May 26, 2015
May 25, 2015
May 24, 2015
Supreme Court of Canada Upholds Priority for Debtor-In-Possession (“DIP”) Lenders in Companies Creditors’ Arrangement Act (“CCAA”) Proceedings
On February 1, 2013, the Supreme Court of Canada (the “SCC”) affirmed the priority granted to Debtor-In-Possession (“DIP”) lenders who provide capital to debtor companies undergoing the restructuring process pursuant to the Companies Creditors’ Arrangement Act (“CCAA”). Such loans are made on the basis of a priority change granted to the DIP lender which supersedes all other claims (with certain limited exceptions negotiated in each case). The CCAA requires that an order creating a priority DIP charge be granted on notice to all affected creditors.
In brief, the SCC held that:
- DIP charges granted under the CCAA have priority over statutory deemed trusts created under provincial law;
- On wind up of a pension plan, the entire amount of the wind up deficiency is subject to the deemed trust created by the Pension Benefits Act (Ontario) (“PBA”);
- Indalex breached its fiduciary duty as plan administrator in seeking first priority DIP financing without notice to the plan members; and
- The imposition of a constructive trust as a remedy for breach of fiduciary duty by Indalex to the plan members was not appropriate in this case.
In order to understand the SCC’s reasons in Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 (“Indalex”), it is important to provide an overview of the events that occurred prior to the decision. The case can be found in its entirety here.
Indalex was a wholly owned Canadian subsidiary of a U.S. corporation (Indalex US) engaged in the business of manufacturing aluminum extrusions. Indalex and Indalex US had operations that were closely linked. Concurrent with the filing by Indalex US of proceedings under Chapter 11 of the US Bankruptcy Code, Indalex filed for protection from its creditors pursuant to the CCAA, as it could no longer meet its obligations as they generally became due.
Indalex was the administrator of two defined benefit pension plans, one for salaried employees and one for executives, both of which were underfunded.
The stated goal of the CCAA proceeding was to find a buyer for the assets of Indalex, but the company did not have enough capital to continue to operate its business as a going concern.
Without notice to the plan members, Indalex applied for DIP financing. The trial court approved the DIP loan and granted a priority charge in favour of the DIP lender on the basis that Indalex could not continue operations without DIP funding. As a requirement of the DIP loan, Indalex guaranteed a US DIP loan to its U.S. affiliates and Indalex US guaranteed the Canadian DIP loan. After court approval of the DIP loan and the advance of funds by the DIP lender, the plan members challenged the priority of the DIP loan on the basis that they had not received proper notice of the request for priority DIP funding, and the PBA statutory deemed trust applicable to the wind up deficiency superseded the priority of the charge granted by the court to the DIP lender.
After the assets of Indalex were sold, there was a deficiency in the amount of money owing to the DIP lender. Indalex US paid the deficiency to the DIP lender as required by the guarantee. Indalex US then stepped into the shoes of the DIP lender and was subrogated to its claims as against the assets of the Canadian debtor company.
Lower Court Decisions
The trial court held that the plan members were not entitled to any of the sale proceeds as the DIP loan had priority. The Court of Appeal for Ontario reversed this decision, concluding that the plan members were entitled to both a deemed and constructive trust over the proceeds from the sale of the assets of Indalex due to the lack of notice provided to them before the DIP charge was granted and the breach of fiduciary duty by Indalex as plan administrator.
Priority of DIP Loan and Deemed Trusts
The SCC confirmed that provincial statutory deemed trusts do not take priority over and cannot alter the priorities created in an order granted under the CCAA. The doctrine of federal paramountcy requires that priorities granted under the federal CCAA take precedence over provincially legislated priorities and deemed trusts.
The SCC unanimously held that there was a conflict of interest between Indalex’s duty owed to the plan members as pension administrator and its duty to restructure the company for the benefit of all stakeholders. Although the SCC also found that Indalex breached its fiduciary duty as pension administrator towards the plan members, the majority held that the imposition of a constructive trust over Indalex’s assets as a remedy for the breach was not appropriate, as the breach of duty did not give rise to and was not sufficiently connected to the assets sold to warrant a proprietary remedy. The SCC therefore held that the Court of Appeal erred in imposing the remedy of constructive trust.
Notice and Pension Representation
While the SCC refused to impose a constructive trust on Indalex, it did note that affected creditors must be notified prior to a DIP charge being granted, and further suggested that an independent pension administrator should be appointed in order to avoid a conflict of interest found in this case.
Consequences to Consider
Overall, the SCC restored what was generally accepted by stakeholders in CCAA proceedings as being the established state of the law. Debtor companies should be aware of their duty to notify affected stakeholders, as well as their fiduciary obligations towards pension plan members, and if they are also acting as pension plan administrators they should cease acting as such when a conflict arises. DIP lenders should be secure in the knowledge that their DIP charges will not be primed by priorities arising from provincial legislation.
- Business Records Exception and the Admissibility of Prior Servicer Records – the Conflict Continues
- A Ninth Circuit Appeal of a Bankruptcy Sale Order May Be Moot Regardless of Whether the Seller Actually Had the Authority to Sell the Assets
- District Court Clarifies Statute of Repose Timeline in Material Misstatement Case