Insolvency & Financial Restructuring
Insolvency practice embraces acting for a variety of stakeholders in bankruptcy, receivership or similar court-supervised insolvency proceedings or private enforcement remedies. Financial restructuring involves advising stakeholders in planning, negotiating and implementing corporate financial restructurings whether in circumstances of insolvency or otherwise, and in the context of informal workouts or proceedings under insolvency or corporate legislation.
As it turns out, the sigh of relief from prospective debtor-in-possession (DIP) lenders over the Supreme Court of Canada's (SCC) decision in Sun Indalex Finance, LLC v. United Steelworkers is not necessarily a breath of fresh air for the entire lending community.
The SCC ruled that DIP lenders have priority over the deemed trust in favour of defined benefit (DB) pensioners mandated by subsection 57(4) of the Ontario Pensions Benefits Act (PBA). But the court also ruled that when the deemed trust does apply, it extends to any deficiency that exists on the wind-up of a DB plan. This could have significant ramifications for lenders relying on security interests in accounts receivable and inventory because the Ontario Personal Property Security Act (PPSA) expressly makes such interests subordinate to deemed trusts under the PBA.
Although some observers have expressed the view that lenders will adjust to this reality and that it will have only a small impact in terms of loan pricing, some lenders took a very conservative approach in assessing their risk while awaiting the Indalex decision. With the ruling, it is now clear that they will be facing a priority issue without any guarantee that they can reverse that priority as part of a restructuring. That makes it uncertain whether the issue will go away.
Additionally, because the deemed trust covers not only payments due to the pension fund but also to the shortfall between the value of benefits payable and the assets available to satisfy those benefits, lenders will find it difficult to assess their risk both qualitatively and quantitatively. Even where the risk of loss may be small, the extent of a potential loss can be huge because deficits can be enormous and extremely difficult to quantify.
Another difficulty arises from the SCC's ruling that Indalex, in its dual role as an employer and plan administrator, was in a conflict of interest from the moment it took any action, such as seeking DIP financing in the restructuring proceedings, that could adversely affect its ability to fund the pension plan. From that point on, the court reasoned, Indalex had a duty as plan administrator to ensure that the interests of pensioners were protected.
In this case, Indalex breached its fiduciary duty by failing to take steps to ensure that the pension plans had the opportunity to be as fully represented in those proceedings as if there had been an independent plan administrator, particularly when it sought the DIP financing approval, the sale approval and a motion to voluntarily enter into bankruptcy.
But unfortunately for the pensioners, no remedy for the breach of fiduciary duty was available to them in this case.
“Regardless of this breach, a remedial constructive trust is only appropriate if the wrongdoer's acts give rise to an identifiable asset which it would be unjust for the wrongdoer (or sometimes a third party) to retain,” the court wrote. “There is no evidence to support the contention that Indalex's failure to meaningfully address conflicts of interest that arose during the CCAA proceedings resulted in any such asset.”
The difficulty for debtors who wear dual hats as administrators of pension plans is that the court did not provide a clear answer as to what circumstances, apart from the facts of the instant case, triggered the conflict or what was required to protect pensioners' interests when the conflict arose. The potential solutions suggested by the Supreme Court varied from providing notice of the DIP financing motion to appointing a replacement administrator or an independent counsel for the pensioners.
Still, the issue is likely manageable. Although it might create an operational business problem, debtors will probably look at the conflict potential as just another step in planning a restructuring. Ironically, however, the burden may fall on the debtor's senior lender, who may have to provide funds to keep operations going for the few days it will likely take to sort out the conflict. The situation would then become analogous to first day motion filing in US bankruptcies.