NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick, Douglas Rienzo and Andrea Lockhart. Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP, Andrea Lockhart is an associate in the group, and Douglas Rienzo is a partner in the firm’s Pensions & Benefits Department .
When contemplating future cross-border restructurings, U.S. insolvency practitioners should take note of proposed amendments to the Bankruptcy and Insolvency Act (“BIA”) and Companies’ Creditors Arrangement Act (“CCAA”) that will affect insolvent debtors with defined benefit pension plans. Bills S-214 and C-501 propose revisions to the BIA and CCAA to expand the scope of protection provided to pension plan obligations. (We note that these Bills also contain other provisions which are not summarized in this article.)
These Bills are currently under consideration before the Senate Committee of Banking, Trade and Commerce and the House of Commons Committee of Industry, Science and Technology, respectively, having cleared first and second reading. However, there is no way to forecast when or if these Bills will come into force.
Currently, the BIA and CCAA provide that where a debtor participates in a pension plan, the court may only sanction a BIA proposal or a CCAA plan of compromise or arrangement if the proposal or plan provides for payment of all deducted but unremitted employee deductions and all employer normal cost pension contributions (the “current service contributions”) unless the relevant parties have entered into an agreement, approved by the relevant pension regulator, respecting the payment of those amounts. In addition, the BIA provides a super-priority security on all the assets of the company for such amounts in the event of a bankruptcy or receivership that ranks behind a limited number of other super-priority claims.
In addition to current service contributions, employers are required to make additional payments to a pension plan in certain circumstances. Under the various Provincial and Federal pension statutes, an employer is required to make “special payments” over time to fund pension plan deficiencies calculated on a going-concern and on a solvency basis.
Bill S-214 and Bill C-501 (as originally proposed) would amend the BIA and CCAA to provide that a proposal or plan of compromise or arrangement must also provide for payment of certain special payments. Where special payments have become due and have not yet been remitted, Bill S-214 and Bill C-501 (as originally proposed) contemplate that no proposal or plan of compromise or arrangement could be approved unless the proposal or plan provided for payment of such special payments, unless the relevant parties have entered into an agreement, approved by the relevant pension regulator, respecting the payment of those amounts. The BIA would also be amended to provide for a super-priority security (i.e. a lien and charge) (subject to a limited number of other super- priority claims) over all of the assets of the bankrupt for these special payments on a bankruptcy or receivership, in addition to, and with the same priority as, the super-priority already provided to deducted but unremitted employee deductions and employer normal cost pension contributions.
There were concerns among insolvency and pension practitioners that Bill C-9, which received Royal Assent on July 12, 2010, could be read in conjunction with Bill S-214 and Bill C-501 (as originally proposed) to provide a super-priority status to the entire solvency deficit of a pension plan rather than just past-due special payments. Pursuant to amendments proposed by the New Democratic Party of Canada (the “NDP”) to “clarify” the ambiguity, Bill C-501 would be amended to provide that (i) all special payments required to fund the pension deficit, rather than only those that were past-due, would be required to be made in order to receive court approval for a proposal or a plan of compromise or arrangement and (ii) the same amounts would be secured by a super-priority lien in a bankruptcy or receivership. In other words, all pension fund shortfalls would either have to be paid on a restructuring, or be granted a super priority lien in a liquidation. It is not clear whether this proposed amendment to the Bill will be adopted.
There are certain practical consequences of this pending legislation which lenders should consider taking into account in the event that this legislation is to be enacted.1 First, should these super-priority amounts for special payments (or the whole pension fund shortfall if the NDP’s proposed amendments are enacted) be carved out of a company’s borrowing base? This will obviously reduce liquidity available to the company and potentially trigger loan-defaults and/or even potentially impair the borrower’s ability to make further contributions to its pension plans. If these Bills are enacted, management of loans will certainly become more complex, as lenders will need to consider the special payments as potential priority claims (or the whole pension fund shortfall if the NDP’s proposed amendments are enacted), and such special payments or pension fund shortfalls may change as the pension plan is revalued in the ordinary course. From an insolvency and restructuring perspective, debtors will find it considerably more difficult to restructure, since payment of these amounts will have to be provided for. Thus, debtors will require increased exit financing to successfully emerge from BIA or CCAA protection and avoid a liquidation.
1 A more detailed explanation of the practical consequences of these Bills is provided by the Canadian Association of Insolvency and Restructuring Professionals in its Submission Paper on Pensions dated June 25, 2010 (http://www.cairp.ca/publications/submissions-to-government/index.php). In addition a discussion of the Bills can be found on the Osler Pensions and Benefits Blog at http://www.pensionsbenefitslaw.com/.