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).

A ruling on April 7, 2011 by the Ontario Court of Appeal has resulted in deemed trust and unsecured breach of fiduciary duty claims in favour of pension beneficiaries being given priority ahead of court-ordered “super-priority” charges.

On April 7, 2011, the Ontario Court of Appeal released its long-awaited decision in Re Indalex Limited 1. In a unanimous decision, the Court of Appeal overturned the decision of the Ontario Superior Court of Justice dated February 18, 2010, and allowed the appeals of the United Steelworkers and a certain group of retired executives. The Court of Appeal ordered FTI Consulting Canada ULC (the Monitor) to pay from the reserve fund (the Reserve Fund) held by the Monitor from the sale of Indalex Limited, Indalex Holdings (B.C.) Ltd., 6326765 Canada Inc. and Novar Inc.

On April 7, 2011, in the context of a liquidating CCAA that achieved a going concern sale of the debtor’s business, the Ontario Court of Appeal held that:

In Canada, as in the US, corporate debtors are permitted with court approval to obtain DIP financing on a super-priority basis. The Order typically provides protections as hard as a nutshell, including that pension claims cannot crack the shell of protection and are subordinated to the new DIP loan. A recent Canadian decision, however, held that certain pension claims could crack the nut wide open and should be paid ahead of a DIP loan. Re Indalex Limited, 2011 ONCA 265 (Apr. 7, 2011).

Section 38 provides a mechanism by which a creditor can take the place of the trustee in any proceeding where the trustee refuses or fails to act. Essentially, the creditor stands in the place of the trustee and, if successful in the proceeding, is entitled to keep all proceeds, except those that exceed the total of the creditor’s claim and the creditor’s costs of the proceeding. Any surplus proceeds received by the creditor are the property of the bankrupt’s estate.

TheBankruptcy and Insolvency Act, RSC 1985, c. B‐3 (the “BIA”) was recently amended to repeal the settlement and reviewable transaction sections of the Act, and replaced these sections with provisions regarding transfers under value and preferences. The aim of these new provisions is to prevent bankrupts from unfairly preferring certain creditors over others and to prevent bankrupts from transferring assets for significantly less than they are worth.

The waiver of Solicitor/Client privilege by a bankrupt company is a difficult matter and one distinct from the waiver of such privilege by an individual bankrupt. As there is nothing in the BIA that either gives or denies a trustee the right to waive solicitor/client privilege on behalf of a company,Hahaha yes with a lot of candles! the courts have had to turn to the common law for guidance on the issue.