While the motion by Sears Canada Inc. retirees to force a windup of the company’s pension plan is in line with a significant body of jurisprudence from the Supreme Court of Canada, that’s not to say there’s any certainty of success.
Ultimately, the decision is in the hands of an Ontario Superior Court judge, who enjoys wide discretion.
“The legal basis for winding up a plan starts with s. 11 of the Companies’ Creditors Arrangement Act, which broadly authorizes the court to ‘make any order that it considers appropriate in the circumstances,’” says lawyer Andrew Hatnay, who represents the retirees.
Read: Sears Canada retirees launch motion to force windup of pension plan
As Hatnay sees it, timing is critical.
“In the circumstances of the Sears Canada CCAA proceedings, we believe the windup of the Sears Canada pension plan is inevitable but we are concerned with the delays by the company and the superintendent in moving to wind up the plan,” he says. “The delays can put the deemed-trust priority for the pension plan members at risk, so the main objective of our motion is to secure the deemed-trust priority for the pension plan beneficiaries as soon as possible in this process.”
Ontario’s Pension Benefits Act creates a deemed trust in favour of pension plan beneficiaries for any deficit in the plan on windup. The province’s Personal Property Security Act gives priority to the deemed trust. In Sun Indalex Finance LLC v. United Steelworkers, a case decided in 2013, the Supreme Court of Canada ruled that, in CCAA proceedings, the deemed trust takes priority, even over secured creditors, with respect to certain assets of the company.
“The deemed trust is only triggered on windup, and it is a vital remedy to help avoid pension benefit losses for members of an underfunded pension plan,” says Hatnay.
Read: Ex-Sears Canada employees facing 19% cut in commuted-value payments
The kicker, however, is that the Supreme Court’s ruling doesn’t apply in a bankruptcy under the Bankruptcy and Insolvency Act.
“The pensioners presumably don’t want to wait and have any potential priority, or opportunity to have leverage to negotiate that they may have priority, trumped by a bankruptcy before they can wind up the plan,” says a veteran restructuring lawyer, who spoke to Benefits Canada on condition of anonymity. “This rationale would also signal that they think there will ultimately be a bankruptcy of Sears and that they want to be ‘locked and loaded’ when that happens.”
Ultimately, then, the retirees want to claim the entire $267-million pension deficit as soon as possible, rather than having the plan assumed by a going-concern buyer, in which case their only claim against Sears Canada in the restructuring proceedings would be for any special payments missed under the terms of their current agreement with the company. The agreement requires the company to continue special payments of $3.7 million per month to the pension plan and maintain its retiree benefits plan until Sept. 30.
Read: Sears Canada agrees to continue special payments to DB plan, retiree benefits
This isn’t the first time pensioners have resorted to the deemed-trust provision and the Indalex decision to bolster their position in a restructuring. In Indalex itself, the deemed-trust priority netted pensioners up to $4 million more than they could have obtained as unsecured creditors. The restructuring of specialty metals producer Timminco Ltd. in 2012 also saw pensioners in Ontario and Quebec benefit from the deemed-trust argument. Pensioners have made similar claims in the CCAA proceedings related to Wabush Mines and its parent company, Cliffs National Resources Inc., but the Quebec and Newfoundland courts involved haven’t yet ruled on the issue.
Regardless, it’s likely that taxpayers will ultimately have to bear some of the burden of the Sears pension deficit.
“Ontario’s pension benefits guarantee fund becomes applicable on the windup of the Sears Canada plan,” says Hatnay.
Read: Newfoundland mine retirees receive good news in pension battle
In the meantime, Sears has agreed to create an employee hardship fund. If approved by the court, former employees of Sears whose entitlements to receive certain payments from the company have been stayed or suspended as a result of the CCAA proceedings may apply to the employee hardship fund.
Ursel Phillips Fellows Hopkinson LLP, which represents the company’s employees, has filed an associated motion for approval of the fund and says it expects the court will hear the motion on Aug. 18.
“While this fund will not make former employees whole in regards to payments they would have normally been entitled to outside of the CCAA proceeding, it will help those in the most precarious financial situations,” said Susan Ursel, lawyer for the employees, in a news release.
Sears Canada and its entities will contribute a maximum of up to $500,000 to the fund from otherwise-earned but forgone executive payment entitlements under the company’s key employee retention plan.
Read: Retention bonuses of $9.2M for key Sears Canada staff spark outcry