February 4, 2013

In a land mark decision the Supreme Court of Canada has confirmed the supremacy of DIP super-priorities

The Supreme Court of Canada (“SCC”) released last Friday, February 1st, its much awaited decision in Indalex[1], in which it overturned the Ontario Court of Appeal(“OCA”), and ruled that DIP charges have priority over deemed trust for pension plans deficiencies.

The SCC ruled, with a 5-2 majority, in favor of the appellant Indalex Limited (“Indalex”) as well as CAIRP, who had intervened in the case. Though two members of the SCC dissented as to the ultimate conclusion, the Court did unanimously hold that the Companies’ Creditors Arrangement Act (“CCAA”) debtor-in-possession interim financing charges (“DIP”) have precedence over a deemed trust created by virtue of the Pension Benefits Act (Ontario) (“PBA”).

Although there was disagreement within the Court as to the exact scope of the PBA deemed trusts, the Court unanimously found that such deemed trust did not have priority over DIP charges. Based on the doctrine of paramountcy, the Court concluded that since DIP charges are granted under the powers conferred by a federal statute, they trump provincial deemed trusts.

As regards the executive plan of the company, the Court held that as it had not been wound up at the time of the insolvency, the deemed trust could not include any wind-up deficiency.

In addition, the SCC also recognized that Indalex, as an administrator of the pension plans, owed fiduciary duties to the plans’ beneficiaries, which in this case were possibly breached by Indalex. However, the SCC rejected the idea that the breach of such fiduciary duties might be constitutive of a constructive trust in equity.

The reasoning of the Court in this regard appeared to have been based, amongst others, on the arguments put forward by CAIRP in its intervention. CAIRP pleaded that Parliament had considered giving a particular protection to pension plans in the context of insolvency proceedings, but ultimately had decided not to do so. The Court held that it was not possible to rely on equity to grant remedies that Parliament considered but chose not to adopt in the applicable legislation.

Accordingly, the SCC held that the OCA erred in finding that the payment of the reserved amounts to the pension plan was an appropriate remedy and it ordered that the sums reserved be remitted in repayment of the DIP loan.

Background

Indalex had sought protection from its creditors under the CCAA in April of 2009. At the time of the filing, Indalex was the sponsor and administrator of two pension plans, one for the salaried employees, which had by then been wound up, and another for the executives, which was then not wound up. Both plans were underfunded.

Early into its restructuring, Indalex had sought and obtained a court order authorizing a DIP loan, which was secured by a super-priority charge over Indalex’s property. Further to the sale of Indalex’s assets, a part of the proceeds were retained, pending a decision on the pension plans beneficiaries’ claim which ultimately led to the SCC decision. The beneficiaries of the plans claimed that the scope of the deemed trust under the PBA included amounts required to pay the wind-up deficiencies under the plans,
that the alleged PBA deemed trusts ranked in priority to the DIP charge, and that sale proceeds should therefore be applied against the deficiencies under the plans.

The CCAA court initially rejected the arguments of the pension plan beneficiaries and ordered that the amounts be distributed on account of the DIP, but the OCA reversed the conclusion of the CCAA court.
Contrary to the CCAA court, the OCA held that the PBA deemed trust, which it found to be applicable to the salaried plan deficiency, ranked ahead of the DIP charge. The OCA also determined that there existed a constructive trust in favor of the executive plan funding deficit as a consequence of Indalex’s
breach of certain of its fiduciary duties owed to the plans beneficiaries, inasmuch as Indalex was also the administrator of the plans. The constructive trust was also held to rank ahead of the DIP charge.

Conclusion

CAIRP welcomes this decision which is clearly in the direction of CAIRP’s pleadings to the Court. The decision clarifies the status of DIP priorities and hopefully puts an end to the uncertainties cast by the earlier OCA’s decision. As was submitted forcefully by CAIRP before the Court in May 2012, maintaining the OCA’s decision would have created uncertainty on the status of DIP super-priority charges vis-à-vis deemed trusts created under provincial laws. This decision consolidates and properly realigns the Canadian regime.


[1] Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6

 

Canadian Association of Insolvency and Restructuring Professionals
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