Pensions vs. insolvency

By Carol Neshevich April - May 2013

Pensions lawyer Rachel Arbour of Hicks Morley says the Indalex ruling brings balance back to the competing interests of pension plans and insolvency law.

Pensions vs. insolvency Photo of Rachel Arbour by Paul Eekhoff.

National: Briefly, what did the Supreme Court decide in Indalex?

Rachel Arbour: This was a highly anticipated decision. It effectively overturns a 2011 Ontario Court of Appeal decision. But big picture overall, what the Court has found is that the priority or the super priorities that are often granted to a debt lender in an insolvency proceeding can continue to be a true super priority over pension plan deficits.

N. What was the biggest challenge for the Court in deciding this case?

RA: The challenge was for the Court to balance the competing interests of pensions law, which is designed to protect the plan beneficiaries in these situations, and insolvency law, whose underlying purpose and social policy is to permit corporations to restructure and to renegotiate arrangements with creditors — including pension plan members. This balance is difficult to achieve, particularly when you consider that without the corporation, there are no employees, no plan members and no pension plans.

N. So for Canadian companies with a pension plan, what are the biggest implications?

RA: Well, the implications are going to be different for a solvent company than an insolvent company. First and foremost, it expands the definition of the deemed trust under the Pension Benefits Act from what we previously understood it to cover. And this is something that the Supreme Court of Canada upheld from the Court of Appeal decision. And it means that a deemed trust is now going to cover deficits upon the wind-up of a pension plan. This means a greater protection for plan members but also means that companies are going to have to take this into account in dealing with their lenders and in operating their businesses.
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N. So there is something positive in this decision for pensioners?

RA: There is. I mean, it’s hard to see it from the outset because essentially, at the end of the day in this particular case, these pensioners are not getting anything out of what’s going on. And I have great sympathy for the pensioners in this situation. But there are things in this decision that are quite helpful to pension beneficiaries in general. 

The first is that expanded deemed trust. The deemed trust, when it applies and when it’s given its priorities, now includes the deficit of a wind-up plan which it didn’t do before. And this is, in my view, the more troubling aspect of the decision, but for a pension beneficiary that’s a greater right than they had before. That’s not what was considered in earlier jurisprudence. 

The second issue is w

"The challenge was for the Court to balance the competing interests of pensions law… and insolvency law... " Rachel Arbour Hicks Morley, Toronto
hen the Supreme Court of Canada speaks about the fiduciary duty of the plan administrator and an employer’s obligation with respect to its duties as the plan sponsor and the plan administrator. It’s providing some guidance for employers in terms of addressing conflicts that may arise in that situation. And that can only mean that the plan beneficiary’s interests are being taken to account.

N. So it’s spelling things out more clearly.

RA: This is a part that pension lawyers are going to be wrestling with I think over the next weeks and months and as they have a chance to digest the decision in more detail. But it appears that the court is telling us that a conflict can arise. We have to recognize when that conflict arises [and provide] notice to the plan beneficiaries to ensure that they have an opportunity to represent their own interest if there’s any concern about the employer’s ability to represent their interests.

N. So governance is a bigger issue for plan sponsors and administrators?

RA: That is the part that most plan sponsors and plan administrators are going to be wrestling with. The decision does confirm the ability of an employer to continue to act as both the employer and an administrator of the pension plan — even in an insolvency — something that was called into question in the Court of Appeal decision. What this decision appears to do is allow an employer to do that as long as they properly recognize their conflicts. And there may be situations where there’s a conflict and they can’t continue in both roles. But it doesn’t automatically oust the employer’s ability to act in both capacities even during an insolvency proceeding.

This interview was edited and condensed for publication.
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