Commentary: Two Comments on Re Indalex Limited

The Ontario Court of Appeal's decision in the Indalex Limited case, decided in April 2011, generated much controversy among members of the Canadian insolvency bar. The appeal concerned the distribution of proceeds following the sale of Indalex's assets as part of a proceeding under the Companies' Creditors Arrangement Act (CCAA). The appeal was brought by members of two pension plans sponsored by Indalex, seeking a declaration that a portion of the proceeds of the asset sale be paid to the Indalex pension plans to fund the shortfall in assets available to pay the promised pension benefits from the plans' funds. The competing claim was made by Indalex's US parent corporation, based on its having satisfied a portion of the debt owed to the debtor-in-possession (DIP) lender.

The Court held that Ontario pension legislation imposes a deemed trust over the employer’s assets for the amount of the shortfall in funding for a wound-up pension plan; that, unless the court in an insolvency proceeding exercises constitutional paramountcy and rules that the priority granted to the deemed trust must yield to a court-ordered priority for a DIP lender, the deemed trust retains its priority outside of bankruptcy proceedings; and that the breach of its fiduciary obligations arising from Indalex's role as pension plan administrator during an insolvency proceeding justified the imposition of a constructive trust over the sale proceeds in favour of both pension plans that outweighed the priority granted by the court when approving DIP financing in a CCAA proceeding.

Members of the commercial insolvency bar are very critical of the decision, while members of the bar representing the interests of employees and pensioners have applauded it. The author writes from a labour and pension law perspective, and analyzes the controversy arising from the Court's ruling.