Companies restructuring under the Companies’ Creditors Arrangement Act (“CCAA”) depend on a supply of critical products and services in order to continue operations during the proceedings. An interruption in the supply of such goods and services would likely be fatal to any restructuring. Prior to 2009, the CCAA was silent about how the post-filing supply of such goods and services was to be obtained. The CCAA provided only that a supplier could not be forced to supply on credit.
Section 8 of the Interest Act (Canada) (the Act) was considered by the Ontario Superior Court of Justice in Grant Forest Products Inc. (Re) in the context of an inter-creditor dispute.
The Ontario Court of Appeal released its decision in Indalex Limited (Re), 2011 ONCA 265 on April 7, 2011. The decision comes as a surprise to many pension and insolvency professionals, lenders and pension plan sponsors. The court, essentially, directed that monies held in reserve by the monitor appointed under the federal Companies Creditors Arrangement Act should be used to pay off pension fund deficits in preference to secured creditors.
Background
Although originating from equity, declared but unpaid dividends have historically been treated as debt claims by courts in proceedings under the Companies’ Creditors Arrangement Act (CCAA).1 Following the coming into force of the CCAA amendments in September 2009, a fresh look at the characterization of claims as debt or equity is being undertaken.
2001 ONCA 265 (Released 7 April, 2011)
Companies’ Creditors Arrangement Act – Pensions – Priorities – Fiduciary Obligations – Funding Pension Plans
introduction
A recent decision of the Ontario Court of Appeal illustrates that secured creditors should address their priority position relative to all other creditors of their borrower in order to achieve a complete subordination of competing security. Failure to do so in this case resulted in circular priorities that the Court was left to resolve. In light of the Court of Appeal’s decision, secured creditors should ensure they are a party to all subordination agreements with the debtor in order to achieve their expected result.
The Facts and Agreements
This week, the Ontario Court of Appeal surprised many by deciding that in the context of the CCAA proceedings of Indalex, pension plan deficiency claims can have priority over security held by secured DIP lenders. The Court granted priority for the entire wind-up deficiency of two pension plans over the DIP lender’s security. If not reversed on appeal, the ruling creates a potential worst case scenario for secured lenders in Ontario and could affect availability of credit for all employers who provide defined benefit pension plans for their employees.
Certain provisions of Bill C-9, last year's Budget Bill, which amended the federal Pension Benefits Standards Act (PBSA), have been proclaimed in force.
Last month, I appeared before the federal government’s Standing Committee on Industry, Science and Technology to convey our concerns regarding Bill C-501,An Act to amend the Bankruptcy and Insolvency Act and other Acts (pension protection), which if passed will alter the status of