On December 1 2011 the Supreme Court of Canada granted leave to appeal the Ontario Court of Appeal's decision in Indalex Limited (Re) (2011 ONCA 265).(1)
Indalex Limited and its US parent sought protection from their creditors under the Companies' Creditors Arrangements Act and under Chapter 11 of the US Bankruptcy Code. The court authorised a loan under a debtor-in-possession credit agreement and gave the lenders a super-priority charge against Indalex's assets.
Upon the sale of Indalex's assets, two groups of pension plan members argued that a portion of the proceeds should be reserved for payment of pension fund deficiencies.
The appeal court decided in favour of the pension plan members, notwithstanding the super-priority granted under the debtor-in-possession loan. The court held that the deemed trust provisions in the Ontario Pension Benefits Act, in respect of the salaried pension plan that had been wound up prior to the Companies' Creditors Arrangements Act proceedings, was effective as against the guarantor of the debtor-in-possession loan. The court also applied a constructive trust in respect of the deficiency in the executive pension plan that had not been wound up.
The appeal court's decision, which came as a surprise to most pension and insolvency practitioners, has potentially far-reaching implications for lending transactions and has already found its way into the negotiation of financing agreements. It has also created uncertainty with respect to the extent of an employer's fiduciary obligations in its role as pension plan administrator and how conflicts in corporate sponsor and administrator roles may be resolved.
It is good news that the Supreme Court of Canada has granted leave to appeal. Hopefully, the country's highest court will bring much-needed clarity to these areas of law.
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Endnotes
(1) For a detailed summary of the appeal court's decision, please see "Pensions and corporate insolvency: Ontario court releases surprising decision".
