Pension Plans and Bankruptcy: The Supreme Court Will Decide

The Supreme Court of Canada has agreed to hear the Indalex Limited case, which will determine if underfunded pension plans should be treated as a priority when it comes time to liquidate the assets of a bankrupt company.

Although the case deals first and foremost with duties and priorities under the Ontario Pension Benefits Act (PBA) and corporate insolvency under the Companies’ Creditors Arrangements Act (CCAA), the Supreme Court’s pending decision has ramifications for organizations, creditors (lenders) and pension plans across Canada.

This appeal stems from the decision of the Ontario Court of Appeal back in April 7, 2011, on a priority dispute over the proceeds from the sale of the assets of Indalex Limited. The asset sale was approved by the Ontario Superior Court of Justice under the CCAA. However, the United Steelworkers (USW), which represented Indalex’s unionized workforce and certain pension beneficiaries, and a group of former executives receiving pension benefits, argued that Indalex’s obligation to fund its pension wind-up deficiencies ranked higher in priority than Indalex’s obligation to repay its debtor-in-possession (DIP) financing. In holding for the USW and the former executives, and departing from earlier case law, the Ontario Court of Appeal gave priority for the entire wind-up deficiency of two pension plans over the secured DIP lender’s security.

The decision provides that in some cases pension funding obligations can rank ahead of DIP security and security on working capital assets of an organization, and that organizations have a duty to plan members to keep them informed of key steps in financial restructurings, to serve them with formal notice of proceedings in CCAA cases, and to defend the priority provided by the PBA to pension claims over other creditor claims. The decision also suggests that organizations should relinquish administration of a plan when insolvency is clearly in sight.

Madam Justice Gillese, writing on behalf of the Court of Appeal, held that:

The entire amount that an employer is required to contribute to fund a pension plan wind up deficiency under the Ontario Pension Benefits Act is subject to the deemed trust provisions of the PBA and, in the circumstances, the amount subject to the deemed trust should be paid in priority to outstanding secured creditor claims.

The Appeal Court decision notes, however, that there may be some situations where creditors must take precedence over the pension, but this should be decided case by case.

Since the Court of Appeal decision, many insolvency, pension and financial services professionals are debating the result. It has created considerable uncertainty over the priority status afforded to pension plan wind-up deficits, particularly in insolvency proceedings involving the plan sponsor, and the effects on availability of credit for all organizations that provide defined benefit pension plans for their employees. Lenders want certainty that their interest in the company’s property takes priority over other entities, including the pension funds.

Thus, the appeal to the Supreme Court of Canada for clarification.

Hopefully, the Supreme Court of Canada will clarify the scope and application of the PBA deemed trust and provide guidance to organizations and lenders in circumstances similar to Indalex. It is expected that the Supreme Court of Canada will hear the case sometime in late 2012.


  1. Speaking personally and as a matter of policy rather than law, I was pleased to see the court give the priority to the pension interests rather than the purely institutional financial interests of the secured creditors. There must be some meaning to the ‘hold in trust’ rules about pension funds. I don’t object to a creditor in possession taking out its enforcement costs, but after that, the workers need more protection than the banks. (I see that the pension creditors included executives as well as lower-ranked workers. Even they probably need protection more than the banks, but if covering them is the price for covering the other workers, so be it.)