Navigating Through Pension Obligations Of Professionals In An Insolvency: Concerns For Monitors, Receivers, Trustees In Bankruptcy, Officers And Directors

Introduction

Canada does not require that a corporation establish registered pension plans for its employees. However, if a corporation decides to do so, and the corporation subsequently becomes insolvent, a number of potential liabilities arise under Canadian insolvency and pension legislation. Recent amendments to the Bankruptcy and Insolvency Act ("BIA")1 and the Companies Creditors Arrangement Act ("CCAA")2 have attempted to address these potential liabilities, but there remains doubt as to whether this statutory response to recently decided troublesome case‐law adequately protects insolvency professionals and a corporation's directors and officers.

Regulatory Framework

Prior to an insolvency event, pension plans are governed by the Income Tax Act (Canada) ("ITA") and the applicable federal or provincial pension legislation. In the case of a federally governed plan, the Pension Benefits Standards Act (Canada) applies and in the case of a provincially governed plan, the applicable provincial legislation. In Ontario, the act is titled the Pension Benefits Act (Ontario) ("PBA").3

Directors and Officers

Directors and Officers duties pre‐insolvency

Under the relevant legislation, directors and officers of a corporation have concurrent responsibilities to both the corporation and to the beneficiaries of the pension plan depending on whether the corporation is acting in its capacity as the employer providing the registered pension plan or the plan administrator.4

Employer

In its capacity as the employer providing the registered pension plan the board of directors has several obligations to the corporation including: (i) the design of the pension plans (for example, this can include determining contribution levels for the corporation and the employees); (ii) eligibility requirements (the class or type of employee that may participate in a particular pension plan); (iii) ensuring that the minimum funding obligations of the corporation are met for registered pension plans; and (iv) amendments or changes to the corporation's pension plans including any decisions to wind‐up the pension plan, merge two or more pension plans, amend the pension plans (subject to any statutory obligations or collective agreements), or take contribution holidays.5

When acting in its capacity as employer under a corporation's pension plans, the board of directors of the corporation do not have a fiduciary obligation to the plan beneficiaries. The corporation and board of directors may therefore act in their own best interests, rather than the best interests of the plan members and beneficiaries.6

Plan administrator

In its capacity as plan administrator, the board of directors of a corporation is charged with accurately administering the registered plan according to the applicable pension legislation and the plan documentation that has been filed with the applicable provincial or federal plan regulator. In Ontario, the pension plan regulator is the Financial Services Commission of Ontario ("FSCO"). The Office of the Superintendant of Financial Services ("OSFI") regulates federally registered pension plans.

The PBA imposes a "fiduciary type" duty on a corporation in its capacity as the plan administrator and requires that the directors and officers of the corporation fulfill their responsibilities using the care, due diligence and skill of an ordinary person charged with dealing with another's property.7 The corporation is not expected to be perfect when administering the plan for the plan members, but is expected not to act negligently, in breach of its fiduciary duty or in bad faith when administering the plan.8

In practice, due to the oversight required to properly administer a registered pension plan, and in recognition of the considerable time involved and necessary expertise required, the board, acting qua administrator, has the power to delegate the administrative function to agents.9 Directors have the responsibility for selecting suitable agents and prudently and reasonably supervising such agents. However, the delegation of the administration of the registered pension plans to such agents does not absolve the directors of their legal responsibilities as administrator of the registered pension plans.10

Directors and officers may be criminally charged if they directed, authorized, assented to, acquiesced in, participated in, or failed to take reasonable care to prevent the contravention of the relevant statue as an individual or on behalf of the corporation. A director or officer that is found guilty of such an offence can be liable for a fine up to $100,000 or twelve months imprisonment or both, for a first offence.11 Personal liability for directors may also arise where the corporation has been convicted of an offence related to a failure to make payment or remit payment.12

Directors' and Officers' liability for under funded pension plans

There have been a number of recent cases that have directly considered directors' and officers' liability under the PBA, the CCAA and the BIA. Two very important decisions arose out of the recent restructuring of Slater Stainless Corp. ("Slater"). In both Morneau Sobeco Ltd. v. Aon Consulting Inc. ("Morneau v. Aon")13 and Re Slater Steel Inc. ("Slater Steel")14 the courts dealt with directors' and officers' liability in respect of claims arising from the administration of the Slater pension plans.

Morneau v. Aon

Slater as employer, provided and acted as plan administrator for two registered pension plans (the "Plans"). The Plans were underfunded. Slater hired a third party actuary, a Mr. Norton ("Norton"), who was employed by Aon Consulting Inc. ("Aon") to manage the Plans and prepare actuary reports to provide valuations of the Plans' assets. Prior to filing for protection under the CCAA, Slater had extensive discussions with FSCO in respect of alleged improprieties in the Plan actuarial reports as prepared by Norton. FSCO alleged that the improper actuarial valuations overstated the value of the Plans' assets enabling Slater to avoid making additional contributions to the Plans before becoming insolvent. FSCO also claimed that had the proper reports been filed, additional payments to the Plans would have been required and these contributions would have reduced or eliminated the alleged deficits in the Plans.15

Pursuant to the Initial Order under which Slater was granted protection under the CCAA, the court granted a charge of up to $17.5 million in order to indemnify Slater's directors and officers (the "D&O Charge") for claims that could potentially be asserted against them (the "D&O Claims").16 A claims procedure was established by the court to resolve any D&O Claims asserted against Slater's directors and officers (the "D&O Claims Process"). The superintendent of FSCO filed a D&O Claim (the "FSCO Claim") pursuant to which it claimed that Slater was in breach of a number of regulatory and compliance requirements regarding Slater's administration of the Plans. Part of the FSCO Claim included a claim that Slater's directors and officers had committed offences under the PBA because they had "caused, authorized, permitted, acquiesced or participated in" Slater's contraventions of the PBA and failed to take reasonable care to prevent Slater contravening the PBA.17

Slater did not file a plan in its CCAA proceedings and Slater's CCAA proceedings were subsequently terminated pursuant to a termination order (the "Termination Order") which provided for the continuation of the D&O Claims Process for certain claims that were already being adjudicated, including the FSCO Claim. PriceWaterhouseCoopers ("PWC") was subsequently appointed by the court as interim receiver and receiver and manager (collectively, the "Receiver") of Slater pursuant to the applicable provisions of the BIA and the Courts of Justice Act (Ontario).18 The FSCO Claim was settled and a settlement agreement was entered into by, inter alia, the Receiver, on behalf of Slater, the directors and officers of Slater and FSCO. The Receiver, on behalf of Slater, agreed: (i) to pay $100,000 to FSCO in lieu...