The Ontario Court of Appeal's decision in the case of Re Indalex Ltd. O.J. No. 1621 is important from the pension and benefits perspective for two reasons. First in regards to the dual roles of an employer in a single employer defined benefit pension plan as the "Administrator" and also as the "Employer"; and the second being the effect of the "deemed trust" provisions of the Pension Benefits Act of Ontario where a Defined Benefit Pension Plan has a solvency deficiency to be paid (amortized) over a 5 year period and the Plan is being wound up.
It is important to note that leave to appeal to the Supreme Court of Canada has been sought on June 6, 2011 to hear this case. However it has not yet been determined whether the Supreme Court will hear this case.
In this case, Indalex was the Employer and the Administrator of two registered defined benefit pension plans known as the Executive Plan and the Salaried Plan (collectively, the "Plans"). Indalex sought protection from creditors under the Companies Creditors Arrangement Act (the "CCAA"). Pursuant to a Court Order, Indalex borrowed funds through a debtor-in-possession financing (the "DIP Financing"), and the Court Order provided that the DIP Financing "shall rank in priority to all security interests, liens, charges and encumbrances, statutory or otherwise..." (the "Dip Order").
In the CCAA proceedings, the Court approved the sale of Indalex's assets as a going concern, and as a result of representations made from beneficiaries of the Plans, $6.75 million was held back to cover the deficiencies under the Plans (the "Reserve Funds").
The sale proceeds from the Indalex assets was insufficient to cover the DIP Financing, and the shortfall was covered by Indalex's American parent ("Indalex U.S.") who had guaranteed the DIP Financing. Upon paying out the DIP Financing, Indalex U.S. advanced its subrogated claim for recovery of the Reserve Funds in accordance with the priority ordered in the DIP Order.
The beneficiaries of the Plans claimed priority over the DIP Financing to the Reserve Funds based on two arguments:
- the deemed trust provisions of the Ontario Pension Benefits Act (the "PBA") applied to give the beneficiaries priority over the DIP Financing; and
- during the course of the CCAA proceedings, Indalex, pursuant to its role as Administrator of the Plans, had breached its fiduciary obligations to the beneficiaries for failing to serve notice of the CCAA proceedings on the beneficiaries, negotiating the DIP Financing and obtaining the CCAA financing Order without notice to the beneficiaries, and generally by doing nothing in the CCAA proceedings to fund the deficit in the Plans, or to take steps to provide for the beneficiaries on the sale of Indalex's asset.
Decision of the CCAA judge
The CCAA judge dismissed the beneficiaries' priority claim, by holding that on the date of the sale of Indalex's assets, the deemed trust under the PBA had not arisen with respect to the Plans. In particular, the CCAA judge found that the Plan for the former executives was not yet wound up and that there were no deficiencies in the executives' Plan at the date of sale, to form the basis of a deemed trust against the Reserve Funds. Although the Plan for the salaried employees was in the process of being wound up on the date of the sale of the assets, the CCAA judge noted that Section 31 of the PBA Regulations permitted Indalex to make a solvency deficiency payment over a number of years, with the amount of yearly payments not coming due until it was required to be paid. As a result, the CCAA judge also concluded that on the date of the sale of Indalex's assets, there was nothing owing as yet under the Plans to form the basis of a deemed trust against the Reserved Funds.
Decision of the Ontario Court of Appeal
The Ontario Court of Appeal held that the PBA "deemed trust" provisions applied to give the beneficiaries of the Plans priority over the DIP Financing to the Reserve Funds to cover the shortfalls of the Plans. In rendering its decision, the Court addressed the application of the deemed trust provisions in the PBA, Indalex's breach of its fiduciary obligations while wearing two hats, namely the hat of the Employer, and as Administrator of the Plans, and the priority of the PBA deemed trust over the DIP Financing.
The "Deemed Trust"
Section 57(4) of the PBA provides that where a pension plan is wound up, an employer who is required to pay contributions to the pension fund shall be deemed to hold in trust for the beneficiaries of the pension plan an amount of money equal to employer contributions accrued to the date of the wind-up but not yet due under the plan or regulations. The Alberta Employment Pension Plans Act and the British Columbia Pension Benefits Standards Act contain similar provisions creating a deemed trust in favour of plan beneficiaries.
