Indalex: Outcomes of wearing multiple hats

Such pension deficits relating to plan windups raise questions about the extent to which pension claims have priority over the claims of other creditors (secured and unsecured) on the debtor’s assets when it emerges from CCAA. These questions are complicated when the debtor wears “two hats”—one as plan sponsor and the other as plan administrator (i.e., fiduciary). Prior to the April 2011 ruling of the Ontario Court of Appeal in Indalex, the widely held view was that the PBA deemed trust provisions operated only to grant limited priority to pension windup deficits in the event of sponsor restructuring proceedings under the CCAA prior to any bankruptcy. In general, only employer contributions that were in default under the PBA deficiency amortization requirements were considered to be included in such deemed trusts, thereby ranking ahead of unsecured creditors and certain secured creditors in respect of their claims against the debtor sponsor’s assets. Before this decision, the balance of any pension deficit not yet due under the amortization instalment rules, and not in default, was assumed to be unsecured debt ranking equally with other general creditors.

The Ontario Court of Appeal and aftermath
The Indalex decision by the Ontario Court of Appeal expanded the scope of the PBA deemed trust to cover the full pension windup deficit and granted priority to pension claims over those of certain secured creditors. Since the 2011 ruling, lenders and borrowers have been trying to deal with the commercial aspects of the case, and pension plan sponsors and administrators have struggled to understand the implications on pension governance.

It is difficult to ignore the commercial practicalities in the context of a DIP loan—a lender will not advance funds to an insolvent company without a priority charge on assets to secure repayment, and, as noted by several lower courts in reported cases after the Indalex ruling, an insolvent company is unlikely to successfully emerge from CCAA if it is unable to borrow the money needed to finance its restructuring activities.

Outside of insolvency proceedings, the Court of Appeal decision had an impact on the terms attached to employer borrowing, as well as the ability of lenders to rely on the traditional priorities governing loan collateral.

The case also had implications for sponsors and administrators dealing with the resolution of conflicts of interest stemming from situations where the dual role of plan sponsor and plan administrator resides with the employer (the two hats approach)—most often the required statutory result for private sector single-employer pension plans. The Court of Appeal had held that Indalex breached its fiduciary duties by not properly dealing with its conflicting roles as both plan sponsor and administrator, and that the remedy for such a breach was imposing a constructive trust over its assets in the amount of the pension windup deficits that ranked ahead of other creditors.

The SCC’s key findings
In its review of the Court of Appeal decision, the SCC presented the following key findings for all parties.

Good for borrowers and lenders; bad for pension plan members
1. Priority of deemed trust and DIP charge: In keeping with commercial expectations, the SCC unanimously confirmed the ability of a CCAA court to order a super-priority charge for a DIP loan that prevailed over any provincial statutory deemed trust.

Good for pension plan members; bad for borrowers and lenders
2. Scope of PBA deemed trust: A majority of the SCC affirmed the expansion of the scope of the PBA deemed trust for plan windup deficits to include the entire windup deficiency—not just defaulted special payments.

Something for everyone
3. Breach of fiduciary duty and constructive trust: The majority of the SCC determined that while Indalex had breached its fiduciary duties as plan administrator, a constructive trust in respect of the plan deficit was not an appropriate remedy in the circumstances.

Practical implications

Pension plan sponsors as borrowers
While the removal of the constructive trust aspect of the case will restore some certainty for lenders, many of the hurdles that have confronted borrowers with Ontario DB pension plans since 2011 will continue, largely because of the expanded scope of the PBA deemed trust. It’s clear that lenders will continue to conduct increased due diligence in respect of DB pension plans and will continue to insist on stricter loan terms where the funded status of such plans is a concern. In some areas, such as asset-based lending, lenders may continue to reserve up to 100% of any plan funding deficiency against the availability under the borrower credit facilities. In other cases, access to credit may even be restricted due to uncertainty regarding the priority of lender security interests. Credit costs will also continue to be impacted, including costs associated with public debt issues.

In addition, lenders will focus their concerns on the SCC’s discussion of when a deemed trust arises on plan windup. While the majority of the SCC made it clear that an actual windup is required for the expanded PBA deemed trust to apply (i.e., it does not apply to a going concern or a solvency deficiency), questions remain as to whether the same conclusion applies if the plan windup is ordered after a sponsor is granted CCAA protection and the Ontario pension regulator seeks to set the windup effective date prior to the CCAA. And, would the regulator even be able to issue such a windup order under a CCAA stay of proceedings?

