The Supreme of Court of Canada has rejected a lower court's decision that the pension plan of restructured company Indalex should be reimbursed before financial backers and other stakeholders get a crack at assets.
The top court handed down its ruling Friday.
Indalex was an aluminum manufacturer that began restructuring proceedings under the Companies' Creditors Arrangement Act (CCAA) in 2009.
At the time, Indalex had two underfunded pension plans, but the United Steelworkers union — on behalf of the employees —had argued that those plans should be replenished before creditors received the proceeds, as has traditionally been the case in insolvencies under Canadian law.
In 2011, the Ontario Court of Appeal ruled on the side of the pensioners. But in a 5-2 decision released Friday, Canada's top court overturned that decision.
"The United Steelworkers appeal should be dismissed," the court said in the ruling.
In the case, Indalex assets were sold to a U.S. company, Sapa Group, after the former ran into some financial difficulty in 2009. While that was happening, the company was ordered to pay back the creditors who had kept it afloat during CCAA proceedings, which moved the company's pensioners and their $6.75 million pension shortfall further down the hierarchy of who would be paid, and how much they would get.
That funding was known as a "debtor-in-possession" loan and is common in insolvencies and restructurings. DIP funding gives companies cash to keep the business going, and those who give them typically do so in part because they are guaranteed to get their money back ahead of other claimants should a dispute arise.
The original court sided with the DIP creditors, until an Ontario Court of Appeal ruling raised legal eyebrows by throwing a wrench into that long-held tradition. It decided the pensioners should take priority because they had formed an entity known as a trust, and should be considered secured creditors.
The Ontario court also ruled that the people overseeing the company had breached their fiduciary duty to the employees by concealing the company's financial difficulties. In the 5-2 split decision, the dissenters on the Supreme Court agreed with that view.
"The employer not only neglected its obligations towards the beneficiaries, but actually took a course of action that was actively inimical to their interests," the court ruled. "The seriousness of these breaches amply justified the decision of the Court of Appeal to impose a constructive trust."
But ultimately, the court's decision largely upheld the status quo on a federal level.
"As a result of the application of the doctrine of federal paramountcy, the [creditors] supersedes the deemed trust," the court said. That's the Supreme Court's way of affirming that no provincial law should be able to supercede the federal legislation for companies that undergo restructuring through the Companies' Creditors Arrangement Act.
The case has implications for any Canadian company with a pension plan, because it reasserts the supremity of existing legislation, which holds that secured lenders always take precedence over other stakeholders when a company sells assets and divests the proceeds during a restructuring.
Business groups were watching the case closely because they saw the Ontario Court of Appeal ruling as a threat in the current economic climate, where restructuring is often a necessity.
"They restored the original order that pension plan members were unsecured creditors," lawyer Brian Rogers, who has no stake in the case, told CBC News. "The pensioners are now back where they were when this all started."
The employees will still receive what they paid into the plan, but they will lose about half of what they would have received under their full pensions.