Law Times

PAGE 12 FOCUS August 8, 2011 • LAw times Restructuring shakeup INFORM YOUR CLIENTS ABOUT THE RISKS AND RESPONSIBILITIES OF DOING BUSINESS ABROAD Bar, judiciary consider implications of Indalex BY JULIUS MELNITZER For Law Times some for borrowers and lenders alike have hit the ground running. "Although there hasn't been a lot of P signifi cant jurisprudence following yet, I can tell you that everyone involved in corporate fi nance or pension funds is talking about the impact of Indalex internally," says Jeremy Dacks of Osler Hoskin & Harcourt LLP. Th e court ruled that pension plan defi ciency claims can have priority over those of debtor-in-possession lenders in the context of Companies' Creditors Arrangement Act proceedings. Some observers believe the ruling raises ques- tions about securing DIP fi nancing, but Kevin McElcheran of McCarthy Tétrault LLP says the real diffi culty lies with everyday loans to solvent debtors. 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Price subject to change without notice and subject to applicable taxes. can get around the decision by giving proper notice to pensioners that their interests would be aff ected by the se- curity," McElcheran says. "But when you're lending to a solvent debtor, In- dalex makes it virtually impossible to make an assessment about what could rank ahead of your security since it's really impossible to fi gure out exactly what a pension shortfall might be until the administrator winds up the plan." Historically, companies have re- structured under the CCAA and then distributed any proceeds in accordance with priorities set out in the Bankrupt- cy and Insolvency Act. "Th e Supreme Court of Canada has recently said that we have one in- solvency system under the CCAA for reorganizations and one under the bankruptcy act for determining priori- ties on distribution," McElcheran says. "Indalex, however, imposes a judgment call on whether it is necessary to take into account provincial law, such as the Pension Benefi ts Act. But that means secured lenders will be facing uncer- tainties about whether they can rely on the priorities set out in the [bankruptcy act] in the event of insolvency." In McElcheran's view, the Court of Appeal misread the jurisprudence from the Supreme Court and was wrong in looking at priorities under the CCAA as separate and apart from those under the bankruptcy act. "If not reversed on appeal, the ruling FOR 30 DAYS Order online at www.carswell.com Call Toll-Free: 1-800-387-5164 In Toronto: 416-609-3800 AVAILABLE RISK-FREE creates a potential worst-case scenar- io for secured lenders in Ontario and could aff ect the availability of credit for all employers who provide defi ned-ben- efi t pension plans for their employees," he says. But Andrew Hatnay of Toronto's Koskie Minsky LLP, who represented one group of successful pensioners in Indalex, says corporate lawyers are ex- aggerating the issue. "Th ere's nothing new here," he says. "Th e Ontario Court of Appeal applied the existing law to the facts of this case, and this is not the fi rst time the court has made it clear that prov- incial laws will apply in insolvency proceedings unless they confl ict with Untitled-5 1 8/3/11 4:05:01 PM www.lawtimesnews.com redictions that the Ontario Court of Appeal's April decision in In- dalex Ltd. (Re) could be trouble- Lawyers for secured creditors will try to limit the application of Indalex, says Kevin McElcheran. the federal law." Hatnay notes some observers are surprised by the decision because it had become an established practice to sidestep provincial laws. "Th at practice became quite comfortable, and people don't like change," he says. "Th ere's no doubt we're going to see more applications from pensioners and employees that certain payments to se- cured creditors are inappropriate, but at least the issue will come squarely be- fore the court instead of being pursued under the court's radar." Meanwhile, directors and offi cers of insolvent companies also have a lot to think about. "Generally speaking, management and directors are induced to stay on by the fact that they have a fi rst charge on the assets and will be paid if they stay on," Dacks says. "If Indalex remains the law, what incentive does the president of a company have to stay on and help with a restructur- ing? And you can ask that question about any stakeholder who requires in- centive to participate in an insolvency process." Th e decision also aff ects the litiga- tion process. Normally, companies are in court within hours of giving notice of their intention. Dispatch is necessary because unless an interim stay order and court protection follow quickly, the company may be unable to continue doing business. "Th e Indalex court suggested that notice be given to pension benefi ciaries, but how can you tell people in advance that you're going to go insolvent with- out undermining the intention of pro- tection orders?" Dacks asks. "Th e prac- tice will likely have to change, and the bar and judiciary are considering what changes to make even as we speak." McElcheran says lawyers for secured creditors will try to limit the applica- tion of Indalex to the unique facts of the case. "It is signifi cant that the parent who was running the subsidiary directly was also the secured creditor," he says. "Th e decision shouldn't necessarily be taken, however, as applying to arm's-length third-party lenders."

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