BULLETIN
Insolvency & Restructuring
May 11, 2012
Superior Court of Québec departs from Indalex judgment.Special contributions covering
the actuarial deficit of a pension plan are unsecured claims.
By: Serge Guérette
In the White Birch Paper judgment dated April 20, 2012 handed down under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C36 (the “CCAA”), Justice Robert Mongeon of the Superior Court of Québec found that the “special contributions” an employer must pay to
cover the actuarial deficit of a defined-benefit pension plan are only unsecured claims in Québec that enjoy no particular protection.
Accordingly, there was no reason to give those contributions precedence over repayment of the interim financing granted to the debtor
company that benefited from a prior charge. In so doing, Justice Mongeon explicitly refused to apply a judgment to the contrary rendered in
April 2011 by the Court of Appeal of Ontario in the Indalex matter, that had created somewhat of a stir in the financial community.
Justice Mongeon was ruling on a motion filed by White Birch Paper’s union seeking an order that White Birch Paper resume its special
contributions that had been stayed by the initial order issued under the CCAA, and that priority be given to the deemed trust created
pursuant to section 49 of the Supplemental Pension Plans Act, R.S.Q., c. R-15.1 (the “SPPA”) over repayment of the interim financing. The
petitioners were invoking the Indalex judgment, which holds that deemed trusts created by statute in order to facilitate the recovery of the
contributions of an employer to a pension plan take precedence over a prior charge granted to the interim lender of a business that availed
itself of the CCAA.
From the moment a business comes under the protection of the CCAA or the provisions of the Bankruptcy and Insolvency Act, R.S.C.
((1985), c. B-3) governing proposals, it must pay goods and services received thereafter in full. On this point, Justice Mongeon notes that
the courts have found that an employer’s obligation to cover the actuarial deficit of a pension plan is not part of the compensation of
persons kept on by an insolvent business as its employees, but is instead a claim subject to the restructuring process.
Justice Mongeon then departs from the Indalex judgment for a number of reasons, some specific to the White Birch Paper case, others
being of a more general nature. Here is a summary of those reasons:
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The Union had been duly advised of White Birch Paper’s initial motion further to which the court allowed the company to suspend
payment of its special contributions and declared that the interim lender’s charge took precedence over any deemed trust, without
the Union seeing fit to intervene.
Contrary to the opinion expressed by the Ontario Court of Appeal in Indalex, Justice Mongeon is of the view that “deemed” trusts
created by statute are neutralized by the effects of the CCAA unless they are explicitly protected by the CCAA, which is only the
case for deemed trusts protecting the recovery of deductions at source.
True trusts within the meaning of the Civil Code of Québec are not affected by initial orders under the CCAA, but the deemed trusts
of section 49 SPPA (even assuming that this provision applies to special contributions) are not real trusts. In Indalex, the company
had been found in reach of its duties as administrator of the pension plan, which breach gave rise to the constructive trust. In his
judgment, Mr. Justice Mongeon rule that Québec civil law does not have anything equivalent to the “constructive trusts” of common
law at issue in Indalex. At any rate, White Birch Paper was not an administrator of a pension plan within the meaning of that
judgment.
Since the actuarial deficit of a pension plan is an unsecured claim that is subject to arrangement procedures, there is no justification
for giving it preferential treatment over any other unsecured claim owed by the debtor and paying it off first. Justice Mongeon notes,
incidentally, that the actuarial deficit of the White Birch Paper pension plans reached $311 million, while the sale of all of the
company’s assets only generated $277 million. He suggests that giving priority to covering the actuarial deficit of pension plans
would make restructuring businesses pursuant to the CCAA impossible and condemn them to bankruptcy, with even worse
consequences for the employees and retired employees.
Although the court is always free to retroactively amend an order issued under the CCAA, it will refrain from doing so where a party
has failed to intervene in due time despite having had the opportunity to act. Neither will the court change its order to the detriment
of a party that acted on the strength of the order as initially rendered. Thus, an interim lender cannot be deprived of the precedence
on which it relied to lend to the debtor under the pretence that later case-law questions the scope of that precedence.
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BULLETIN
Insolvency & Restructuring
Indalex was handed down under very specific circumstances where it was the debtor’s parent company that was trying to enforce the prior
charge of the interim lender and where it seemed as though the debtor company’s assets had been sold summarily without giving all of the
interested parties a chance to intervene, which was obviously not the case for White Birch Paper.
Finally, Indalex is not the last word on this issue, even in Ontario, as the Supreme Court of Canada has granted leave to appeal and this
appeal is to be heard next month. The Supreme Court judgment will likely have an impact in Québec, especially on how CCAA orders will
affect deemed trusts other than trusts in favour of the State.
Moreover, a Motion Seeking Leave to Appeal Mr. Justice Mongeon’s decision was filed on May 9, 2012.
Contacts
VANCOUVER
TORONTO
MONTRÉAL
LONDON
John Grieve
+1 604 631 4772
jgrieve@fasken.com
Edmond Lamek
+1 416 865 4506
elamek@fasken.com
Alain Riendeau
+1 514 397 7678
ariendeau@fasken.com
Robert Paydon
+44 207 917 8570
rpaydon@fasken.com
QUÉBEC CITY
PARIS
Jean G. Morency
+1 418 640 2002
jmorency@fasken.com
Sylvain Beaumont
+33 1 44 94 96 98
sbeaumont@fasken.com
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© 2012 Fasken Martineau
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