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Follow-up Commentary on Indalex

In a client update released earlier this month, we discussed the recent decision of the Ontario Court of Appeal in the CCAA proceedings of Indalex Limited. In that case, the Court decided that Indalex’s pension plan wind-up deficiency claims had priority over Indalex’s CCAA secured lender in the context of that case. Of concern is the "chill" that decision may have on secured lending in Ontario to borrowers that sponsor defined benefit pension plans.

From a secured lender’s perspective, although there is much to dislike about the case, the situation may not be as dire as it may first appear.

As a starting point, the Ontario Court of Appeal only dealt with the priority of the statutory deemed trust for wind-up deficiency claims in relation to court-ordered CCAA security. The Court was not determining the priority of the statutory deemed trust relative to ordinary security granted to a secured lender in a regular financing context. The distinction is important.

That priority has been considered by the Supreme Court of Canada. In Royal Bank of Canada v. Sparrow, the Supreme Court held that a security interest created by a general security agreement has priority over subsequently arising statutory deemed trusts, unless the lender has agreed otherwise or legislation provides otherwise.

In the case of the deemed trust created by the Pension Benefits Act (Ontario) which was the subject of the Indalex decision, that Act does not give the deemed trust any special priority. On the other hand, the Personal Property Security Act (Ontario) elevates the priority of the deemed trust over a security interest in inventory or accounts. As a result, the good news is that ordinary security over collateral other than working capital assets, such as a mortgage over real property or a security interest in equipment, should not be impacted by the Indalex decision.

However, as it relates to security over inventory and accounts, the Ontario PPSA creates a further challenge. Nevertheless, there still may be possible strategies available to working capital lenders in certain situations.

In this regard, another important conclusion of the Supreme Court of Canada in Royal Bank of Canada v. Sparrow was that security granted pursuant to the Bank Act (Canada) has priority over statutory deemed trusts. Of particular note is that this decision has been applied by the Ontario Court of Appeal in the specific context of the deemed trust under the Pension Benefits Act (Ontario). Although Bank Act security is not available to all lenders and for all collateral, it is a form of security that may be taken by Canadian chartered banks and authorized foreign banks in respect of inventory within the manufacturing, agricultural, mining and forest products industries, among others (industries in which defined benefit plans are not uncommon). As a result, in situations where Bank Act security is available, it may provide a possible priority solution for secured lenders in respect of inventory and accounts receivable that are proceeds of inventory.

In summary, the Ontario Court of Appeal’s decision in Indalex creates challenges for secured lending to Ontario borrowers with defined benefit pension plans. However, the scope of the case’s application is limited and in appropriate circumstances, strategies may be available to lessen its impact.