The Ontario Court of Appeal ruled in favour of the former employees of Indalex yesterday. The aluminum company, which filed for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) in 2009, was seeking to use the proceeds from the sale of its assets to cover a $6.75-million shortfall in its underfunded pension plans.
“Indalex knew that the plans were underfunded and that unless more funds were put into the plans, pensions would have to be reduced,” the court said in a decision written by Madam Justice Eileen Gillese. “The decisions that Indalex was unilaterally making had the potential to affect the plans’ beneficiaries’ rights, at a time when they were particularly vulnerable.”
Over the past few years, high-profile insolvencies—such as Nortel, AbitibiBowater and CanWest Global—left employees with reduced pensions. In many cases, other creditors and bond holders were placed ahead of pension plans when remaining assets were distributed to creditors.
The Ontario Court of Appeal ruling could change this. The ruling means that companies in a CCAA proceeding can’t automatically ignore an underfunded plan. Instead, companies will have to make a case in court that they can’t meet their pension obligations.
“Companies can’t ignore pensioners in insolvency proceedings, and they have to take steps to deal with pension deficiencies,” said Andrew Hatnay, a lawyer with Koskie Minsky LLP, who represented 16 former managers and executives of the company who were facing a 60% cut to their pension income. He said the ruling is a “wake-up call” for companies in bankruptcy protection.
Judge Gillese acknowledged that the court did not want to hamper companies from being able to arrange financing when filing for court protection from creditors. Decisions should be made on a case-by-case basis, she said, adding that “there may well be” situations where pension plans can’t receive priority.