The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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BANKRUPTCY AND INSOLVENCY "THE KEY QUESTION [IN INDALEX] WAS WHAT HAPPENS WHEN AN EMPLOYER IS WINDING UP A PENSION PLAN AND HAVING TROUBLE FINDING THE MONEY TO DO SO?" Ari Kaplan > Koskie Minsky LLP Unfortunately, this aspect of Indalex has given rise to various issues for the lending community. "The court's confirmation of the existence of a constructive trust may have significant ramifications for lenders relying on security interests in accounts receivable and inventory because the Ontario Personal Property Security Act expressly makes such interests subordinate to deemed trusts under the PBA," says James Gage in McCarthy Tétrault LLP's Toronto office. And it's not just Canadian lenders who will be struggling with Indalex. "The decision is highly relevant in the cross-border environment, because almost all of Canada's big companies borrow money from US lenders," says Gage's partner Kevin McElcheran. "So companies with large pension shortfalls could have difficulty getting financing from across the border." Although some observers have expressed the view that lenders will adjust to this reality and that it will have only a small impact in terms of loan pricing, Gage does not share that view. "Some lenders took a very conservative approach in assessing their risk while awaiting the Indalex decision," Gage says. "Now it's clear that they're going to face a priority issue and there is no guarantee that they can reverse that priority as part of a restructuring. So I'm not at all sure the issue is going to go away." It's least likely to go away for US lenders unfamiliar with Canada's insolvency and restructuring legislation. "There's no analogous priority scheme in the US that can affect the ranking of secured creditors," says Pamela Huff in Blake, Cassels & Graydon LLP's Toronto office. As well, because the deemed trust covers not only payments due to the pension fund but also to the shortfall between the value of benefits payable and the assets available to satisfy those benefits, lenders will find it difficult to assess their risk. 22 | LEXPERT • December 2013 | www.lexpert.ca "Even when the risk is small, the problem may be a mile deep because deficits can be enormous and extremely difficult to quantify," Gage says. Huff is of similar mind. "It's not uncommon for a pension claim, especially one relating to a legacy plan that has a deficiency, to be the largest claim in an insolvency or CCAA proceeding," she says. What's not clear is whether Indalex would apply beyond Ontario. "Other provinces don't necessarily have the same provision in relation to the creation of a statutory trust for pension benefits," Huff says. However that may be, Indalex could extend beyond pension claims. "The decision could affect the priority status of such things as source deductions and various kinds of taxes," Huff says. But Indalex did clear the air for DIP lenders. "We can now tell our lending clients with certainty that we can obtain priority for DIP loans that supersedes pension plan claims," Huff says. As the SCC saw it, a judge's order giving super-priority to the DIP lender amounted to a valid federal order that did not negate the existence of the provincial trust for the pensioners, but subordinated it under the doctrine of paramountcy. The fact that paramountcy had not been invoked in the courts below did not affect the principle. "In essence, the court said that when a judge acting under the CCAA, a federal statute, makes an order, that order is the equivalent of a federal statutory provision," Kaplan explains. NORTEL: CROSS-BORDER JOINT TRIAL WILL PROCEED In June 2013, the Ontario Court for Appeal ruled that the joint