In the course of the company's restructuring proceedings, Nortel Network Corp.'s board decided that it would continue to make contributions to the company's pension plans.
"Typically, a company facing insolvency doesn't do that," says David Vincent of Ogilvy Renault LLP's Toronto office. "But throughout, the directors were operating with a case called Slater Steel in the back of their minds."
As well they might. The 2008 decision of the Ontario Court of Appeal had raised considerably the alert level for directors wary of personal liability with respect to the decisions they took regarding pension plans, The Montreal Gazette reported.
"It's probably an understatement to say that Slater Steel has had a chilling effect in terms of boards' decisions about how the company should handle pension plans -- particularly if there's a hint of financial trouble in the air," Mr. Vincent says.
Generally speaking, courts grant directors and officers a discharge from liability on the conclusion of restructuring proceedings under the Companies' Creditors Arrangement Act. In Slater's case, the directors obtained the usual discharge despite the fact the proceedings were unsuccessful and Slater went into receivership under the Bankruptcy and Insolvency Act.
Morneau Sobeco Ltd. Partnership, which succeeded Slater as administrator of the company's plan, alleged the directors and officers who had served on Slater's audit committee had breached their fiduciary duties by acquiescing in actuarial valuation reports said to contravene the Pension Benefits Act. Morneau alleged the breaches resulted in a $20-million deficit for which the audit committee members were responsible.
The defendants relied on the discharges they had obtained under CCAA as a bar to Morneau's proceedings. But as the Court of Appeal saw it, the discharges protected only the directors and officers "from claims arising from their service as directors and officers." Here, the suit against the audit committee members did not relate to that function, but to the defendants' functions as administrators of the Slater plan.
"The court basically said that directors and officers were not immune from all civil liability simply because they obtained a CCAA discharge," Mr. Vincent says.
In other words, the decision opened the door to the possibility that any director involved in a pension-related decision could become liable as acting in an administrator's capacity.
"The question to which we don't have an answer is whether every director can become an administrator, or whether there was something particular the Slater audit committee did that made them administrators," says Kathryn Bush of Blake, Cassels & Graydon LLP's Toronto office.
Ms. Bush believes courts will construe Slater Steel narrowly.
"There's no question that Slater sends a message that directors should be more careful about what they do about pensions, particularly in cases where they make aggressive funding decisions when a company is in financial difficulty," Ms. Bush says. "But that doesn't mean that directors dealing with pension issues will always be cast as administrators, and Slater may just be a case of bad facts making bad law."
Until the courts qualify Slater Steel, however, directors and officers will be looking for ways to protect themselves against pension liability. Read more.
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