After 'Indalex': Pension Claims Under The New CCAA

On February 1, 2013, the Supreme Court of Canada (the "SCC") released its long-awaited decision in Sun Indalex Finance, LLC v. United Steel Workers1 ("Indalex"). By a five to two majority, the SCC allowed the appeal from the 2011 decision of the Ontario Court of Appeal (the "OCA") which had created so much uncertainty about the relative priorities of debtor-in-possession ("DIP") lending charges and pension claims in Companies' Creditors Arrangement Act (the "CCAA") proceedings. The SCC was unanimous in holding that the deemed trust for pension claims created by section 57 of the Pension Benefits Act (Ontario) (the "PBA"), which deemed trust is elevated to priority status by the operation of subsection 30(7) of the Personal Property Security Act (Ontario) (the "PPSA"), had survived into the commencement of Indalex's CCAA proceeding but then had its priority reversed by the court-ordered charge in favour of the DIP lender. The SCC held that a DIP charge in a CCAA proceeding has the same paramountcy over a conflicting priority scheme under provincial legislation as if the court-ordered DIP Charge priority scheme had been prescribed by the CCAA itself.

Although the SCC's decision gives some comfort to DIP lenders in CCAA proceedings, it actually did not provide that much practical clarity. On the one hand, DIP lenders had already successfully worked around the OCA's Indalex decision by seeking explicit paramountcy rulings in CCAA DIP-charge orders2. On the other hand, would-be DIP lenders will still have to make sense of certain statements made by the SCC about giving notice before seeking a DIP charge and will have to determine how to time DIP advances if, due to such new notice requirements, the DIP charge cannot be obtained on the first day of the CCAA proceedings. The would-be DIP lender in that position shares the uncertainty of any other creditor who has to rely on contractual security rather than a court-ordered charge. And, unfortunately, contractually secured creditors get neither comfort nor certainty from the SCC's ruling.

PBA Deemed Trust Expanded

Secured creditors without a DIP charge get no comfort because the SCC held that the PBA deemed trust survives a CCAA filing, thus priming non-DIP charge secured claims in respect of proceeds of current assets by the operation of subsection 30(7) of the PPSA which elevates PBA and Employment Standards Act (Ontario) (the "ESA") deemed trust claims above other secured claims. Moreover, secured creditors would be primed to a greater extent than previously thought because the SCC also expanded the scope of the PBA deemed trust. PBA subsection 57(4) creates a deemed trust for employer contributions "accrued to the date of the wind up but not yet due". The SCC majority held that, although the subsection 57(4) deemed trust only applies to CCAA company's pension plan if the plan's wind-up had already commenced prior to the CCAA filing, in such circumstance, the subsection 57(4) deemed trust extends to all amounts that are determined to be owing by the employer up to the date of wind-up (even if such amounts are not determined until a later date) and not just amounts that could be determined on the date of wind-up. This expansion of the PBA deemed trust to cover wind-up deficiencies presents a problem for lenders (and therefore companies who need credit), not just because of the potentially large quanta of such newly-prioritized wind-up deficiencies, but also because such liabilities will not be calculated until some undetermined time, after wind-up has begun, by an actuary who will employ art as much as science to do so - and then remain subject to recalculation thereafter. The calculation of a pension plan's wind-up deficiency will depend on, among other things, choices the plan beneficiaries can only make after the wind-up has commenced and the actuary's assumptions. It will then fluctuate over the five-year period the employer has to satisfy the wind-up deficiencies due to changes in market and other assumptions. So, even if the amounts in question were manageable, it could be practically impossible for a lender to maintain reserves to deal with such liabilities with any reasonable precision. As SCC Justice Cromwell (dissenting on this point) put it in his Indalex judgment:

