Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Steven Golick and Lindsay Offner. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Lindsay Offner is an associate in the group.
The law in Canada concerning priorities between the statutory deemed trusts relating to pension plan contributions and certain pension fund shortfalls on the one hand, and court ordered charges in favour of DIP lenders on the other hand has been in a state of flux ever since the decision of the Ontario Court of Appeal (the “OCA”) in Re Indalex. Although this case has been appealed to and argued before the Supreme Court of Canada, the Supreme Court of Canada’s decision is on reserve. In the meantime, a recent decision of the OCA sheds some light on topic.
Timminco Limited and Bécancour Silicon Inc. (collectively, the “Timminco Entities”) obtained an initial order from the Ontario Superior Court of Justice (the “Court”) on January 3, 2012 (the “Initial Order”), granting them protection under the Companies Creditors’ Arrangement Act (the “CCAA”). Shortly thereafter the Timminco Entities sought a further order that among other things (1) approved a debtor-in-possession facility (the “DIP Facility”) with QSI Partners Ltd. (the “DIP Lender”), and (2) granted a Court-ordered super priority charge over the current and future assets, undertakings and properties of the Timminco Entities’ in favour of the DIP Lender and other lenders under the DIP Agreement.
In particular, the order sought a super priority charge in favour of the DIP Lender over the trusts created under the Quebec Supplemental Pension Plans Act (“QSPPA”) and the Ontario Pension Benefits Act (“OPBA”) for various amounts under such pension legislation. The Communications, Energy and Paperworkers’ Union of Canada and the United Steelworkers’ Union (collectively, the “Unions”) opposed the motion (the “DIP Motion”), and the request to grant super priority to the DIP Lender.
The Court found in favour of the Timminco Entities and granted the DIP charge in priority to the statutory deemed trusts created under the Provincial pension legislation. We have previously commented on this decision, which comments can be found at: http://restructuring.weil.com/north-of-the-border-update/avoiding-indalex-canadian-pension-law-and-insolvency-law-collide-again/#axzz24iCvoicK
The Unions brought a motion seeking leave to appeal the order granting the super-priority charge. The motion for leave to appeal was recently denied by the OCA.
The OCA held that, in the context of the CCAA, leave to appeal is only to be granted sparingly in situations in which there are arguable grounds that “are of real and significant interest to the parties.” The OCA then articulated the following four-part inquiry from Re Stelco (2005) that the Court is required to consider in determining whether to grant leave to appeal:

1. Whether the point on the proposed appeal is of significance to the practice;

2. Whether the point is of significance to the action;

3. Whether the proposed appeal is prima facie meritorious or frivolous; and

4. Whether the appeal will unduly hinder the progress of the action.

The OCA found that the Leave to Appeal by CEP and USW lacked sufficient merit to meet the narrow test in Re Stelco. The OCA refused to interfere with the Court’s findings in the DIP Motion and held that:

“We see no basis on which this court could interfere with the motion judge’s decision, including his unassailable findings of fact that: (1) without DIP financing, Timminco would be forced to cease operating; (2) bankruptcy would not be in the interests of anyone, including members of the pension plan; (3) if the DIP lender did not get super priority, it would not have agreed to provide financing; and (4) there was insufficient liquidity or unfavourable terms associated with the rejected DIP proposals. In short, he found that there was “no real alternative” to approving the DIP facility and DIP super priority charge.”

The OCA also considered the doctrine of paramountcy. Pursuant to the doctrine of paramountcy, under the CCAA, which is a Federal statute, the court has the ability to override provisions of Provincial statutes which would have the effect of frustrating a company’s ability to restructure and avoid bankruptcy. In this case, the Court had held that “in the absence of the court granting the requested super priority, the objectives of the CCAA would be frustrated”, and also that “to ensure that the objectives of the CCAA are fulfilled, it is necessary to invoke the doctrine of paramountcy such that the provisions of the CCAA override those of the QSPPA and the OPBA”.  The OCA refused to interfere with the Court’s decision.
The law relating to the intersection of insolvency law and pension law in Canada continues to evolve. The OCA Timminco decision provides support for the proposition that the decision in Indalex may be limited to the particular facts of that case. Pending release of the decision of the Supreme Court of Canada in Indalex, this decision of the OCA provides further guidance that where the proper steps are taken by the debtor concerning notice, and the appropriate facts exist, a CCAA court may still grant a super-priority charge in favour of a DIP Lender in priority to the statutory trusts created by Provincial pension legislation. We await the decision of the Supreme Court of Canada which will no doubt shed further light on this topic.