Indalex Limited's assets were sold in a liquidating
proceeding under the federal Companies' Creditors
Arrangement Act (the "CCAA"). Indalex administered
defined benefit pension plans which had substantial deficiencies at
the time of the filing, although the company was up to date in
making all statutorily mandated payments. Former employees and the
union asserted priority claims over the sale proceeds in respect of
Indalex's pension plan deficits giving rise to the question:
Does the statutory deemed trust under Ontario's Pension
Benefits Act trump the Court ordered super-priority charge
typically granted to a debtor-in-possession ("DIP")
lender inside CCAA proceedings? Shockingly, the Ontario Court of
Appeal's answer was: "Yes".
That answer, however, was still not the most concerning aspect of
its decision. The Court of Appeal also held that where a debtor has
breached its fiduciary duties1 to the pension plan
beneficiaries, then the Court may find that a "constructive
trust" applies to the debtor's property (such as the
proceeds resulting from the sale of its business) and, therefore,
such property (or sale proceeds) must be used to fund the full
amount of any pension plan deficiencies first ahead of anyone else
— whether or not the statutory deemed trust applies to
such pension obligations. In addition, the Court of Appeal stated
that a voluntary assignment into bankruptcy should not be used to
defeat a secured claim under valid provincial legislation and, in
particular, that: "it is inappropriate for a CCAA applicant
with a fiduciary duty to pension plan beneficiaries to seek to
avoid those obligations to the benefit of a related party by
invoking bankruptcy proceedings when no other creditor seeks to do
so."
The decision suggests that the priority question can be addressed
by clearer and more explicit priority language being drafted into
CCAA orders pertaining to DIP financing than currently exists under
the model orders prescribed by the Ontario court. However, to grant
such an order, the CCAA Court must find that the recognition of the
pension deemed trust would frustrate the purpose of the CCAA
proceeding and therefore explicitly invoke the paramountcy of the
CCAA (which is federal legislation) to grant a super-priority
charge over a trust created under a provincial statute. This will
necessitate providing evidence in DIP financing motions that the
financing will not be made available (or otherwise materially more
onerous) without the ability to trump the pension deemed trust.
This may be tricky to do under recent CCAA amendments dealing with
DIP financing and the definition of "secured creditor"
under the CCAA. Further, any motion to approve the DIP priority
must be on notice to the affected pension beneficiaries. Giving
such notice may be problematic particularly if funding is needed on
the first day. However, if successful, the end result would be to
put DIP lenders back to the spot where they believed they were
prior to Indalex and, therefore, resolve at least part of
the problem.
The larger issue — avoiding a breach of fiduciary duty
finding that leads to a constructive trust remedy of paying out all
pension plan deficiencies first — will be considerably
more difficult (if not impossible) to address. Furthermore, this
issue affects all creditors with claims against a debtor's
assets, not just DIP lenders and, therefore, will impact credit
markets generally. And, while an argument exists to distinguish
Indalex on its facts,2 relying on the ability
to successfully distinguish Indalex will likely be cold
comfort to any lender until there are a number of cases clearly
recognizing the distinction.
Where an employer is also the pension plan administrator (as is
almost always the case with single employer plans in Ontario), it
is very difficult to see how such an employer can implement a CCAA
restructuring without being held to then have breached its
fiduciary duties to pension plan beneficiaries as plan
administrator. While the Court of Appeal did hold that the decision
to commence a CCAA proceeding was not part of the administration of
the pension plan nor does it necessarily engage the right of the
beneficiaries of the pension plan, it did allude to the following
factors in considering whether or not a breach of fiduciary duty
occurs: doing nothing in the CCAA proceedings to fund the deficit
in underfunded plans; taking no steps to protect the vested rights
of the plan beneficiaries to continue to receive their full pension
entitlements; applying for CCAA protection and obtaining the CCAA
order that provided the super-priority charge in favour of its DIP
lender without notice to the plan beneficiaries; selling assets
without making any provision for the plans; doing nothing to
protect the best interests of the plan beneficiaries; and,
basically, ignoring its role as pension plan
administrator3 and focussing solely on its general
duties to stakeholders.
Of course, if a debtor attempts to fund a plan deficiency (in
cases where the deficiency is not subject to the statutory deemed
trust) in preference to its other creditors, that action will
likely be attacked as not only being a fraudulent preference but
possibly also oppressive conduct. The Monitor, the CCAA Court's
officer, would likely not sanction such payments. Insolvency law
requires that the debtor preserve the status quo standing of all
creditors at the date of filing so that no one creditor can obtain
a "leg up" on other creditors of the same class. As of
the CCAA filing date, any deficit in an ongoing pension plan would
be an unsecured claim which should share pro rata with all
other unsecured creditors as of the filing date. Accordingly, a
CCAA debtor essentially cannot engage in actions that prefer one
pre-filing unsecured creditor over another - yet, this decision
suggests that if the CCAA debtor does not attempt to engage in such
conduct it will be seen as being in breach of its fiduciary duties
as plan administrator. Furthermore, even if a debtor wished to have
someone independent appointed as the plan administrator just prior
to or shortly after a CCAA filing, it would be very difficult to do
so. As such, debtors (and their creditors) have now been placed in
an impossible position with no apparent way out.
The Court's holding that attempting to deal with the priority
issues by bankrupting a CCAA debtor once the assets have been sold
is essentially impermissible creates further uncertainty. Secured
lenders to Canadian debtors have long relied on plan deficits being
unsecured claims in a bankruptcy when determining the amount of
borrowing availability to provide a debtor. Prior court decisions
had approved of debtors converting CCAA proceedings into
bankruptcies to alter priorities. This reliance is now in question
if the bankruptcy is preceded by a CCAA filing as is often the
case.
It is expected that Canadian credit markets will be reacting with
caution to the Indalex decision until it is clarified by
future case law or legislative amendments, and debtors inside or
contemplating CCAA proceedings will need to find ways of ensuring
that the "breach of fiduciary duty as plan administrator
issue" is not visited upon them.
Footnotes
1.Because Indalex acted as administrator of its pension
plans it had fiduciary duties to the beneficiaries of the
plans.
2.By arguing that such a result really only applies where the
beneficiary of the security that is to be enforced is a related
party that effectively controlled the decisions of the CCAA debtor
and, thereby, was the party in effect breaching the fiduciary
duties (as it was effectively Indalex's U.S. parent invoking
the DIP charge in this case having paid out on a guarantee to the
DIP lender). There may be a trend to creditor imposed filings in
order to avoid this issue.
3.It is noted that Indalex's filing always contemplated a
liquidation of the business and there was never any prospect that
the company would be restructured and that the pension plans would
continue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