Pension plan sponsors as pension plan administrators

(i) Conflicts of interest
While the SCC was unanimous in holding that Indalex had breached its fiduciary duties to plan members and should have brought the conflicts to the attention of the CCAA court, it appears to have struggled somewhat with identifying which conflicts led to breaches of duty, when those conflicts arose and the proper steps that could be taken to avoid or remedy them. Nonetheless, plan sponsors and administrators may take some comfort in these findings by the majority.

• Indalex’s seeking CCAA protection from its creditors without notice to plan members was not a conflict of interest.
• Indalex’s seeking a CCAA court order giving the DIP loan super-priority put Indalex in a conflict of interest. And its failure to provide plan members with reasonable notice of this court motion was a breach of fiduciary duty.
• The dual role of an employer as plan sponsor and administrator is entrenched under pension legislation, as is the potential for conflicts of interest to arise during the course of a company discharging its specific, and sometimes contemporaneous, duties in respect of each role.

(ii) Appointing a replacement administrator
The SCC’s broader discussion of the options to resolve Indalex’s conflict appears to assume that employers with a dual sponsor/administrator role can, as a legal and practical matter, transfer the administrator role to an independent third party to avoid or manage a potential conflict of interest between corporate objectives and pension duties in the context of CCAA proceedings.

The suggestion of using a third-party administrator may seem like a reasonable option in theory. However, there are a number of legal and practical considerations that will need to be addressed, including the following.

• Limitations in pension legislation on who is eligible to be a plan administrator—in most cases, third-party administrators are not allowed, although a pension plan administrator is permitted to delegate administrative tasks and decisions to qualified committees, individuals and third parties.
• In theory, it may be possible for the employer to amend its plan to replace itself as administrator with a committee of individuals (possibly representatives of plan members as well as the employer). However, in the context of the CCAA, such an approach raises practical problems, including the selection of qualified individuals.
• Currently, most pension legislation permits the pension regulator to appoint a replacement third-party administrator only in certain specified circumstances (e.g., in Ontario following a plan windup declaration where the administrator fails to act).

The SCC has provided some guidance in the context of CCAA proceedings on which situations might lead to a conflict of interest. However, there is less guidance on what the administrator must do if faced with a conflict of interest outside of employer insolvency. In assessing how best to resolve such conflicts, it is important for plan administrators to consider the significance of the conflict. For example, extreme steps such as appointing a third-party administrator or resigning from the board of trustees or pension committee may not be the normal (or even a reasonable) course of action in the majority of circumstances.

(iii) Pension Plan Governance
The two hats approach is commonly applied when considering the potential for conflicts of interest when an employer has a dual sponsor/administrator role in pension governance, as well as where the same committees or individuals have been delegated both sponsor and administrator responsibilities. For such governance structures to work, it is essential that all involved are aware which role they are carrying out in the decision-making process.

This two hats approach appears to have been slightly refined in Indalex. In focusing on situations where there could be a conflict resulting from an employer’s dual role, the majority of the SCC concluded that while the mere existence of a conflict did not preclude an employer from exercising sponsor rights it has outside its role as plan administrator, it could not ignore the steps it should then take within the scope of its authority as plan administrator to address identified conflicts to avoid any breach of its fiduciary duties.

An important general message for sponsors and administrators to take from the ruling is that individual members of any board or committee (jointly appointed or otherwise) involved in pension plan administration, while not prevented from taking action outside of their administrator’s role must, in the performance of their administration duties, take care to recognize when such outside actions pose a potential conflict of interest for them in making decisions as plan fiduciaries. A best-practices approach to resolving identified conflicts must be used based on their significance to the plan, the plan administrator’s scope of authority and other factors. The concern of the SCC in Indalex was not only the employer’s failure (as administrator) to recognize the conflict and disclose it to the CCAA judge but, more so, the employer’s failure to take action as administrator to consider options and adopt a course of action to resolve the conflict as a fiduciary. Conflict-of-interest policies should be part of all pension governance models.

Ian McSweeney is a partner in the pensions and benefits group, and Stephanie Kauffman is an associate in the pensions and benefits group with Osler, Hoskin & Harcourt LLP. imcsweeney@osler.com; skauffman@osler.com

Get a PDF of this article.