“Insolvency can trigger catastrophic consequences”.

So begins the epic decision released this morning by the Supreme Court of Canada in Sun Indalex Finance, LLC v United Steelworkers, 2013 SCC 6 – a case that considers the impact of insolvency on the employee beneficiaries to a pension plan.

Indalex Limited, the sponsor and administrator of two employee pension plans, sought creditor protection under the federal Companies’ Creditors Arrangement Act (“CCAA”).  In the context of these CCAA proceedings, and with an eye to continuing its operations, Indelex was authorised to obtain debtor in possession (“DIP”) financing from an affiliate of an existing creditor. Repayment of the DIP financing was guaranteed by the parent company of Indalex.

As is usual, the amount owed on account of the DIP financing would rank in priority to all other creditors in the CCAA proceedings.  Also importantly, there were wind-up deficiencies in both of the pension plans.

Indalex was ultimately unable to satisfy repayment of the DIP financing in full, such that its parent company had to cough up the shortfall. This provided the parent company with the same “super-priority” over the other creditors that was enjoyed by the DIP financier.

After Indalex was sold, a portion of the sale proceeds were held in a court-ordered reserve to allow the litigation between the pension plan members and Indalex’s parent company.  With respect to those moneys, the key questions before the Supreme Court were as follows:

  • Can the parent company access the reserve fund in compensation for its repayment on the DIP financing?  Or can the reserve fund be used to address the wind-up deficiencies in the pension plans.  In other words, as between the parent company and the plan members, who comes first?
  • As both plan administrator and sponsor, did Indalex breach its fiduciary obligations to the plan members when it secured the DIP financing complete with a super-priority?  Put differently, how can a plan administrator and sponsor simultaneously satisfy its obligations to the plan members and its obligations to the company?

The reasons of the Supreme Court are lengthy, and it is difficult to quickly appreciate what forms the majority (or binding) answer to these key questions.  What follows is a quick summary of the result.

  • The parent company should be able to access the reserve fund, not the pension plans.
  • Although the wind-up deficiencies of one pension plan were advantaged with a statutory trust by the Ontario Pension Benefits Act, compensation for repayment of the DIP financing must prevail.
  • This is because of the resulting conflict of priorities between this provincial statutory trust and the DIP charge created under the federal CCAA.  In the face of such provincial-federal conflict, the federal will trump as a matter of constitutional law.
  • Indalex breached its fiduciary obligations to the plan members when it secured the DIP (in favour of continued operations) without notice to the plan members.  Indalex should have given the plan members an opportunity to speak to the proposed financing and the impact it might have (and ultimately did have) on their interests in the pension plans.
  • That said, as a matter of law, this breach cannot permit access to the reserve fund in priority to the parent company.  So, there is no effective remedy for the breach.

What does this mean?  Fortunately, the Supreme Court has clarified the interplay between a provincial statutory trust and the ranking of priorities in CCAA proceedings.  Creditors can take comfort in the result, namely that a conflicting priority under provincial legislation cannot prevail.  However, the decision does not clearly articulate a resolve to the sometimes competing obligations of a company to its business as well as to its pension plan as administrator (and sponsor)

The full reasons of the Supreme Court of Canada can be read here.