A controversial Ontario Court of Appeal decision that boosts the rights of pension plan members when their employer heads into a restructuring could have wide ramifications, lawyers and lenders say.
The court ruled this week that two underfunded pension plans at Indalex Ltd. should rank ahead of a secured lender in the distribution of the proceeds of the sale of the company, which sought protection from its creditors in 2009 under the Companies Creditors Protection Act.
That reverses the conventional pecking order in CCAA proceedings, in which so-called debtor-in-possession (DIP) lenders agreed to lend companies emergency funds on the understanding that they would be paid back before anyone else.
While a win for pension plan members, many in the financial and legal worlds say the ruling could have negative unintended consequences not just for the CCAA process, but for Canada’s credit markets in general.
Newton Glassman, head of Catalyst Capital Group Inc., Canada’s largest distressed-debt investor, cautioned that he has not studied the ruling in detail, but said it could make it harder and more expensive for struggling companies to get DIP financing.
These kinds of loans will become inherently more risky and less predictable, he argued, because lenders can no longer be certain that they will be first in line to get their money back.
Even for companies not in court protection from their creditors, he said, borrowing money could get harder as senior lenders take another look at whether pension obligations are being met.
“If the case is not read narrowly, it actually does have very wide implications, and very bad implications,” Mr. Glassman said. “Not just for DIP lending ... but I would argue for the credit markets generally.”
Every partner at Catalyst has been told to read the decision over the weekend, he said, as pension and insolvency experts scramble to predict its impact.
Elizabeth Brown, a pension lawyer with Toronto firm Hicks Morley Hamilton Steward Storie LLP, said the case will have a major impact.
“This case has everyone in the insolvency and pension world turned upside down,” Ms. Brown said, as unpaid pension deficits could now jump to the front of the line in an insolvency proceeding. “It’s quite a far-reaching decision.”
Lawyers who argued the case on behalf of the pension-plan members say the decision does not mean pension plans will always come first in future proceedings.
They say the ruling means that companies in a CCAA proceeding cannot automatically ignore an under-funded pension plan. Instead, companies will have to first make a case in court that they cannot meet their pension obligations.
Robin Schwill, a leading insolvency lawyer with Davies Ward Phillips & Vineberg LLP in Toronto, said the decision raises “thorny questions” and even creates uncertainty for CCAA cases currently under way.
The decision suggests that a formerly solid guarantee to a DIP lender could be thrown out by a court that later determines a company was guilty of a “breach of fiduciary duty” to pension plan members, he said.
“That’s going to cause any DIP lender a lot of pause,” Mr. Schwill said.
Kevin McElchern, a Toronto insolvency lawyer with McCarthy Tétrault LLP, said the decision could see creditors push ailing companies that are facing massive pension liabilities into full-blown bankruptcy. That’s because in a bankruptcy, as opposed to a restructuring under court protection from creditors, pension claims are pushed back again to the end of the line, he said.
“It’s a very big win for the pensioners, and of course every one is concerned about the pensioners, but I’m just not sure in the long run ... it won’t actually have a negative or rebound effect,” he said.
Some say predictions of widespread problems for CCAA financing are overblown.
“Practically speaking, it’s just a question of dollars and cents and of return rates. There’s still a lot of money to be made by being a DIP lender,” said David Ullmann, an insolvency lawyer with Minden Gross LLP in Toronto.
He said he did not believe the ruling means that pension plans would always rank ahead of other lenders, but that the pension issue would now have to at least be addressed in court during a company’s restructuring.
“It’s something else to add to the list, more than it is some sort of cataclysm that would prevent DIP lending,” Mr. Ullman said.
I agree, I don't see this as a 'cataclysm' for DIP lending or for Canadian credit markets. There is a lot of fear mongering going on right now but when the dust settles, this ruling won't have a material impact on DIP lending.
Meanwhile, CBC reports that Ex-Nortel workers look to make pensions an election issue:
A group of former Nortel workers are fighting to make bankruptcy reform an election issue, and are targeting Conservative incumbents in over 20 ridings, including three in the Ottawa area.
The group, calling itself the Silver Fox Alliance, says it is looking to unseat Conservative MPs in response to what they say was a lack of support when Nortel filed for bankruptcy protection.
Nortel pensioners had sought the government's assistance to give their pensions greater priority amongst creditors. In particular, the group was upset the Conservatives did not support an NDP private member's bill seeking to add that protection to pensions.
"For two years we have watched the ambivalence and apathy of the Conservative government and now we are just fed up," said John Tyson, a spokesman for the group who worked at Nortel for 35 years.
"We're going out to appeal to those millions of private-sector employees and pensioners and as this election unfolds, voter turnout is going to be the single-largest deciding factor", said Tyson.
In the Ottawa area, the group is focusing its energy on rallying support against sitting MPs John Baird, Gordon O'Connor and Pierre Polievre.
The Conservative party platform, released Friday, offers to extend wages and severance protections for workers whose employer's restructuring attempts take longer than six months and then fail.
The party also promised to work with the provinces and territories to establish a pooled retirement pension plan. But the platform is silent on changes to bankruptcy laws as it pertains to pensions or disability payments.
Tyson said the group hasn't aligned itself with one opposition party but is instead endorsing strategic voting and parties that support their cause.
"As the election campaign unfolds, we will in fact endorse opposition candidates that support the need for changes in the bankruptcy act," said Tyson.
Opposition parties offer different plans
The federal Liberals said in their party platform they would provide greater priority for long-term disability benefits owed to workers during bankruptcy proceedings.
Their platform outlines a plan to create a pension agency to ensure Canadian workers could transfer their pensions into the Canadian Pension Plan rather than placed in a low-return annuity.
The Green Party platform, released Thursday, calls for corporate pension plans to be audited to ensure they are fully funded and for party members to review federal and provincial laws with the view to enact legislation to protect pension benefits.
The NDP and Bloc Quebecois will not release their party platforms until this weekend, but both parties have argued for reform to bankruptcy laws.
Ottawa Centre MP Paul Dewar said Friday the party would push for legislation to allow pensioners to be put to the front of the line when it comes to recouping funds from companies that face bankruptcy or insolvency.
I referred to Nortel's disabled in my post on "Big CPP" being dragged into Canadian politics. They're still waiting for justice. Pension politics are heating up in Canada and it's about time politicians and voters wake up and start asking some tough questions on pensions. Importantly, bankruptcy laws are not there just to protect creditors. They should first and foremost protect disabled workers and pension plans. All this just confirms my thinking that companies should be offloading their defined benefit pension risk to new or existing government pension funds. Companies should worry about their business, not pensions.