Following the Supreme Court of Canada decision in Sun Indalex Finance, LLC v. United Steelworkers,  1 S.C.R. 271 (Indalex), creditors and their advisors have been closely following jurisprudence which considers the scope of the decision.
On Friday, August 7, 2015, the Ontario Court of Appeal released its much-anticipated decision in Grant Forest Products Inc. v. The Toronto-Dominion Bank. As discussed below, this decision represents a clear narrowing of some of the broader interpretations of Indalex. Holders of pre-filing liens that would be concerned that, unlike debtor-in-possession financers, they would not enjoy the application of federal paramountcy during a CCAA proceeding to rank ahead of a deemed trust (a wind up deemed trust) arising upon a windup of a defined benefit pension plan (a DB plan), will take comfort from the clear holdings by the Court of Appeal that
- a windup of a DB plan that is ordered after the initial CCAA order is granted will not result in a wind up deemed trust having priority over the pre-filing liens (i.e., only where a windup of a DB plan is ordered before that date need be a concern); and
- the court continues to have a discretion to lift a CCAA stay to permit a Bankruptcy and Insolvency Act (Canada) (the BIA) filing, and that it is not inappropriate, and is not in bad faith, for a creditor to request that relief ,even if the purpose is to reverse the priorities through the application of the doctrine of federal paramountcy.
Following a petition filed by a creditor under the BIA, Grant Forest Products Inc. and certain affiliates obtained protection under the Companies’ Creditors Arrangement Act (CCAA) and stayed the BIA petition. Following an unsuccessful effort to market the business as a going concern, the companies entered into a liquidation process. There was no debtor-in-possession financing arrangement. After selling assets and paying out the first lien lenders, there were insufficient funds to satisfy the claims of the second lien lenders and claims in connection with two DB plans, which during and before completion of the liquidation of assets but after the initial CCAA order was granted were ordered by the Ontario Superintendent of Financial Services (the Superintendent) to be wound-up.
The CCAA judge on application of a second lien holder (who sought to be substituted for the original petitioner under the BIA or a lift of the stay of proceedings to permit it to petition the companies into bankruptcy) ordered the debtor companies into bankruptcy at the end of the liquidation process, and then determined that, under the BIA scheme of priorities, the second lien holders had priority over the wind up deemed trusts arising upon the windup of the DB plans.
The Superintendent appealed, relying upon the Supreme Court of Canada decision in Indalex. The Superintendent argued that by virtue of Sections 57(3) and (4) of the Pension Benefits Act (Ontario) and Section 30(7) of the Personal Property Security Act (Ontario), the wind up deemed trust had priority. Representative counsel to active and retired employees of U.S. Steel Canada Inc. intervened in the appeal to argue that the Indalex decision means that the wind up deemed trust has priority over all secured creditors since pension benefits are a form of deferred compensation for employee’s service and that the CCAA judge wrongly caved into the lender’s threats that their credit would be restricted if secured creditors were not ranked ahead.
The Court of Appeal unanimously dismissed the appeal.
The CCAA judge noted in his decision that (as opposed to a rush to bankruptcy by creditors concerned upon wind up deemed trusts) the CCAA proceeding provided the widest benefit to all stakeholders, whereby some assets were sold as going concern which provided employment and benefits to many, whereas an immediate bankruptcy might have resulted in lower recoveries for creditors and certain loss of employment. He found that the wind up deemed trust would prevail only when a wind up is ordered before insolvency and not when a wind up is ordered after the initial order in the CCAA proceeding. He further relied upon Indalex for the proposition that provincial/statutory provisions in the pension area prevail prior to insolvency, but once the federal statute is invoked, the insolvency regime applies.
Further, the CCAA judge observed that it is a discretionary decision whether to terminate a CCAA proceeding and permit a bankruptcy petition to proceed. The question is whether it is fair and reasonable, bearing in mind the interests of all creditors, that the interests of the creditor seeking preference under the BIA should be allowed to proceed. There was no evidence of a lack of good faith on the part of the second lien creditors in seeking to lift the stay.
The CCAA judge specifically noted that the Supreme Court in Indalex limited the wind up deemed trust to obligations arising prior to bankruptcy and rejected that bankruptcy applications would be at odds with the Indalex decision.
The Court of Appeal confirmed that the lifting of the stay to permit bankruptcy is a discretionary decision and found no error in principle, or that the CCAA judge’s exercise of his discretion was unreasonable since liquidation was complete and the bulk of sales proceeds had been distributed. There was nothing left to reorganize or restructure. The Court of Appeal reconfirmed that a creditor is entitled to seek a bankruptcy order in order to reverse priorities, and that once the bankruptcy order is made, the federal BIA scheme of priorities prevails over the provincial priority.
The Court of Appeal did not curtail the broad finding in Indalex that a wind up deficiency under an Ontario DB plan gives rise to deemed trust ranking, outside of bankruptcy, in priority to secured liens on certain collateral. However, the Court of Appeal distinguished the facts and issues in Indalex as there was no windup of a DB plan prior to the commencement of CCAA proceedings and the BIA played no part in Indalex, but in this case a bankruptcy petition had been initiated before the CCAA proceeding.