Employees of insolvent companies will have a better chance of collecting their pensions after a surprise court decision transformed the law around corporate bankruptcies in Ontario.
The Ontario Court of Appeal on Thursday ruled in favour of the former staff of a failed manufacturer that was seeking to use the proceeds from the sale of the company's assets to cover shortfalls in their under-funded pension plans.
Pension-plan members are usually last in the lineup of creditors when an employer goes under, and often lose their retirement nest eggs. But the court upset that traditional pecking order, and its decision has ramifications well beyond the aluminum company, Indalex, which had a $6.75-million pension-plan shortfall when it filed for creditor protection under Canada’s federal Companies’ Creditors Arrangement Act in 2009, and well beyond Ontario.
“Indalex knew that the plans were under-funded and that unless more funds were put into the plans, pensions would have to be reduced,” the court said in a decision written by Madam Justice Eileen Gillese, who is known as one of Canada’s foremost pension law experts. “The decisions that Indalex was unilaterally making had the potential to affect the plans’ beneficiaries’ rights, at a time when they were particularly vulnerable.”
In her ruling, she said Indalex failed to inform pension plan members about the CCAA hearing, and did not protect their interests. The judge also said the company did not clearly inform the lower court about its pension issues.
Pensioners’ vulnerability to bankruptcy proceedings drew attention during the recession of 2008 and 2009, when corporate failures spiked and pension plans across the country faced shortfalls estimated at $50-billion during the worst of the downturn. Politicians have done little to elevate the rights of pension plan members in bankruptcy cases, leaving courts to fall back on traditional precedents, awarding creditors first dibs on companies’ remains.
Over the past few years, high-profile insolvencies at such companies as Nortel Networks Corp., AbitibiBowater Inc., Fraser Papers Inc., Slater Steel Inc., and CanWest Global Communications Corp. left employees with reduced pensions. In many cases, other creditors and bondholders ranked ahead of the pension plans when remaining assets were distributed to creditors. Retirees of Nortel have lobbied the federal government for new legislation giving pension funds higher priority in bankruptcies, but have so far found no government support.
The Ontario Court of Appeal ruling could change that trend, however, by setting higher standards for companies when dealing with pensioners. 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.
“Companies can’t ignore pensioners in insolvency proceedings, and they have to take steps to deal with pension deficiencies,” said Andrew Hatnay, a lawyer with Koskie Minsky LLP, who represented 16 former managers and executives of the company who were facing a 60-per-cent cut to their pension income. The ruling is a “wake-up call” for companies in bankruptcy protection, he said.
He said it was not clear the ruling would always send pension-plan members to the front of the line during an insolvency proceeding.
While about 40 per cent of proceedings under CCAA take place in Ontario, the ruling could influence courts across the country. An appeal to the Supreme Court of Canada is possible, but it will stand as precedent-setting in the meantime.
Indalex’s descent into court proceedings is one that has played out for embattled companies across the country. The Toronto-based company, battered by the collapse of the U.S. housing market and a slump in the price of aluminum, filed for court protection from its creditors in April, 2009. Both its employee and executive pension plans had massive shortfalls, leaving workers facing sharp reductions to their pensions as the plans were being wound up.
As is common in such proceedings, Indalex arranged a loan known as debtor-in-possession (DIP) financing to help cover its costs while it was shutting down its operations under the creditors arrangement act. A condition of the loan gave the lender priority over the rest of the company’s other creditors – including the pension funds.
Pension-plan members challenged the arrangement in court, arguing they should have the right to any remaining assets of the company, which has since been sold.
The ruling caught Ontario’s pension community by surprise because insolvent companies typically pay secured creditors ahead of the claims in their pension plans.
“This would seem to change the landscape quite a bit,” said Toronto pension lawyer Hugh O’Reilly, who represented the actuarial firm appointed as the administrator of the Indalex pension plans.
Mr. O’Reilly said the decision means companies will have to follow more stringent processes in the future to ensure the rights of pension plan members are represented, which is “an exciting development” in pension law.
“What it says now is that employees and retirees need to be at the table a lot sooner,” Mr. O’Reilly said.
The decision raises questions about how companies will be able to secure debtor-in-possession financing, said pension lawyer Mitch Frazer of Torys LLP.
In her ruling Thursday, Judge Gillese acknowledged the court did not want to hinder companies from being able to arrange financing when filing for court protection from creditors.
She said decisions should be made on a case-by-case basis and “there may well be” situations where the pension plans cannot receive priority.
Darrell Brown, a lawyer who represented the United Steelworkers in the case, said the company did not try to live up to its obligations to its employees: “Our argument was, the company has to show that they’ve made some effort to deal with this. Clearly, they didn’t.”
