan members. The SCC narrowed the scope and content of the fiduciary duty that the Court of Appeal had imposed.
- Remedies. Any remedy for a breach of fiduciary duty must be tailored to the nature of the breach. The remedy of a “constructive trust”, which provides the plan members with a proprietary interest in specific assets of the employer corporation, will only be available if there is a direct link between the breach of fiduciary duty and the specific assets. The breach must have resulted in the assets being in the corporation’s hands. The SCC overturned the Court of Appeal on this issue.
Lawyers will be picking through the lengthy judgments in this decision for months to come. It has significant implications for Canadian corporate lending, insolvencies and restructurings.