PENSIONS & EMPLOYEE BENEFITS
In its April 2011 decision in Re Indalex Limited, the Ontario Court of Appeal ruled that pension plan deficiency claims can have priority over the claims of debtor-in-possession (DIP) lenders in the context of Companies' Creditors Arrangement Act (CCAA) proceedings.
Historically, companies have restructured under the CCAA and then distributed any proceeds in accordance with priorities set out in the Bankruptcy and Insolvency Act (BIA).
Critics of the decision say the Court of Appeal misread jurisprudence from the Supreme Court and was wrong in looking at priorities under the CCAA as separate and apart from those under the BIA. They argue that the ruling creates a potential worst case scenario for secured lenders in Ontario and could affect the availability of credit for all employers who provide defined benefit pension plans for their employees.
Indalex's defenders say that there's nothing new in the case. They maintain that the Court of Appeal applied the existing law to the facts of the case, and that this was not the first time the courts have held that provincial laws (in this case, the Pension Benefits Act) applied in insolvency proceedings unless they conflict with federal law. Any surprise, they say, is attributable to the fact that sidestepping provincial laws had become an established practice in the insolvency bar.
Meanwhile, directors and officers of insolvent companies, who are generally induced to stay on with insolvent companies by the fact that their remuneration is guaranteed by a first charge on the assets, also have a lot to think about. Critics say they – and any other stakeholder who requires remunerative incentive to participate in an insolvency process – will have little cause to do so.
The decision also affects the litigation process. Normally, companies are in court within hours of giving notice of their intention. Dispatch is required because unless an interim stay order and court protection follows quickly, the company may be unable to continue doing business.
The Indalex court suggested, however, that notice be given to pension beneficiaries, a development that insolvency lawyers argue will undermine the intention of protection orders.
Most likely lawyers for secured creditors will try to limit Indalex's application to the unique facts of the case that involved a parent company that was running the subsidiary directly and was also the secured creditor. The decision, some are saying, shouldn't necessarily be taken as applying to arm's length third party lenders.
DIP loans aside, Indalex may impact even more significantly on everyday loans to solvent debtors. DIP lenders, after all, can get around the decision by giving proper notice to pensioners that their interests would be affected by the security. But Indalex makes it virtually impossible for secured creditors to make an assessment about what could rank ahead of their security because it's very difficult, if not impossible, to figure out exactly what a pension shortfall might be until the administrator winds up the plan.
Finally, Indalex is instructive about the conflicts that might arise when a company is the employer providing the pension plan but also acting as the administrator of the pension plan with fiduciary duties to pension plan members. Indeed, the courts suggest that the employer as administrator may be required to advocate the pension plan interests against the interests of creditors and other stakeholders.
As a result, some writers have gone so far as to suggest that employers should consider resigning as administrators before insolvency to avoid these conflicts.