A Quebec Superior Court decision refusing to give priority to pension contribution deficiencies in the context of a mining company’s restructuring has ramped up the uncertainty around the windup of Sears Canada Inc.’s defined benefit plan.
Earlier this month, Justice Stephen Hamilton ruled that the deemed trust that gives priority to pension claims under Newfoundland and Labrador’s Pension Benefits Act wasn’t effective in a liquidation scenario in a Companies’ Creditors Arrangement Act proceeding.
Hamilton’s ruling came in the context of CCAA proceedings arising from the insolvency of Wabush Mines. When Wabush filed for restructuring in 2015, the company sponsored two defined benefit plans, both of which were registered in Newfoundland and Labrador. The plan covered employees in that province and in Quebec, as well as federally regulated workers. On termination, the plans had deficits of $55 million and special payments arrears of some $9 million. The company had made all normal cost contributions.
Wabush Mines sold its assets and sought directions from the Quebec court as to the priority that applies to the deemed trust in respect of the deficits and the outstanding special payments.
Hamilton relied on a constitutional doctrine known as paramountcy. The doctrine states that provincial legislation that conflicts with federal legislation must give way to the federal law.
In this case, the scheme of distribution in Newfoundland and Labrador’s pension legislation, which created the deemed trust, had to give way to the scheme in the CCAA. In an earlier judgment in a 2010 case called Century Services Inc. v. Canada (Attorney General), the Supreme Court of Canada ruled that the scheme of distribution in a liquidating CCAA proceeding is the same as that provided for in the Bankruptcy and Insolvency Act, which creates no deemed trust and no priorities for pension deficits.
Applying the Wabush case to the Sears situation, however, is a complex undertaking. To begin with, it arises only if and when the Ontario Superior Court of Justice order a windup of the Sears pension plan, which has a $267-million funding shortfall and is also subject to a deemed trust under Ontario law. That won’t occur until at least Nov. 30.
Otherwise, it’s not yet clear that the Sears matter is fact a liquidating CCAA proceeding.
“So far, it’s hard to tell whether Sears is a liquidating process or not,” says Robin Schwill, a lawyer at Davies Ward Phillips & Vineberg LLP’s Toronto office. “The company came into it saying it was a restructuring and during the sales process, they have been saying that we’ll look at anything that’s on the table.”
That creates difficulties because the courts haven’t clearly enunciated a bright line separating a restructuring and a liquidation under the CCAA. Deemed trust and priority problems don’t arise in the case of a restructuring because that scenario contemplates a plan of arrangement providing for a negotiated compromise between the debtor and the creditors.
It’s also not clear that the Wabush decision would stand on appeal. In 2014, the Supreme Court of Canada revisited its Century Services decision, on which the Wabush decision relies, in a case called Sun Finance Indalex LLC v. United Steelworkers. The decision stated that while courts would favour “analogous entitlements” under the CCCA and the Bankruptcy and Insolvency Act, judges were also not free to “read bankruptcy priorities into the CCAA at will.”
And if that isn’t complicated enough, the provincial government has asked the Newfoundland Court of Appeal to determine the scope and effect of that province’s deemed trust.
What is clear is that should the Wabush decision survive appellate review, pensioners throughout Canada won’t have fared well.
“If we’re thinking about what type of pension protection retirees have, Wabush is the worst-case scenario,” says Simon Archer, a lawyer at Goldblatt Partners LLP in Toronto.