On February 1, 2013, the Supreme Court of Canada released its decision in Sun Indalex Finance, LLC v. United Steelworkers. The ruling:
- gives comfort to the DIP lending community as it holds that Companies’ Creditors Arrangement Act (“CCAA”) court ordered lender charges trump provincial statutory deemed trusts did not reorder priorities by using equitable remedies such as constructive trusts
- creates potential challenges for pension plan sponsors and administrators including their corporate directors due to conflicting fiduciary duties owed to pension plan members and to the debtor company
- raises the potential that such directors, to the extent they breach such competing fiduciary duties, may well face potential liability
- holds that the deficiency in a wound-up pension plan is a valid statutory deemed trust so that, in a non-insolvency environment, the deemed trust would trump a lender’s security over inventory and accounts receivables
In Re Indalex Ltd., the Ontario Court of Appeal shocked the insolvency community by ruling that certain trust claims with respect to a CCAA debtor’s pension plans took priority over a court ordered super-priority charge for necessary financing incurred during the CCAA process (commonly referred to as “DIP” or “debtor in possession” financing). The following aspects of the Court of Appeal’s ruling were particularly surprising: (i) all amounts owed by an employer under the pension plan on the date of wind-up, including the pension plan deficiency, are subject to the deemed trust provisions in the Pension Benefits Act (“PBA”) (whereas it was previously thought that only arrears of normal and special contributions were included in the statutory deemed trust); and (ii) Indalex had breached its fiduciary duty owed to the pension plan members as administrator of the pension plans and, as a remedy, the Court granted priority to such members over the DIP charge on the basis of a remedial constructive trust.
Although the Indalex decision was very fact specific, and those facts were unusual, the decision created considerable uncertainty in the DIP lending community.
Supreme Court of Canada Decision
On February 1 2013, the Supreme Court of Canada released its long awaited decision. The decision restores certainty for the DIP lending community; however, the ruling creates issues for traditional lenders and pension plan administrators most notably for the directors of companies that are both pension plan sponsors and administrators.
DIP Charge Orders Trump Provincial Deemed Trusts
The DIP lending community can take comfort as the Supreme Court of Canada firmly ruled that the super-priority status of DIP charges is protected. The Court reversed the Ontario Court of Appeal and held that the deemed trust claim of pension plan members was subordinate to the court ordered DIP charge. The Court found that a claim of priority based upon the provincial statutory deemed trust was in direct conflict with the CCAA Order which granted a super-priority charge to the DIP lenders. As a result, the Court held that the DIP charge must prevail over the provincial deemed trust through the doctrine of federal paramountcy.
This aspect of the decision represents a return to the status quo which existed prior to the controversial Ontario Court of Appeal decision and has restored a measure of certainty to DIP lenders. DIP lenders can now be assured that the doctrine of federal paramountcy will continue to protect DIP charges granted under CCAA orders from encroachment by provincial statutory deemed trusts.
Constructive Trust is Not an Appropriate Remedy
A majority of the Supreme Court of Canada upheld the Ontario Court of Appeal’s ruling that Indalex breached the fiduciary duty it owed to pension plan members as administrator of the plan. In failing to give notice of the DIP charge motion to the plan members, the directors (who owed fiduciary duties both to Indalex and to pension plan members) permitted the company’s best interests to prevail over those of the plan members.
Notwithstanding this breach of fiduciary duty, the Court held that it was inappropriate to impose a constructive trust on Indalex’s assets for the benefit of pension plan members. A constructive trust is only awarded in cases where the asset which is to be the subject of the trust can be directly related to a wrong arising from a breach of fiduciary duty such that it would be unjust to allow the party in breach to retain it. In this case the wrong, being lack of notice, would not have resulted in the pensioners securing any additional benefits. Thus, in this case, the majority of the Court was not prepared to use equitable remedies to reorder priorities.
Unresolved Issues for Plan Sponsors and Administrators including Corporate Directors
The case is clear that when a pension plan sponsor is also the administrator of the pension plan, it must be sensitive to conflicts of interest and address those conflicts on timely basis. The holding that Indalex, as plan administrator, breached its fiduciary duties will be of concern to plan administrators and sponsors including their corporate directors. In particular, the justices do not entirely agree on what constituted the breach of fiduciary duty. The Court held that it was not appropriate to reorder priorities in the CCAA but that leaves open the question - what is the appropriate remedy for the breach? Are plan sponsors and administrators including their directors exposed to direct claims where conflicts arise in restructurings?
The practice which has evolved after the Ontario Court of Appeal decision in Indalex (see, for example, such cases as Timminco Limited, (Re)) in order to minimize this exposure is to give notice of important steps in restructurings to pension plan members and regulators. Whether such notice will be sufficient to insulate plan administrators and sponsors including their corporate directors may well be explored by the courts in future cases. While the Supreme Court of Canada decision in Indalex will be of comfort to the defendants in such cases, the risk of personal exposure including in an action for breach of fiduciary duty or in an oppression action reinforces the importance of dealing carefully with pension plan members not just during a CCAA proceeding but also during the lead-up to such a proceeding.
Wind-up Deficiencies are Valid Provincial Deemed Trusts
The majority of the Court held that, in the case of a wound up pension plan, the wind up deficiency is subject to the deemed trust created by section 57(4) of the PBA. Prior to this ruling, the prevalent view among many practitioners was that only arrears of normal and special pension contributions were included in the statutory deemed trust under the PBA.
Accordingly, lenders in a non-insolvency environment must be wary of the broadened scope of the PBA deemed trust provisions and should take this potential priority into account moving forward. We note that section 30(7) of the Personal Property Security Act (“PPSA”) provides that this deemed trust would only rank in priority over a security interest in the accounts or inventory of a borrower, although this point was not discussed at length in the Supreme Court of Canada decision.