Secured creditors facing prioritization concerns in insolvency proceedings can take comfort from the Ontario Court of Appeal’s recent decision in Grant Forest Products v. Toronto-Dominion. The court confirmed that a judge presiding over a Companies’ Creditors Arrangement Act proceeding can permit a creditor to bankrupt the debtor company even when the transition to bankruptcy proceedings results in the loss of the deemed trust available to pensioners under the CCAA.
“Secured creditors who wish to alter priorities in their favour can rest assured that they will be able to convert CCAA proceedings to bankruptcy proceedings,” says David Byers of Stikeman Elliott LLP, who represented Ernst & Young, the monitor in the CCAA proceedings.
Arguably, the court also limited the extent of the priority available to pension plan wind-up deficits in CCAA proceedings. The seminal case on the issue is the Supreme Court of Canada’s ruling in Indalex, which held that the statutory deemed trust for the wind-up of a pension plan under CCAA applies to the entire wind-up deficiency. In Grant Forest, however, the wind-up occurred after the initial order in the CCCA proceeding. So it remained unclear as to whether the deemed trust applied.
The case arose in 2009 when Justice Colin Campbell of the Superior Court of Justice granted CCAA protection to Grant Forest Products Inc., which continued to make contribution under the pension plans it was administering for its employees.
Following an asset sale, the court granted the Superintendent of Financial Service’s request for a wind-up order, a development that triggered GFPI’s obligation to make significant wind-up payments as required by the Pension Benefits Act. Campbell ordered that these payments be withheld from the distribution of proceeds from the asset sale, leaving insufficient funds to satisfy all the secured creditors.
When GFPI applied for an order that it was not required to make the wind-up payments, Campbell ruled that the deemed trust provisions of Ontario’s Pension Benefits Act do not prevail over the pre-existing security of other creditors when a pension plan is wound up during the course of CCAA proceedings.
The Court of Appeal did not explicitly uphold this ruling. It did, however, distinguish the facts in Grant Forest from Indalex, pointing out that the wind-up in Indalex had occurred before the CCAA proceedings started.
According to a recent Torys LLP bulletin, “Although the OCA did not expressly affirm Justice Campbell’s conclusion on this point (i.e. that the PBA deemed trust priority only applied to plans that are wound up before the commencement of insolvency proceedings), they did not question his findings in any way.”
On this view, Grant Forest serves to contain the impact of Indalex on secured creditors by limiting the circumstances in which deemed trusts apply to alter priorities in CCAA proceedings. “This should give comfort to secured lenders, especially where secured credit facilities contain covenants restricting the commencement of such wind-up proceedings,” the Torys lawyers write.
Still, the priority issue remains controversial and will no doubt be litigated again. “The Court of Appeal’s decision in Grant Forest in no way limits the application of Indalex,” says Andrew Hatnay of Koskie Minsky LLP in Toronto, who appeared in the case as the court-appointed representative counsel for employees of U.S. Steel Canada Inc. who were involved in CCAA proceedings and might be affected by the decision. “The court decided the case on the narrow issue of whether the secured creditor could proceed with a bankruptcy petition.”
Strictly speaking, Hatnay is correct: the Court of Appeal did decide the case on the transition issue, ruling that whether to allow the transition from CCAA to BIA was a discretionary decision on the part of the CCAA judge. Because the deemed trust would not apply under the BIA, it became unnecessary to decide the priority issue.
But regardless of the interpretation put on the Court of Appeal’s approach to the priority issue, Grant Forest does confirm that insolvency proceedings – absent bad faith and subject to the court’s approval – could move from one statute to another.
“This means that, where advantageous, parties can opt for the BIA’s structured distribution scheme rather than proceeding under the CCAA, as long as such election is done in good faith,” Torys writes. “This is a very important tool available to lenders, where the circumstances are appropriate, to combat uncertainty in priority disputes.”