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April 03, 2013
Supreme Court reverses Ontario insolvency ruling favouring pensioners

The Supreme Court of Canada has ruled that pensioners should not be first in line to claim a company’s assets during bankruptcy or insolvency.

In a precedent-setting case, the Supreme Court overturned an earlier Ontario Court of Appeal decision that had pushed pension plan members ahead of other creditors during corporate bankruptcies.  (See the May 2011 edition of the Coughlin Courier for background.)

The decision is a hard blow for pensioners, such as those formerly employed by Nortel Networks and other prominent companies that faced major pension reductions or cuts when their companies faced financial hardships during and after the 2008 market meltdown.

The Supreme Court’s decision originated with an April 8, 2011 Ontario Court of Appeals ruling that said the members of two underfunded pension plans of an aluminum smelter seeking protection under the Companies Creditors Arrangement Act (CCAA) should have precedence over debtor-in-possession lenders that provided emergency money to the failing company on condition that they would be paid first in a bankruptcy.

The decision by the Ontario court reversed the traditional order of credit precedence in restructuring proceedings.  Until that ruling, lenders that provided emergency funding to failing companies, known as debtor-in-possession (DIP) lenders, were given “super-priority” status and were considered first in line to receive any funds from the restructured companies.

Under the Ontario Court of Appeal ruling, companies would have to declare to the courts that they cannot meet their pension obligations when they apply for CCAA protection.  Many legal and bankruptcy financing experts felt that would make emergency financing harder to secure as lenders could be hesitant to finance firms considered to be in breach of their fiduciary duty.  Plus, their claims would be considered secondary to those of pensioners.  The result could be increased corporate bankruptcies and fewer applications for CCAA protection.  

The Supreme Court based its ruling on the doctrine of federal paramountcy, which asserts that federal legislation trumps provincial laws. Based on that, the federal CCAA has precedence over provincial pension legislation.  Therefore, the traditional order of creditor preference will prevail in corporate bankruptcies and CCAA restructuring.

For pensioners of failed plan sponsors, the only silver lining to the Supreme Court decision was its confirmation that the total amount of a pension shortfall during a plan’s wind-up under CCAA rules would be considered a “deemed trust” under Ontario pension law.  While that would move pensioners ahead of other, smaller creditors during bankruptcy or restructuring, they would still be secondary to DIP lenders.

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