The recent decision of Ontario Superior Court Justice Geoff Morawetz in the restructuring proceedings involving Timminco Ltd. entities poses a conundrum for lenders concerned about the impact of the Ontario Court of Appeal’s decision 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 Court confined its decision to the Indalex facts and distinguished between Indalex and Timminco, which is a more run-of-the-mill insolvency.”
Timminco involved two decisions in the ongoing proceedings 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 underfunded defined-benefit plans sponsored by Timminco. The unions involved argued that the grant of a super priority was an extraordinary measure and that the evidence didn’t support a finding that providing for it was necessary in this case.
“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 prejudice 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 circumstances and that the decision in Indalex is not an impediment to so doing,” Firman says.
“The difficulty that remains is that Timminco, which involved a DIP loan and charges created by the court at the outset of a case, does not address aspects of Indalex that are of concern to lenders with security over working capital assets granted by security agreements governed by the Ontario Personal Property Security Act.”
Under that legislation, a trust arising under the Pension Benefits Act has priority over security, other than purchase-money security interests, in inventory and accounts.
In Indalex, the Court of Appeal held that when a company winds up a pension plan, the entirety of any wind-up deficit was subject to that deemed trust.
“In order to avoid such a result, lenders have sometimes sought to create a bankruptcy before the distribution of CCAA sale proceeds and courts have held that in a bankruptcy, the deemed trust loses its effectiveness and also its priority,” Firman says.
“In Indalex, however, the court did not acquiesce to such a transition.”
What, then, is the upshot?
“There remain many aspects of Indalex that would benefit from guidance from the Supreme Court,” Firman says.
“That would certainly help facilitate commercial lending practices by removing some uncertainty from them.”
Observers expect the unions to appeal Timminco.
“It will be interesting to see whether the Court of Appeal will use Timminco as an opportunity to correct Indalex before the Supreme Court hears the appeal,” says a lawyer working on proceedings involving similar issues.