The Supreme Court’s (SCC) recent decision to hear an appeal of Re Indalex Ltd.[1]is significant for the development of law on secured transactions. However, the importance of the decision extends beyond written law. As Baby Boomers leave the workplace, they begin to draw on benefits en masse. Combined with a top-heavy population, it is a distinct possibility that many benefit plans will quickly become unsupportable by a smaller working population. According to the Globe and Mail[2] this will be the first pension insolvency matter heard by the SCC, an indication of the importance of the topic to our country’s future. Regardless of the outcome, the SCC’s willingness to hear the matter will certainly send a strong message to Parliament.
The current socio-economic context demands that the law clarify the effects of bankruptcy and insolvency on pension benefits. In Re Indalex, the Ontario Court of Appeal (ONCA) broadened the rights of pension members to recover outstanding payments. The ONCA granted members priority over secured creditors, including the US Company who was debtor-in-possession of its bankrupt Canadian subsidiaries. The Court interpreted the company’s pension administrator role as a fiduciary duty owed to the members; this obligation took priority even during proceedings under the Companies’ Creditors Arrangement Act (CCAA). A broader interpretation of the members’ “deemed trust” under the Pension Benefits Act included all outstanding amounts regardless of payment timeframe. Indalex had breached its fiduciary duty to the pension members by attempting to undermine the operation of the deemed trust. The Court’s application of a constructive trust provided an equitable remedy for the underfunded pension.
Re Indalex presents a perfect opportunity to examine the development of a novel fiduciary duty and the application of a constructive trust in the context of secured transactions. Contrary to a Professor’s warning against conceptualizing equity as magic, the pension members felt the touch of a fairy godmother in the Court’s application of an equitable remedy. The case isn’t perfect, however, particularly when viewed from the perspective of the secured creditors whose priority was trumped by a previously unsecured interest.
Until the SCC decision, the new rules may introduce uncertainty in CCAA procedures. The challenges of underfunded pension plans will only worsen under the weight of increasing concurrent withdrawals. However, if creditors can’t be assured of their ability to claim secured interests from a debtor’s estate, the incentive to invest may decrease. If there is any hope of maintaining growth during the coming workplace exodus, investment is a necessity. Creditor prudence may also force businesses to outsource pension plans and purchase additional insurance to shield from a plan administrator’s fiduciary obligations. Such actions could drastically increase the cost of administering pension plans and decrease employer contributions. The question is one of efficiency. The ONCA appears to believe that placing the burden on the defaulting company is most efficient, but the SCC may not agree. The broad changes described by the ONCA may not be met with enthusiasm at the SCC, where “incremental change” and deference to Parliament may be used to prod legislators into action.
