NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Patrick Riesterer. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Patrick Riesterer is an associate in the group.
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: (1) suspended the Timminco Entities’ obligations to make certain payments to their pension plans and (2) granted super priority for charges to cover the expenses of the Monitor, its counsel and counsel to the Timminco Entities (the “Administrative Charge”) and to indemnify the directors and officers from certain statutory liabilities (the “D&O Charge”). In particular, the requested relief sought priority for the Administrative Charge and the D&O Charge over the deemed trust created under the Ontario Pension Benefits Act (the “PBA”) or the Quebec Supplemental Pensions Act (the “SPA”).
The reasons of Mr Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) were released on February 2, 2012. The Court relied in part on the decision of the Ontario Court of Appeal (the “OCA”) in Re Indalex (currently under appeal to the Supreme Court of Canada), however, based on the facts, did not follow the result in Re Indalex. Considering the impact of the decision in Re Indalex on the intersection between Canadian pension law and insolvency law, the Court’s reasons in Timminco are important to the practice.
By way of brief summary, in Indalex, the OCA held that in certain circumstances a pension plan deficiency was subject to a deemed trust under the PBA and that these amounts had priority over amounts owing to a DIP Lender in a CCAA proceeding, despite the fact that the lower court had issued an order granting the DIP Lender priority over all other security interests. In addition, the OCA found that the CCAA debtor, Indalex Limited, as administrator of its pension plans, had fiduciary duties to the beneficiaries of those plans. The OCA ruled that Indalex Limited was in a conflict of interest due to the different obligations imposed pursuant to its corporate fiduciary duties and its pension plan fiduciary duties (a “two hats problem”). Further, the OCA found that Indalex Limited had breached its pension plan fiduciary duties by, among other things, seeking to give the DIP Lender priority over the amounts owing to the pension plans pursuant to the PBA without notice to the pension plan beneficiaries. For a more detailed discussion of the Indalex case, see our North of the Border Update on the case.
The Timminco Entities also had pension plans in deficit. There were three pension plans. The Haley Pension Plan had been terminated and had a wind-up deficiency. This wind-up deficiency must be paid by special payments in equal instalments over a period of not more than five years. The Bécancour Union Pension Plan and the Bécancour Non-Union Pension Plan had not been terminated. Each had solvency deficiencies. Each of these deficits was required to be made up through special payments in instalments.
The Court distinguished the situation faced by Indalex Limited from that faced by the Timminco Entities. The principal fact that distinguishes the situation in Re Indalex from the decision in Re Timminco is that the Timminco entities are continuing to operate and there is still a chance that the business will be able to be restructured and continue as a going concern. The Court found that the Timminco Entities did not have sufficient cash flow to make the special payments to the pension plans and continue operating and continue with their restructuring efforts. The only alternative would be bankruptcy (i.e. liquidation), which the Court found would be detrimental for all involved including stakeholders, employees and pensioners. Accordingly, the Court granted the motion and authorized the Timminco Entities to cease making the special payments to the pension plans.
The Court also relieved the directors and officers from any liability for seeking to cease, and ceasing to make, the special payments notwithstanding the fiduciary nature of the relationship referred to in Re Indalex. The Court found that no “two hats problem” arose. The Timminco Entities, their creditors, the employees and the pensioners would all benefit from a successful restructuring of the business that preserves it as a going concern. This result would also benefit the pension plans more than a bankruptcy (i.e. liquidation), since on a bankruptcy, there is no priority for the special payments. As such, the request of the Timminco Entities to cease payment of the special payments, and ceasing to make the payments in accordance with the Court’s order, did not lead to a conflict of interest.
The Court also made a specific finding that the CCAA, as federal law, was paramount to provincial pension law. The Court found that the purpose of the CCAA is to facilitate a compromise that will allow a company to continue as a viable economic entity for the benefit of society and the company’s creditors, and that a compromise encompasses both a restructuring and a sales process. In this case, the Timminco Entities could not afford to make special payments while preserving funds to operate the business. If the Timminco Entities were ordered to make special payments at the expense of continuing as a going concern, the purpose of the CCAA would be frustrated. The application of provincial pension law would result in a direct conflict with federal insolvency law. The Timminco Entities were therefore ordered to make normal, operating payments on the pension plans but to take no steps to make the special payments to make up the deficits in the pension plans.
The Court also granted super priority charges in connection with the Administrative Charge. The Court found that the services of the Monitor, counsel to the Monitor and counsel to the Timminco Entities were essential for a successful restructuring. The Court stated that it would be unreasonable to expect those parties to take the business risk of participating in the proceedings without the security of the Administrative Charge.
Similarly, the Court found that the services of the directors and officers were essential to the successful restructuring of the Timminco Entities. Absent a super priority D&O Charge the directors would not remain with the business, and there would be no one to guide the Timminco Entities through the restructuring.
For similar reasons, the Court granted a super priority charge for a key employee retention program (the “KERP Charge”), as it was likely that otherwise the key employees would not stay with the Timminco Entities. If the key employees left, it would be necessary to replace them and replacing them would not provide any substantial economic benefits to the Timminco Entities.
One potential problem raised by Re Indalex is the requirement that an insolvent company provide notice to affected pensioners if it seeks an order that grants certain parties a charge with a higher priority than the outstanding pension liabilities. We have previously identified the potential problem with requiring a company to provide notice to a large group of stakeholders before filing for CCAA protection. In this case, the Timminco Entities avoided the potential pitfalls of notifying pensioners prior to obtaining an initial order pursuant to the CCAA. The Timminco Entities sought and obtained an Initial Order that did not prime the pension obligations. However, they indicated in court that they intended to bring a motion soon after the Initial Order was issued to seek to have the obligation to make special payments suspended and the Administrative Charge, the D&O Charge and the KERP Charge given priority over statutory deemed trusts including deemed trusts pursuant to the PBA and SPA. This intention was also telegraphed in the initial order which gave the Timminco Entities the right to seek priority for these charges on notice to the affected parties.
The Timminco Entities brought the within motion on notice to (among others) the members of the pension plan, committees of each pension plan, the provincial boards that supervise pension plans in Quebec and Ontario and the unions involved. Accordingly, the Administrative Charge and the D&O Charge were potentially subordinate to the deemed trust for the deficiency in the pension plans until the Court made its order on this motion.
Re Timminco provides a road map to limit the impact certain aspects of the OCA’s decision in Re Indalex in the right circumstances. The facts that will be relevant include evidence that (1) a successful restructuring would be beneficial to all stakeholders, including the pensioners, (2) the debtor does not have the resources to continue to make the special payments and the only alternative would be a bankruptcy (i.e. liquidation), (3) it would not be reasonable to expect the professionals involved (the monitor, the monitor’s counsel and debtor’s counsel) or the directors and officers to continue without the benefit of super priority charges and (4) the pensioners, unions, relevant provincial boards have been served with the proceedings with proper and timely notice (even if it only after the CCAA proceedings have been commenced, provided that the priority is not sought until the motion is heard).
It will be of interest to see whether the Supreme Court of Canada refers to this decision in the context of the Re Indalex appeal which is scheduled to be heard on June 5, 2012 and, if so, how it deals with the decision in contrast to the situation in Re Indalex.