Lawyers who advise companies on insolvency proceedings, lenders for emergency financing for companies seeking court protection while they are restructuring and pension matters are closely watching the outcome of Supreme Court of Canada’s hearing today of an appeal in what has become known as the Indalex case.This is a huge case with potentially far-reaching legal implications for employee pension plans, creditors and Canadian credit markets.
The Ontario Court of Appeal’s landmark decision in Re Indalex Limited in April last year created lots of waves in the Canadian business law community because it ruled that underfunded employee pension plans should be given priority repayment over an emergency operational loan, notably a debtor-in-possession, or DIP, loan, in the distribution of proceeds from the sale of assets of Indalex Ltd., a company seeking court protection under the Canadian Companies’ Creditors Arrangement Act (CCAA).
While the ruling was encouraging for pensioners who often see their retirement plans slashed under corporate restructurings, the Ontario appeal court ruling raised questions about the certainty for lenders who provide DIP loans to Canadian companies in trouble who file for protection under the CCAA and the availability and cost of such borrowings in Canada in the future. It also sparked some warnings about the obligations of companies that administer defined pension plans, given that Ontario Justice Eilene Gillese also ruled that Indalex had breached its fiduciary duty by not giving sufficient notice about its CCCA filing and DIP loan to pension plan beneficiaries, nor considering sufficient ways to address the pension plan underfunding.
“Since its release, the Indalex decision has led to extensive discussion and debate among professionals who practice in the insolvency, pension and financial services area,” noted Blake, Cassels & Graydon LLP in a bulletin on the decision of the Supreme Court to grant leave to hear an appeal by creditor Sun Indalex Finance LLC, and the court-appointed monitor in the CCAA process, FTI Consulting Canada ULC, the court-appointed monitor in the Indalex CCAA process and some of the issues.
McCarthy Tétrault LLP wrote that the Supreme Court’s decision to hear the appeal reflects the broader national implications of the case for lenders and employer-borrowers even though the case was specific to Indalex’s situation and Ontario laws governing pension benefits were at play.
More recently, groups of Quebec employees and retirees of newsprint giant White Birch Paper Co. sought to have the legal findings of Indalex applied for court recognition that amortization payments to address a deficit in their employee pension plans should be given a higher priority than a DIP loan repayment.
But in a ruling last April 20 by Quebec Superior Court Justice Robert Mongeon concluded that the main legal principles of the Indalex case cannot be applied in Quebec because the differences in provincial legislation governing pension plans and trusts are too great.
Read the take on that decision Osler, Hoskin & Harcourt LLP restructuring and insolvency lawyers Martin Desrosiers, Sandra Abitan and Julien Morrisette here, the McMillan LLP bulletin by corporate restructuring lawyers Nicholas Scheib and Alexandre Forest here and Stikeman Elliott LLP’s comment by litigator Matthew Liben here.
They and others will be looking for guidance and clarity from the Supreme Court to determine how jurisprudence in the area of the federal Companies’ Creditors Arrangement Act, which is the same across Canada, intersects with provincial pension law.
“There is no doubt the Quebec legal community is following the (Supreme Court of Canada) case closely in order to ascertain whether there are any consequences or implications for Quebec insolvency and pension matters,” said Gerry Apostolatos, a litigator with Langlois Kronström Desjardins LLP, which represented three pension committees of non-unionized employees in the White Birch CCAA file.
While those non-unionized employees are not appealing the Mongeon decision, a group representing retired employees of White Birch Stadacona Inc.. In their motion for leave to appeal to be presented before the Quebec Court of Appeal on June 27, lawyers state that the Supreme Court of Canada decision could have a direct impact on their case. Jocelyn Morency of Boily Morency Roy, and Serge Létourneau and Audrey Létourneau. of Létourneau Gagné, in Quebec City are acting on the file for the employees.
I've been bombarded by all sides on this issue. Credit analysts and portfolio managers warning me that if the Supreme Court upholds the Indalex decision, it could get a lot more costly for Canadian companies to obtain credit in the future as lenders will have to factor in that they won't get priority over everyone in case a corporate restructuring takes place.
On the other hand, unions rightfully claim that pensions are sacred and underfunded employee pension plans should be given priority repayment over any creditor, including those that provide an emergency operational loan, notably a debtor-in-possession, or DIP, loan.
My take? All these complicated legal rulings are a boon to lawyers but the reality is they are just another example of why we need to radically rethink pension policy, separating pensions from operating businesses, and bolstering our large public pension funds.
GM and Ford's pensions Jubilee highlights the urgent need to rethink public policy on pensions and following last week's Walrus HOOPP luncheon debate on pensions, I'm more convinced than ever before that Canadian policymakers need to stop dithering on pensions and start acting in the best interests of all Canadians.
And what is in the best interests of all Canadians. Easy. Businesses should just focus on their business, not pensions. Most of them are already offloading pension risk onto employees but that will only bring about widespread pension poverty.
Instead, we need to make the case for bolstering defined-benefit plans. Banks and insurance companies will scream, but the truth is defined-benefit plans are vastly superior to any high fee products they're peddling. And if banks and insurance companies had any vision (remarkably shortsighted), they'd realize boosting public DB plans is in their best interests too.
As for the Supreme Court of Canada, we shall see if they bungle this decision up again. I used to be very impressed with our top court, much less so after realizing they are hardly infallible and prone to making serious mistakes on important public policy issues.
Below, listen to Capital Account's Lauren Lyster interviewing Nomi Prins on Banker's Gone Bad - MF'ers, BoA, and Spanish Bond Bashing. Ms. Prins discusses the issue of how MF Global's creditors are "first in line ahead of customers", allowing corporate lawyers to make a killing in this bankruptcy case. The findings from the trustee for MF Global's customers are very troubling. Watch below.