Re Indalex Limited: A Question of Priorities

The Ontario Court of Appeal’s decision in Re Indalex Limited (Indalex) in April has raised a number of questions about the strength of secured creditors’ interests, and the scope of an employer’s duty as administrator of a pension plan under the Companies’ Creditors Arrangement Act (CCAA). This article focuses on the decision’s pension law implications for employers. While the decision is generally unfavourable for employers, the silver lining may be that the particular facts influencing the decision could limit its future application.


Indalex Limited (Indalex Canada) sponsored and administered two defined benefit (DB) pension plans, one for eligible unionized employees (Union Plan), and the other for eligible executives (Executive Plan).

In April 2009, Indalex Canada obtained protection under the CCAA, following a Chapter 11 filing by its U.S.-based parent company (Indalex U.S.). At the time of the CCAA filing, the Union Plan was subject to an ongoing wind up; the Executive Plan was not. Both plans were underfunded.

The CCAA court authorized a debtor in possession (DIP) loan to Indalex Canada which was secured by a super-priority charge that, by the CCAA court order, ranked "in priority to all other … trusts ... statutory or otherwise." Indalex U.S. guaranteed the loan.

Indalex Canada sold its assets on a going-concern basis in July 2009. The buyer did not assume the pension plans. The proceeds of the sale were insufficient to satisfy the DIP loan in full, with the result that Indalex U.S., as guarantor, paid $10.75 million to the DIP lender and thereby assumed this portion of the DIP lender’s claim. The court-appointed monitor (Monitor) set aside $6.75 million from the sale proceeds (Reserve Fund), which was the approximate amount of the Union and Executive Plans’ combined funding deficiency.

Former employees with entitlements, under the Union and Executive Plans, moved for an order that they be paid from the Reserve Fund the amount necessary to liquidate the funding shortfalls in both plans. Both groups relied in part on the Ontario Pension Benefits Act (PBA), which provides that, "employer contributions accrued to the date of the wind up [of a pension plan] but not yet due under the plan or regulations," are deemed to be held in trust.

Shortly after the former employees’ motion, Indalex Canada moved to lift the CCAA stay of proceedings and assign itself into bankruptcy. Hearing both motions together, the CCAA court found that the DIP claim had priority over the pension claims of former employees. As a result, it was unnecessary to hear the bankruptcy motion.

The former employees appealed.

The Decision

A unanimous Court of Appeal held that the Union and Executive Plans had priority to the Reserve Fund in the amount of their respective deficiencies.

Underlying this holding, was the Court’s finding that Indalex Canada had breached its fiduciary duty as administrator of the Union and Executive Plans by filing for CCAA protection and applying for the DIP loan without providing sufficient notice to pension plan beneficiaries, and without adequately considering ways to address the Union and Executive Plans’ underfunding.

The Court also found that Indalex Canada breached its duty to avoid conflicts of interest in the administration of both pension plans because its actions, in respect of the CCAA filing and DIP loan, inappropriately preferred Indalex Canada’s corporate interests to the interests of pension plan beneficiaries.

Regarding the Union Plan, the Court found that the wording of the PBA created a statutory deemed trust over the Union Plan’s entire funding deficiency, since this amount crystallizes or "accrues" on the date of wind up, even if the regulations under the PBA allow an employer to liquidate this deficiency over a period of up to five years.

In an unusual turn, the Court then found that the deemed trust had priority over the DIP claim, despite the CCAA court’s order approving the DIP loan, which provided for super-priority over statutory trusts. The Court found that such a remedy was necessary, because of Indalex Canada’s breach of its fiduciary duty, and because plan beneficiaries did not have sufficient opportunity to put the deemed trust before the judge authorizing the DIP loan.

Regarding the Executive Plan, the Court declined to find that the PBA’s deemed trust applied, because that plan was not being wound up at the time of the sale of Indalex Canada’s business.

The Court, however, found that given Indalex Canada’s breach of its fiduciary duty, it was appropriate in this case to award a constructive trust over the Reserve Fund, in priority to the DIP claim, in an amount equal to the Executive Plan’s deficiency. The Court noted that if it was wrong about the PBA’s deemed trust in favour of the Union Plan, it would have also awarded a constructive trust in favour of that plan, too.

The Court’s decision was largely influenced by the case’s particular facts. First, the Court noted that one of Indalex Canada’s directors had sworn an affidavit in support of the initial CCAA, filing in which he deposed that Indalex intended to comply with all applicable laws including "regulatory deemed trust requirements." Second, the Court noted that because the original DIP lender had been fully repaid by Indalex U.S., awarding priority to the pension claims did not in this case prejudice the rights of intervening creditors. Third, the Court appears to have given weight to the fact that Indalex Canada had attempted a voluntary assignment into bankruptcy, after former employees asserted their pension claims. Finally, the Court noted the complicated relationship between the Chief Restructuring Officer for Indalex U.S., who was authorized to direct the affairs of Indalex Canada, and who was also Senior Managing Director of the Monitor’s parent company. This relationship influenced the Court’s finding that Indalex Canada had developed a conflict of interest.

Indalex Canada, Indalex U.S. and their supporting interveners have applied for leave to appeal to the Supreme Court of Canada. Currently, that application remains pending.

McCarthy Tétrault Notes

Should the Supreme Court agree to hear the appeal, it is possible that the Court of Appeal’s decision could be overturned. In this regard, the Court of Appeal’s decision departs in a number of ways, from previous decisions of the Court of Appeal and the Supreme Court of Canada, in respect of the administration of restructuring cases under the CCAA.

In the meantime, the Court of Appeal’s judgment stands. What are its ramifications from a pension law perspective for employers who also act as administrators of DB pension plans? The answer, unfortunately, remains unclear.

It is important to note that the Court’s decision was heavily influenced by what it found to be Indalex Canada’s breach of fiduciary duty. The Court did not articulate a general principle that the PBA’s deemed trust or a constructive trust will always, or even often, take priority over other secured claims. In fact, the Court was careful to suggest otherwise and limit its own decision to the facts. Nevertheless, creditors will no doubt be more cautious in lending to employers who provide DB pension plans.

The case also suggests that if the employer fails to provide adequate advance notice to plan beneficiaries of a CCAA filing, application for DIP financing, or other material events affecting plan beneficiaries’ interests, the employer may be found to be in breach of its fiduciary duties. An employer-administrator entering CCAA may wish to consider the appointment of an independent third-party pension plan administrator, if possible. In those jurisdictions in which the plan administrator must be the employer, it may be useful to consider delegating administrative authority to an independent third party. Whether such steps would be advisable may ultimately depend on the applicable pension standards legislation, as well as, the facts of the particular CCAA proceedings, including whether the intended goal is liquidation on the one hand, or restructuring and emergence as a viable enterprise on the other.

To view McCarthy Tétrault’s previous alerts on Indalex, including more fulsome commentary on the decision’s potential effect for secured lenders, please click here.

Additional Contacts : 

Randy Bauslaugh

Kevin P. McElcheran