Sears liquidation a vindication for pensioners’ move to force DB windup

Sears Canada Inc.’s announcement on Tuesday that it will seek a liquidation order from the Ontario Superior Court of Justice appears to vindicate the earlier decision of the company’s employees and retirees to seek a windup of the company’s defined benefit pension plan at the earliest opportunity.

“While you might not want to seek a pension plan windup if there was a chance of a restructuring, most of us were doubtful from the start that this was anything but a liquidation,” says Simon Archer, a lawyer at Goldblatt Partners LLP in Toronto. “For a while, everyone could pretend there was no insolvency coming and even when it came, they pretended there was no liquidation.”

Read: Assessing the prospects of retiree motion to wind up Sears pension plan

Sears applied for and received creditor protection under the Companies’ Creditors Arrangement Act in June. While the court allowed Sears to seek a buyer or investors, the company also announced that it was closing 60 stores. It received approval to close 11 others last week. Court approval of the liquidation would see Sears’ remaining 130 outlets close and result in job losses for 12,000 employees.

In August, lawyers for the employees and retirees, citing their efforts since 2014 to have the plan wound up, asked the court to make the windup order.

“The pensioners asked [the Financial Services Commission of Ontario] to step in, they asked the board of directors to take steps, they tried everything,” says Archer. “Even as people saw the risk of this insolvency coming, the shareholders — and one in particular — were given massive dividends of about $1.5 billion while the pension plan went from surplus to a deficit of $267 million by the end of 2015. Where that kind of money is being extracted from a company that is otherwise close to insolvency and has mounting pension deficits, you can see why the retirees were so focused on protecting the plan.”

Read: Sears Canada retirees launch motion to force windup of pension plan

Most importantly, the pensioners worried that the delays in winding up the plan would put the deemed trust priority at risk. Ontario’s Pension Benefits Act creates a deemed trust in favour of pension plan beneficiaries for any deficit in the plan. The trust arises only on windup, at which time the province’s Personal Property Security Act gives it priority.

In Sun Indalex Finance LLC v. United Steelworkers, the Supreme Court of Canada ruled in 2013 that, in CCAA proceedings, the deemed trust takes priority even over secured creditors with respect to certain assets of the company. But the courts have struggled with the application of Indalex to individual insolvencies. So whether or not the deemed trust argument would succeed in the Sears case is very much unclear.

The windup motion had been scheduled to be heard on Nov. 30 at the earliest. But at this point, it’s unlikely to move forward until the liquidation — expected to start on Oct. 19 and to last for 10 to 14 weeks — is complete. The delay, however, will not adversely affect the pensioners’ rights.

“No creditors will be paid any proceeds until the issues in the windup motion are determined,” says Archer.

Read: Sears Canada agrees to continue special payments to DB plan, retiree benefits

The pensioners’ recovery, then, will depend on what Sears ultimately recovers from the liquidation, the outcome of any negotiations and, failing an agreement, the decision on the windup motion in which the availability of the deemed trust under Ontario law will be the main issue.

“If the pensioners succeed with the deemed trust argument, they will get first priority on the proceeds,” says Archer. “If they lose, the pension plan will be an unsecured creditor and will receive only cents on the dollar if anything is left after the secured creditors are paid out.”

Whether or not negotiations will usurp the windup motion is unclear.

“It could happen, but I’m uncertain whether there is any ongoing appetite for negotiations,” says Archer.

In either case, the province’s pension benefits guarantee fund could be on the hook to the extent that the underfunding of the plan cuts benefits below $1,000 monthly (exclusive of indexing, which the fund doesn’t cover).

“The PBGF would be exposed to the top-up amounts,” says Archer. “This will all be determined by the windup report that will follow the windup date.”

Read: Ex-Sears Canada employees facing 19% cut in commuted-value payments