Landmark Indalex case goes to Supreme Court

Insolvency and pensions experts are applauding the decision of a three-judge panel of the Supreme Court of Canada that granted leave to appeal from the decision of the Court of Appeal for Ontario in a case that put pensions before creditors.
The Supreme Court on Dec. 1 said it would hear Re Indalex Ltd. in late 2012 or early 2013. Many observers hope it will provide greater clarity on the application of the deemed trust provisions of the Pension Benefits Act and give guidance to companies in similar situations.

“We hope it will effectively overturn this case in many respects and give certainty that secured lenders and debtor-in-possession lender claims will rank in priority to pension deficiency claims,” says Jay Swartz, a partner with Davies Ward Phillips & Vineberg LLP.

Swartz is also president of the Insolvency Institute of Canada, an independent organization of senior insolvency professionals. He wrote and sent an affidavit to the Supreme Court on the Court of Appeal decision.

“We felt this was such an important case that for the first time in our organization’s history, we thought we should try to intervene in the Supreme Court hearing if leave was granted,” he says.

As part of that process, Swartz filed an affidavit explaining why the Indalex case was of national importance, why it had significant ramifications to the business and pension community, and why the court should hear the case.

“While they said the affidavit wasn’t admissible, they did have to read it to come to that conclusion and did conclude they should hear the case, so we’re happy they are hearing the case,” he notes.

The United Steelworkers union and a group of former executives of aluminum processor Indalex Ltd. had appealed the case to the Ontario appeal court as they were left with underfunded defined-benefit pension plans when the company went into Companies’ Creditors Arrangement Act proceedings. The sale of the insolvent company did not provide enough funding to repay loans Indalex had taken under a debtor-in-possession agreement with its U.S. parent company.

In the Ontario Court of Appeal decision on April 7, it stated that underfunded pension plans must be addressed first before secured creditors are paid under the CCAA proceedings.

Effectively, the debtor-in-possession lender that provided financing would rank behind the payment obligation to the pension, a problematic scenario for those providing such financing in Canada and those lending generally as secured creditors assume they come first. The concern, therefore, has been that the appeal court decision could seriously affect the availability of credit to businesses in trouble.

“Anyone making that kind of loan is fairly comfortable knowing they rank first and generally if there are enough assets to cover the loan, it facilitates the restructuring process,” says Swartz. “With this decision, it casts a cloud on whether or not those DIP loans will rank first. We think that giving comfort to a DIP lender is very difficult in light of this decision and they may pull out financing.”

Swartz adds that U.S. rules offer more certainty than the current state of Canadian law after Indalex. “What we’re seeing is counsel for potential DIP lenders saying to debtors, ‘You should file in the United States, not in Canada,’ shifting some cases out of Canada into the U.S.”

The Indalex case addresses two types of claims: pension amounts the company should have contributed and underfunding that’s not yet due. There’s also the issue of what a board should do when it has obligations as pension administrators as well as a duty to keep the company as a whole afloat.

“The Indalex case essentially says, ‘Tough luck, you shouldn’t have put yourself in that position,’” says Swartz. “But the reality is most companies act as administrators for their own pension plans and when they get in trouble, they can’t eliminate that conflict of interest because there is no one who will take over that administration and the pension regime doesn’t really allow for it either.”

The hope, then, is that the top court will provide clarity. “I think it really is important the Supreme Court look at it and the issues get aired again and hopefully clarified. Even if the decision stands, hopefully there would be some further guidance,” says Elizabeth Brown, a partner with Hicks Morley Hamilton Stewart Storie LLP.

“There’s that old saying [that] bad facts make bad law, and I think with Indalex, it was the particular relationships between the corporation and the entity lending money was not an arms-length entity, so I think the court thought on these particular facts that the pension plan beneficiaries had really been shafted,” says Brown.

Brown points out that in Indalex, the deficit was $6 million, a small amount compared to other more headline-grabbing cases such as Nortel, Stelco, or Air Canada. “How do you take the reasoning for this case and apply it in a case where the deficit would have been huge? No one would ever lend money to a company if they thought that the effect of lending that money was that they would never get their security back.”

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