Vol 10 (2013) - Issue 2

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When Two Worlds Collide: The Supreme Court of Canada’s Decision in Re: Indalex

When Two Worlds Collide: The Supreme Court of Canada’s Decision in Re: Indalex D.J. Miller, Partner, Thornton Grout Finnigan LLP, Toronto, Canada On 1 February 2013, the Supreme Court of Canada ('SCC') released its long-awaited decision in Re Indalex Limited. The appeal sought to overturn the Ontario Court of Appeal’s ruling that granted priority to beneficiaries of two pension plans over the rights of a party granted a super-priority charge by court order for loans that facilitated a restructuring under the Companies’ Creditors Arrangement Act ('CCAA'). The Ontario Court of Appeal did so through the use of a statutory deemed trust and the imposition of a constructive trust for breach of a fiduciary duty by the insolvent company, as administrator of the pension plans.
The decision highlights a thorny problem that arises when provincial and federal laws intersect upon insolvency. In Canada, insolvency matters are within the exclusive jurisdiction of the federal parliament and are reflected in the CCAA and the Bankruptcy and Insolvency Act (Canada) (the 'BIA'). Property and civil rights, which encompass a myriad of legal interests, are within the exclusive jurisdiction of each province. This includes legislation governing (i) the creation, perfection and priority of security interests; and (ii) pension matters, for all employees and employers other than those relating solely to federally-regulated industries such as banking and aviation. Upon insolvency, conflicts can arise if application of the provincial legislation would produce a different result than that prescribed by the federal insolvency statutes.
Within that context, the SCC was asked to rule on the respective rights of stakeholders in an insolvency proceeding under the CCAA. Key aspects of the SCC decision are:
(a) the deemed trust under section 57(4) of the Pension Benefits Act (Ontario) ('PBA') extends to the entire deficit in a wound-up pension plan, not just the unpaid contributions or special payments as at the date of wind-up (the 'Statutory Deemed Trust');
(b) based on section 30(7) of the Personal Property Security Act (Ontario) ('PPSA'). a Statutory Deemed Trust under the PBA has priority over (a) the interests of all secured creditors with respect to the inventory and accounts receivable of the company; and (b) all unsecured creditors;
(c) the Statutory Deemed Trust will be subordinate to the interests of a lender who is granted a super-priority charge by court order for debtor-in-possession ('DIP') financing pursuant to the CCAA, due to federal paramountcy over provincial statutes;
(d) Indalex breached its fiduciary duty to the plan beneficiaries by failing to take steps to address a conflict of interest between its corporate duties and its duty to the plan beneficiaries once such conflict arose during the insolvency proceedings; and
(e) the imposition of a constructive trust is inappropriate as it would give the plan members a benefit that they would not otherwise enjoy, is disproportionate to the breach and would have the effect of re-ordering priorities among creditors.