" ... extending the deemed trust protections to the wind-up deficiency might well be viewed as counter-productive in the greater scheme of things. A deemed trust of that nature might give rise to considerable uncertainty on the part of other creditors and potential lenders. This uncertainty might not only complicate creditors' rights, but it might also affect the availability of funds from lenders. The wind-up liability is potentially large and, while the business is ongoing, the extent of the liability is unknown and unknowable for up to five years. Its amount may, as the facts of this case disclose, fluctuate dramatically during this time. A liability of this nature could make it very difficult to assess the creditworthiness of a borrower and make an appropriate apportionment of payment among creditors extremely difficult."3

No Clarity on Impact of New CCAA

Secured Creditors without a DIP charge also get no certainty from the Indalex decision because the SCC applied the CCAA without its material 2009 amendments. The amendments enacted in September 2009 after the start of, and thus not binding on, the Indalex CCAA proceedings include a number of provisions aimed at giving new protection to pension claims. Section 6 of the CCAA, which sets out certain pre-conditions for court sanctioning of a plan of compromise or arrangement, now prohibits a court from sanctioning a CCAA plan unless the plan ensures payment of certain amounts to pension plans. These pension amounts are limited in subsection 6(6) to (i) unpaid amounts deducted from payroll, (ii) unpaid normal costs contributions, and (iii) any unpaid defined employer contributions. Because underfunded amounts are limited to unpaid normal cost contributions, the effective priority the CCAA now gives to pension claims is far narrower in scope than the priority (by operation of PPSA subsection 30(7)) under the PBA deemed trust, which covers all unfunded pension liabilities including special payments (going concern unfunded liabilities and solvency deficiencies) and wind-up deficiencies. In its language, CCAA subsection 6(6) largely mirrors the language of subsection 60(1.5) of the Bankruptcy and Insolvency Act (the "BIA") which imposes similar requirements when a court is approving a BIA proposal. CCAA subsection 6(6) also follows closely the language in sections 81.5 and 81.6 of the BIA which create super-priority charges for certain pension claims in bankruptcy and receivership, and has the same effect as those BIA provisions.

More pertinent to the facts in Indalex, the 2009 CCAA amendments also include the new section 36 provisions governing going-concern sales in CCAA proceedings. As a pre-condition to court approval of such a sale, subsection 36(7) requires payment of "the amounts that would have been required under paragraphs 6(4)(a) and (5)(a) if the court had sanctioned the compromise or arrangement". Paragraph 6(5)(a) of the CCAA requires payment of the same types and amounts of pre-filing wage arrears as are given priority in bankruptcies and receiverships (by operation of sections 81.3, 81.4 and 136 of the BIA) together with all post-filing wage arrears. A quandary arises, however, because there is no paragraph 6(4)(a) in the CCAA4. Subsection 36(7) of the CCAA and the parallel subsection 65.13(8) of the BIA were originally introduced in 2007 by Bill C-125. The legislative summary for Bill C-12 described the effect of subsection 36(7) of the CCAA (and subsection 65.13(8) of the BIA) as follows:

" ... in the case of a debtor that is an employer, the court may only grant an authorization to sell or dispose of the assets if it is satisfied that the debtor can and will make any payments in respect of unpaid wages and unremitted pension plan contributions that would have been required in order to obtain court approval of the reorganization"6

The legislative summary then immediately goes on to state, in a footnote:

"(28) It should be noted that there is a small drafting error under the proposed section 36(7) of the CCAA. That section reads: "The court may grant the authorization only if the court is satisfied that the company can and will make the payments that would have been required under paragraphs 6(4)(a) and (5)(a) if the court had sanctioned the compromise or arrangement" (emphasis added). Subsections 6(4)(a) and 6(5) (a) of the CCAA, as enacted by Chapter 47, are the provisions that require the reorganizing debtor to meet its obligations with respect to unpaid wage claims and unremitted pension plan contributions. However, these provisions are renumbered under clause 106 of Bill C-12 as paragraphs 6(5)(a) and 6(6)(a). There is no 6(4)(a)."

It thus appears that the reference in...