Indalex Limited, a Canadian company with a U.S. parent that produced aluminum extrusions, obtained court-ordered protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA) in April 2009. This kind of protection is designed to give struggling organizations time to arrange their affairs so that they can remain in business. Indalex sold its assets as a going concern, meaning that the business remained operational under new ownership.
Indalex obtained a court order allowing it to borrow money to continue financing its operations. The creditors under this arrangement became debtor-in-possession (DIP) creditors. Under this arrangement, it was assumed that to the DIP lenders would have first priority to all of Indalex’ property if it defaulted on the loans.
In July 2009, Indalex completed the sale of its assets and asked the court to approve the distribution of the proceeds to the DIP creditors. Some of Indalex’s former executives and the union objected because the proposed distribution would have left two of the company’s pension plans underfunded by approximately $6.75 million. The two plans were both sponsored and administered by Indalex.
As a result, $6.75 million (the reserve fund) was held back from the proceeds of the sale until the court determined who had priority. In the meantime, Indalex’s parent company in the U.S. paid back the DIP lenders in full and claimed their position as DIP lenders in the court battle.
The Ontario Court of Appeal ruled that the pensioners should have access to the reserve fund.
Under the Pension Benefits Act, when a pension plan is being wound up, if the employer owes any contribution amounts to the plan, these amounts are deemed to be held in trust in favour of the pension beneficiaries. The Court of Appeal ruled that this extends to all amounts that the employer owes to a pension, not just those amounts that are already due.
The employee plan had been wound up, but the executive plan had not. Therefore, there was a deemed trust in favour of the beneficiaries of the employee plan for the amount that Indalex owed it.
More importantly, the court found that Indalex in its role as pension administrator had breached its fiduciary duties to the beneficiaries. As a fiduciary, a pension administrator must look out for the beneficiaries’ best interests. However, when an employer administers its own pension plans, this fiduciary duty can conflict with its own business interests. In this case, although Indalex was entitled to move for CCAA protection for business reasons, once it did so it had a duty to protect the pension beneficiaries.
Indalex was in a conflict of interest situation but neglected its role as administrator in favour of its corporate interests, said the court.
As for the distribution of the reserve fund, the Ontario Personal Property Security Act gives deemed trust pension beneficiaries priority over all lenders, including DIP lenders. However, Indalex argued that a judge in CCAA proceedings can give super-priority to DIP lenders. Without this protection, DIP lenders would be very unlikely to finance a struggling business.
The Court of Appeal agreed that a court can give DIP lenders super-priority, but it must be specifically asked for at the outset of CCAA proceedings. In particular, the beneficiaries of the deemed trust must be notified that the company is seeking to disrupt their priority. Since Indalex had not done this at the outset of CCAA proceedings, the deemed trust retained its priority.
The deemed trust only applied to the employee plan, but Indalex breached its fiduciary duties towards beneficiaries of both plans. The Court of Appeal, considering all of the circumstances, ruled that the pension beneficiaries had a better claim to the reserve fund than the DIP lenders.
Implications for employers
While this case is somewhat complex and the result depended largely on its unique facts, there are some important lessons for employers. In particular, when an employer is the administrator of its own pension plan, it must be careful to ensure that business interests do not interfere with the fiduciary duty owed to pension beneficiaries. This is sometimes referred to as the “two hats” doctrine the employer must strike a balance between wearing the “corporate hat” and the “administrator hat” at the same time.
In this case, although Indalex had a legitimate business interest in entering CCAA proceedings, it failed to adequately protect its employees’ interests in its role as administrator. The Court of Appeal suggested that Indalex should have asked for an independent administrator to be appointed when it became apparent that it was in a conflict of interest situation.
In addition, if an employer is planning on making business decisions that will affect pension plan beneficiaries, it is important to alert the beneficiaries from the outset. Otherwise, the restructuring plans will risk being defeated by the pension beneficiaries later on. See Indalex Ltd. (Re), 2011 CarswellOnt 2458 (Ont. C.A.).