In Re Indalex, the main issue involved what employer contributions are caught within the purview of Section 57(4) of the PBA. According to the CCAA judge, the contributions which fall within Section 57(4) are only those contributions that the employer had to make while the plan was ongoing and do not include solvency deficiency payments set out in Section 75(1)(b) of the PBA. More particularly, the CCAA judge held that Section 57(4) of the Act only applies in respect of the payments under Section 75(1)(a) of the Act and not under Section 75(1)(b).
The Court of Appeal held that Section 57(4) of the Act which creates a deemed trust in respect of employer contributions applies to all employer contributions under Section 75(1) (both current and deferred solvency payments) and is not limited to only those contributions that the employer had to make while the plan was ongoing. The Court of Appeal held as well that even though, under the PBA and its Regulations, the solvency deficiency of the Plans may be paid over a period of five years after wind-up and as a result, the solvency deficiency was not yet due and owing to the Plan at the time of wind-up, the amount of the solvency deficiency payable over time is included in the deemed trust granted in the PBA.
Alberta pension benefit legislation contain similar provisions relating to the payment of solvency deficiencies over a five year period, and if Re Indalex is followed in Alberta, the full amount of the solvency deficiency, once incurred, is subject to the deemed trust priority granted in the Employment Pension Plans Act.
Breach of Fiduciary Obligations
The Court of Appeal decision also addresses the issue of whether Indalex, as the Administrator of the Plans, breached its fiduciary duty to the Plans' beneficiaries during the CCAA proceedings.
In the case of Imperial Oil Ltd. v. Ontario (Superintendent of Pensions) (1995), 18 C.C.P.B. 198, the Pension Commission of Ontario used the "two hats" analogy to describe the dual role of an employer who is also the administrator of a pension plan. Essentially, the employer, when managing the business, wears the corporate hat and is expected to act in the best interest of the Corporation. However, when acting as the pension plan Administrator, the employer wears its fiduciary hat and must act in the best interest of the plan members and beneficiaries.
In the context of CCAA proceedings, the Court of Appeal in Re Indalex held that at different stages in the proceedings, Indalex was acting as the employer and at certain other stages, Indalex should have been acting as administrator.
The initial decision to commence CCAA proceedings was a corporate decision and as such, Indalex appropriately acted in the best interests of the corporation in deciding to commence CCAA proceedings. However, according to the Court of Appeal, when making the decision to grant DIP Financing and to give the DIP lender a super priority, Indalex should have been wearing both its corporate hat, as well as its administrator hat. The Court of Appeal held that the decision to grant DIP Financing and give a super priority to the DIP lenders when Indalex was well aware that the Plans were underfunded did not take into consideration the beneficiaries' best interests. As such, Indalex breached its fiduciary duty to the Plan members and beneficiaries by essentially ignoring its role as an administrator.
The Court of Appeal noted that the Plan beneficiaries were not given any notice of the CCAA proceedings and had no knowledge that such was occurring. Accordingly, the plan beneficiaries did not have the ability to protect their own interests and further, did not participate in the negotiations involving the DIP Financing. Therefore, the plan beneficiaries were particularly vulnerable and Indalex should have considered the Plan's best interests. By failing to do so, the Court of Appeal determined that Indalex breached its fiduciary duty to the Plans members and beneficiaries, as the Administrator of the Plans.
This particular Decision is of significant interest to Insolvency lawyers and its impact on what is generally thought of being the "super priority" for "DIP" financing. Of interest to Pension lawyers is the following:
- The recognition by the Court of the legal principle that an employer in a single employer defined benefit plan wears "two hats"; that of being an Employer and that of being an Administrator for its Pension Plans, with the fiduciary obligation to the beneficiaries of the Pension Plans where the Employer is acting as the "Administrator"; and
- The effect of the deemed trust provisions in pension benefit legislation, not only to the "current" pension payments that may be due, but also for the contributions which are due in the future for the amortization (payment) of the solvency deficiency.