During the past 14 months, courts in Ontario have rendered three decisions dealing with the application of limitation periods to claims for fraudulent conveyances or preferences. A “limitation period” is a period of time, specified in a statute, within which a plaintiff must commence a court proceeding to seek a remedy. Otherwise, the claim is said to be “statute-barred” and an action to enforce the claim will be dismissed.

The recent decisions have brought some clarity to the law in this area, but have left other questions unanswered.

Background

Insolvent companies with under-funded employee pension plans that want to borrow money to keep operating and ultimately return to profitability may find it tougher to find new financing as a result of a recent Ontario Court of Appeal decision.

The Court ruled on April 7 that Indalex Limited (and certain affiliated companies), the second largest aluminum extrusion company in North America, which administered two pension plans, one for employees and the other for executives, was obliged to pay its pension

Section 11.01 of the Companies’ Creditors Arrangement Act (the “CCAA”) states that no order under Section 11 or 11.02 of the CCAA has the effect of: (a) prohibiting a person from requiring immediate payment for goods, services, the use of leased or licensed property or other valuable consideration provided after the order is made; or (b) requiring the further advance of money or credit.

A nominee director of a corporation appointed by one of its creditors may encounter risk of liability where that creditor is engaged with the corporation in efforts to restructure its debt. Steps can be taken to minimize the risk of such liability.

Nominee Directors in Canada

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The Ontario Court of Appeal decision in Indalex Limited (Re) has created considerable uncertainty over the priority status afforded to pension plan wind-up deficits, particularly in insolvency proceedings involving the plan sponsor.

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

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.

On April 7, 2011, in Indalex Limited (Re), 2011 ONCA 265 (Re Indalex), the Ontario Court of Appeal (the Court) held that in certain circumstances a pension plan wind-up deficit should be paid in priority to claims of secured creditors, including amounts outstanding under a court-approved debtor-in-possession facility (the DIP Facility).