The Ontario Court of Appeal recently addressed the issue of pension deficits in the context of a restructuring under the Companies' Creditors Arrangement Act (the "CCAA"). However, unlike past decisions, in Re Indalex the Court held that such deficits may have priority against monies advanced under interim debtor-in-possession ("DIP") financing agreements authorized by a CCAA judge. This apparent departure from the conventional understanding of the priority of pension deficit claims and related issues should raise concerns for lenders, employers, and plan administrators.

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:

Pursuant to section 38 of theBankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) a creditor of the bankrupt estate can obtain the trustee’s right to pursue estate litigation where the trustee refuses or fails to pursue such litigation. In a recent Ontario case, Indcondo Building Corp. v. Sloan [2010], CarswellOnt 9785, the Court of Appeal was asked to determine whether the limitation period for the assigned litigation commences with the trustee’s knowledge of the facts giving rise to the claim or the assignee’s knowledge of those facts.

The case of Canrock Ventures LLC v. Ambercore Software Inc. et al is a cautionary tale for a Receiver and its counsel alike. In this case, the Ontario Superior Court of Justice rejected a Receiver’s application for the approval of an asset purchase agreement because of a failure to take the requisite steps when conducting a sale process and, in the Court’s view, failing to remain a neutral officer of the Court.

2011 ONCA 160 (Released March 2, 2011)

Trustee – Constructive Trust – Fraud – Bankruptcy

In this case, the Court of Appeal for Ontario explained the conditions under which a constructive trust remedy can be granted in favour of defrauded creditors after the fraudster enters into bankruptcy proceedings.