Law Times

Law TiMes • March 19, 2012 FOCUS ON Restructuring & Insolvency Pension protection Lawyers eagerly await SCC ruling on T BY JULIUS MELNITZER For Law Times he Supreme Court of Canada has agreed to hear an appeal from the Ontario Court of Appeal's April 2011 decision in Re Indalex Ltd., a landmark case holding that pension-plan defi- ciency claims can have priority over those of debtor-in-posses- sion lenders in the context of Companies' Creditors Arrange- ment Act proceedings. From the date of the Court of Appeal's judgment, borrowers and lenders have been askance at its implications. "We know that the fallout from Indalex is profound," says Mark Firman of McCarthy Té- trault LLP. "Borrowers who spon- sor defined-benefit plans have put on more stringent conditions and lenders are worried about their security even when insol- vency is not in the cards." Indeed, Firman's colleague Kevin McElcheran says the real difficulty lies with everyday loans to solvent debtors. "If you're seeking a DIP loan, you can get around the deci- sion by giving proper notice to pensioners that their interests would be affected by the security," McElcheran says. "But when you're lending to a solvent debtor, Indalex makes it virtually impossible to make an assessment about what could rank ahead of your security since it's really impossible to figure out exactly what a pension shortfall might be until the administrator winds up the plan." Historically, compa- nies have restructured under the CCAA and then distributed any proceeds in accordance with the priorities set out in the Bankruptcy and Insolvency Act. "The Supreme Court of Canada has recently said that we have one insolvency system un- der the CCAA for re- organizations and one under the bankruptcy act for determining pri- orities on distribution," McElcheran says. "Indal- ex, however, imposes a judgment call on wheth- er it is necessary to take into account provincial law, such as the Pension Benefits Act. But that means secured lenders will be facing uncertain- ties about whether they can rely on the priorities set out in the [bankrupt- cy act] in the event of insolvency." In McElcheran's view, the Corporate lawyers are exaggerating the implications of Indalex, says Andrew Hatnay. ronto's Koskie Minsky LLP, who represented one group of But Andrew Hatnay of To- suc- Court of Appeal misread the ju- risprudence 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 creates a potential worst-case scenario for secured lenders in Ontario and could affect the availability of credit for all employers who provide defined-benefit pension plans for their employees," he says. cessful pensioners in Indalex, says corporate lawyers are mak- ing a mountain out of a molehill. "There's nothing new here," he says. "The Ontario Court of Ap- peal applied the existing law to the facts of this case, and this is not the first time the court has made it clear that provincial laws will apply in insolvency proceed- ings unless they conflict with the federal law." Hatnay suggests that some observers were surprised by the decision because it had become an established practice to side- step provincial laws. "That practice became quite comfortable, and people don't like change," he says. "There's no doubt we're going to see more ap- plications from pensioners and employees that certain payments to secured creditors are inappro- priate, but at least the issue will come squarely before 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. Timminco BY JULIUS MELNITZER For Law Times T he recent decision of Ontario Superior Court Justice Geoff Morawetz in the restructuring proceedings involving Timminco Ltd. enti- ties poses a conundrum for lenders concerned about the impact of the Ontario Court of Appeal's deci- sion in Re Indalex Ltd. Indalex was a landmark case in which the Court of Appeal ruled that pension-plan deficiency claims can have priority over those of debtor-in-possession lenders in the context of Companies' Creditors Arrangement Act proceedings. The Supreme Court, however, has granted leave to appeal and scheduled the case for a hearing on June 5, 2012. Meanwhile, lenders don't know whether to applaud Re Timminco Ltd. or at least praise it too loudly. "On the one hand, Timminco is in a sense a strong affirmation of Indalex because Justice Morawetz relied on the exceptions carved out in the case to reach a contrary result," says Mark Firman of McCarthy Tétrault LLP. "On the other hand, Timminco provides a great deal of fuel for the argument that Indalex is limited to its very specific facts." According to Firman, the core difference between Indalex and Timminco is that Indalex involved some very unique issues, including the fact that the DIP lender and the debtor were related companies and the pensioners didn't receive proper notice that the DIP lender was claiming a super priority. "The best result for lenders would occur if the Supreme Court reversed Indalex," Firman says. "But failing that, it would be ideal if the Supreme proceedings Court confined its decision to the Indalex facts and dis- tinguished between Indalex and Timminco, which is a more run-of-the-mill insolvency." Timminco involved two decisions in the ongoing regarding the related restructurings of Timminco Ltd. and Bécancour Silicon Inc. under the CCAA. In both of these decisions, Morawetz created charges to secure DIP financing with super priority over all encumbrances, including statutory deemed trusts imposed by provincial pension legislation. The case arose in the context of three underfund- ed defined-benefit plans sponsored by Timminco. The unions involved argued that the grant of a super prior- ity was an extraordinary measure and that the evidence didn't support a finding that providing for it was neces- sary in this case. www.lawtimesnews.com "Among other things, the unions relied on Indalex for the proposition that a super priority should not be granted unless it would frustrate the company's ability to restructure and avoid bankruptcy," Firman says. "They also argued that Timminco was in a conflict of interest by seeking the super priority and so were not fulfilling their fiduciary obligations as administrators of the pension plans." For his part, Morawetz also relied on Indalex but in this case for the proposition that "the CCAA judge can make an order granting a super-priority charge that has the effect of overriding provincial legislation, including the [Pension Benefits Act]." He also noted that the super priority wouldn't preju- dice plan beneficiaries because the bankruptcy that would likely result from the failure to grant it wouldn't produce a better result for them. "Timminco may give employers and lenders renewed comfort that the court in a CCAA proceeding can and will grant priority for a DIP loan over any deemed trust for pension plan funding shortfalls in appropriate cir- cumstances and that the decision in Indalex is not an impediment to so doing," Firman says. "The difficulty that remains is that Timminco, which See Appeal, page 11 "Generally speaking, management and direc- tors are induced to stay on by the fact that they have a first charge on the assets and will be paid if they stay on," says Jeremy Dacks of Osler Hoskin & Harcourt LLP. "If Indalex remains the law, what incentive does the president of a company have to stay on and help with a restruc- turing? And you can ask that question about any stakeholder who re- quires incentive to par- ticipate in an insolvency process." The decision also affects the litigation process. Normally, companies are in court within hours of giving notice of their inten- tion. Dispatch is neces- sary because unless an interim stay order and court protection follows quickly, the company may be un- able to continue doing business. "The Indalex court suggested that notice be given to pension beneficiaries, but how can you tell people in advance that you're going to go insolvent without undermining the intention of protection orders?" Dacks asks. "The practice will likely have to change, and the bar and judiciary are considering what changes to make even as we speak." The Supreme Court has scheduled Indalex for a hearing on June 5. LT PAGE 9 Indalex decision Business lawyers relieved at

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