Pensions v. Insolvency: Applying Indalex 

publication 

March 2012

Re Timminco Limited

The Ontario Superior Court of Justice (Commercial List) has confirmed that provincial pension benefits legislation may be trumped by the Companies' Creditors Arrangement Act (the "CCAA") where application of the pension legislation would otherwise frustrate a company's ability to restructure and avoid bankruptcy.

Following the Ontario Court of Appeal's decision last year in Indalex, the decisions by the Superior Court in the restructuring proceedings involving Timminco Limited and Bécancour Silicon Inc. (the "Companies") provide some comfort for companies that are looking to restructure in the face of underfunded pension liabilities and for potential lenders that are considering whether or not to finance the restructuring.

Background 

The Companies sponsor three defined-benefit pension plans, one of which is governed by the Ontario Pension Benefits Act ("PBA") and two of which are governed by the Quebec Supplemental Pensions Plan Act (the "QSPPA"). All three plans have significant wind-up/solvency deficiencies which the Companies are required to amortize and pay down by way of special payments.

On January 3, 2012, the Companies filed for and obtained relief under the CCAA.   The Initial Order granted in the case included an Administration Charge for the benefit of certain professionals and a Directors' and Officers' Charge to secure the Companies' obligation to indemnify their directors and officers against certain claims.  The Initial Order did not give the charges priority over the interests of most secured creditors.

On January 12, 2012, the Companies returned to court on notice to their secured creditors and sought orders:

(a) suspending the Companies' obligations to make the special payments to the underfunded pension plans;

(b) granting super-priority to the Administration Charge and the D&O Charge; and

(c) approving key employee retention plans secured by a charge on the current and future assets of the Companies.

The relief sought was opposed by the Communications, Energy and Paperworkers' Union of Canada (the "CEP"), which represented some of the Companies' unionized employees. The CEP did not dispute that the court had the jurisdiction and discretion to grant the relief sought.  However, CEP took the position that the Companies had not provided sufficient basis for the court to make such extraordinary orders. Further, the CEP argued that the relief sought should not be granted because the Companies had not provided any restructuring plan.On January 27, 2012 and February 6, 2012, the Companies again returned to court, this time for an order approving a DIP loan facility and granting a priority charge on their current and future assets in favour of the DIP Lender. That application was also opposed by the CEP.

At both the January 12 motion and the DIP approval motion, the CEP contended that the Companies had failed to consider their fiduciary obligations or to consider the best interests of the plan members or beneficiaries.

The Decisions

Despite the CEP's opposition, the court made the all of the orders as requested.  The court found that the Companies were clearly insolvent and without sufficient reserves to address the funding requirements of the pension plans. In the court's view, CEP's position had to be considered in the context of the practical circumstances facing the Companies. In particular, if they were required to make the pension contributions, the Companies would not have sufficient funds to continue operating and as a result would be forced to cease operations to the detriment of their stakeholders, including their employees and pensioners. In short, if the Companies were required to make the special payments, they would not have sufficient funds to continue operating.

The Court found that the doctrine of federal paramountcy was properly invoked because the application of the provincial pension statutes would have the effect of frustrating the purpose of the CCAA (to facilitate the making of a compromise or arrangement between an insolvent debtor and its creditors, with the purpose of allowing the business to continue). In the court's view, the purpose of the CCAA remains constant regardless of whether a company is actually restructuring or is continuing operations during a sale process in order to preserve maximum value and achieve the highest price for the benefit of the stakeholders. It was immaterial that the Companies had not yet put forth a plan for restructuring.

With respect to the super-priority of the Administration Charge and the D&O Charge, the Court found that the role of the Companies' advisors, directors and officers was crucial if the Companies were to effectively proceed with any type or form of restructuring under the CCAA. It was unreasonable and unrealistic to expect that the advisors would take the risk of participating in the proceedings without the security of a charge; it was likewise unreasonable and unrealistic to expect directors and officers to continue without the protection afforded to them by the D&O Charge.  The Court also made an order that the directors and officers would incur no liability as a result of their failure to make the Special Payments during the stay period.

The Court also approved the KERPs and granted the KERP Charge on the basis that the continued participation of experienced and necessary employees would assist the Companies in its objectives during the restructuring process. The Court relied on the both the Companies' and the Monitor's support of the KERPs and noted that the business judgement of the board of directors of the debtor company and the Monitor should rarely be ignored when it comes to approving a KERP charge.

On February 9, 2012, the Court rendered its decision on the DIP loan application and granted the relief sought by the Companies. The Court held that to the extent that the request for the DIP lender's priority charge was a request for the court to override the provisions of the QSPPA or the PBA, the court had the jurisdiction to grant the request for the same reasons it had the jurisdiction to grant priority to the D&O Charge and the KERP Charge. The DIP loan was necessary to allow the Companies sufficient liquidity to put forth a restructuring plan. The court also found that it was necessary to grant the DIP lender a priority charge on the basis that it is unrealistic to expect that any commercially motivated DIP lender to advance funds without receiving the kind of priority requested.

With respect to CEP's argument that the Companies' failed to consider their fiduciary obligations to the pension plan members and beneficiaries, the Court simply stated that to accede to the arguments put forth by the CEP would do nothing to improve the position of its members.

Pensions v. Insolvency: What's next?

The CEP and the USW are seeking leave to appeal the Timminco decisions. The Court of Appeal's decision on the leave application may add additional clarity regarding the scope of the same court's decision in Indalex and the treatment of wind-up deficiencies in restructurings.

On June 7, 2012, the Supreme Court of Canada will hear an appeal of the Ontario Court of Appeal's decision in Indalex.  Among other things, the appeal will address (i) whether the deemed trust prescribed by the PBA includes a wind-up deficiency, and (ii) the tension between a debtor company's ability to restructure for the benefit of stakeholders and its duties as an administrator of a defined benefit pension plan.  Lenders and borrowers should stay tuned.

by Adam Maerov and Jennifer Cockbill