Indalex: Appeal Allowed

The Supreme Court of Canada has overruled the controversial decision of the Ontario Court of Appeal that had granted pensioners priority recovery from the proceeds of the sale of insolvent Indalex Limited ahead of a Court-ordered priority charge for “DIP” (debtor in possession) financing designed to keep the insolvent company operating during its restructuring proceedings.  Lenders and many insolvency professionals saw the Court of Appeal’s unanimous decision to retroactively deny DIP lenders’ priority as destabilizing and an impediment to the restructuring model under the Companies’ Creditors Arrangement Act (the “CCAA”). Goodmans LLP represented the lender enforcing the DIP priority in its successful appeal before the Supreme Court.

In a complicated patchwork of important issues decided in three separate and overlapping sets of reasons released on February 1, 2013, the panel of seven judges of the Supreme Court made a number of pronouncements:

1.  The Court ruled that:

a. priorities granted by a court administering CCAA proceedings trump provincially enacted priorities without requiring the court to explicitly “invoke” the paramountcy doctrine.  In this case, the CCAA court’s order giving DIP lenders a super-priority charge was all that was required to ensure that the DIP loan would be repaid ahead of any priority for pension plans or pension members under the Ontario Pension Benefits Act (“PBA”); and

b. although the employer, which was the administrator of the pension plans at issue, breached a fiduciary duty to members of the plans, the Court of Appeal’s granting of a constructive trust to give priority for pensioners as a remedy for the breach was inappropriate.

2.  Four judges, including two who dissented from the majority on the overall result, agreed with the Court of Appeal’s finding that the PBA grants a deemed trust for the wind-up deficiency of a defined benefit plan once the effective date of the wind up of the plan has been declared.

3.  The Court did not reach consensus on the extent of the fiduciary duty owed by an employer acting as pension administrator.  The Court indicated in this case that the employer/debtor should at least have done more to enable its pensioners to have a more effective voice at a key stage in its CCAA proceedings.

The ramifications of this decision will be analyzed and discussed in various fields and it will take some time until we see how lower courts interpret and implement some elements of the Court’s reasons.