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February 29, 2012
Supreme Court to rule on standing of pension creditors

The Supreme Court of Canada has agreed to hear a case that will ultimately decide whether pension plan members have priority over other creditors in cases of corporate bankruptcy.

The case involves Indalex, a Toronto-based smelter that filed for bankruptcy protection under the Canadian Creditors Arrangement Act in 2009.  At that time, the company had a pension shortfall of $6.75 million.   As part of the company’s restructuring efforts, Indalex was able to secure debtor-in-possession (DIP) bridge financing, allowing the firm to cover its costs while shutting down operations.  

However, under the terms of the financing package, the DIP lender was to be given priority over other creditors.  

The terms of that arrangement were not conveyed to pension plan members.  That sparked a court challenge from the union representing pension plan members.
In its submissions, the representatives of the pension members argued that the company deliberately under-funded the pension plan, unilaterally impacting the rights of plan members.  The union went on to argue that plan members should have a right to any remaining assets of the company.

The case was eventually heard by the Ontario Court of Appeal, which ruled in favour of the pension plan members.  The company then appealled to the Supreme Court.

According to legal and bankruptcy experts, the Indalex case has “far reaching and profound consequences”, opening the door to a possible re-write of the Companies Creditors Arrangement Act itself.

Many companies have to resort to short-term debt financing to cover their costs during periods of financial restructuring.  To place lenders of such emergency funding behind pensioners could make restructuring money harder to secure, thereby increasing the number of potential bankruptcies.

In addition, according to the Moody’s Investors Service ratings agency, should the Ontario Court of Appeal ruling be confirmed by the Supreme Court, companies with underfunded pension plans could face ratings downgrades.

On the other hand, a Supreme Court ruling endorsing the earlier Ontario Court of Appeal ruling could represent an “exciting development in pension law,” says Hugh O’Reilly, the lawyer representing the actuarial firm appointed to administer the Indalex pension plan.  It would mean that employers facing bankruptcy would be required to address their pension obligations and deal with their pension deficits.

“This would seem to change the landscape quite a bit,” he noted.  “What it says is that employees and retirees need to be at the table a lot sooner.”

A date for the Supreme Court hearing will be set later in 2012.

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