The Supreme Court of Canada will make a “seminal” decision about the rights of pension-plan members to make a claim on a bankrupt company’s assets to cover pension shortfalls.
The court announced Thursday it will hear an appeal of a landmark Ontario court ruling that reversed the traditional pecking order for distributing corporate assets in an insolvency. The April decision by the Ontario Court of Appeal ruled that former employees of aluminum processor Indalex Ltd. had a priority claim on its assets to pay for a shortfall in their pension plan.
Pension plan members traditionally have ranked behind many other secured creditors when a company goes under, even though this often leaves retirees facing reduced pensions.
Indalex’s U.S. parent, Sun Indalex Finance LLC, sought leave to appeal the decision to Canada’s top court, arguing in submissions that the lower-court ruling had “potentially far-reaching and profound consequences.” The Supreme Court has not set a date yet for a hearing in the case.
Benjamin Zarnett, a lawyer who represented the Canadian unit’s parent company, said Sun Indalex is pleased the case will be heard “given the important issues arising out of the court of appeal’s decision.”
The ruling will be the first pension insolvency case heard by the Supreme Court, and will lay the groundwork for all future restructurings in Canada, said Toronto pension lawyer Mitch Frazer. “This will be the seminal case in insolvencies dealing with pension issues,” he said.
Mr. Frazer said the decision will be especially important in two areas – clarifying the rights of pension plan members to a priority claim on assets, and clarifying the fiduciary duties of directors who must balance the company’s needs against their new duties to the pension plan.
The Ontario decision came at a time when numerous Canadians are facing reduced pensions following the failure of companies during the latest economic downturn, and not long after the collapse of technology giant Nortel Networks Corp., whose plan members are also facing reduced pensions.
Companies have said the Ontario court decision raised new uncertainty about restructurings. Many firms receive short-term debt financing from lenders to cover their costs while restructuring, but have complained that the Indalex decision could make it harder to obtain financing if lenders fear their claims will rank below pension plans.
Lawyer Andrew Hatney, who represented former executives of Indalex who took the case to court, said the Supreme Court’s decision to hear the appeal means retirees will likely wait another year or more to know whether they will get their pensions improved.
“It’s disappointing because it means our retiree clients have to wait another year-plus for their case to be resolved, which is certainly not a good thing for an elderly retiree to have to endure,” he said.
“They’ve already lost their supplemental pension entirely, and had their basic pension cut by 35 per cent. That’s now on hold for over a year.”
Mr. Hatney said he also believes the initial furor over the Ontario court decision has died down, and the legal community is now adopting the decision without problem. “The decision is workable,” he said.
Lawyer Darrell Brown, who represented a group of unionized employees at Indalex, said the Ontario Court of Appeal ruling “laid out a clear path that could have been easily dealt with by insolvency practitioners,” while the Supreme Court’s decision to hear the case will “inject uncertainty” until a ruling is released.
Mr. Brown said he believes the case has gotten overblown. He said the Ontario court decision did not say there should be priority rights for pension plans in every case, and noted that in cases where paying the pension obligation would jeopardize the chances of successfully restructuring the company, the pension debt should not get priority.
“Bottom line is that the court of appeal decision meant that companies could not simply ignore the pension issue once they enter an insolvency proceeding,” Mr. Brown said. “It did not mean that pension debt would trump secured creditor claims in most instances.”