On December 1, 2011, the Supreme Court of Canada granted leave to appeal of a decision of the Ontario Court of Appeal regarding the right of pension-plan members to claim priority over the assets of their bankrupt company to cover a shortfall in their pension plan: Sun Indalex Finance, LLC v. United Steel Workers, [2011] SCCA No. 274 (“Indalex”).
The major issue that the Ontario Court of Appeal had to decide was who had a priority claim to money held in a reserve fund: was it the members of the two registered pension plans or the parent company that guaranteed the loans?
Indalex was a Canadian company that became insolvent and its U.S. parent company had filed for bankruptcy. Indalex obtained protection from its creditors under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Indalex also received a court order enabling it to borrow funds under a debtor-in-possession (DIP) credit agreement, and the U.S. parent company guaranteed this loan. The court further approved the sale of Indalex, but the proceeds did not cover the loans made to it by the DIP creditors and the parent company covered the difference. A portion of the sale proceeds was put into a reserve fund that was controlled by the CCAA monitor.
Justice Gillese decided in this case that Indalex, as the administrator of the pension plans, breached its fiduciary duty to the plan members. Specifically, the court decided that both a deemed trust and constructive trust arose, which gave priority to the plan members to the funds in the reserve fund.
This case raises a similar issue to that in the recent Nortel bankruptcy, which left hundreds of employees on long-term disability without money in the reserve fund to cover their benefits.
The Indalex case will likely be the first case of its kind to be decided by our Supreme Court and may have far-reaching ramifications for both companies and pension plan members.