Canadian Lawyer InHouse

INDALEX RULING CLEARS AIR ON PRIORITY E mployers and financiers can breathe a sigh of relief following a ruling by the Supreme Court of Canada that restores order over debtorin-possession loans in restructurings. Normally under a CCAA application, a DIP financier is granted a super priority over other creditors, meaning they are first in line to get repaid before secured and unsecured creditors. By granting that priority, it ensures DIP financiers will get paid, which encourages lenders to loan the much needed money to keep companies operating while buyers are pursued or to re-float financially impaired companies. Without that guarantee, lenders would be reluctant to loan money or would only do so at a higher interest rate to offset the risk they might not be repaid, notes Osler Hoskin & Harcourt LLP lawyer Ian McSweeney. "No one will lend money unless they are certain they will get it back." However, an Ontario Court of Appeal threw the traditional view about priorities out the window in Sun Indalex Finance LLC v. United Steelworkers and held company pensioners had priority to repayments of the DIP money by the employer. The Appeal Court ruled Ontario's pension laws created a deemed trust for pension shortfalls on a wind-up and there was a constructive trust, which put pensioners at the front of the line when it comes to payback. "The Court of Appeal changed the way everyone thought and the pension legislation concept of a deemed trust," McSweeney says. That ruling raised eyebrows among corporate and insolvency lawyers, who were waiting for the Supreme Court of Canada to weigh in. The court did that in early February in a 160-page ruling. In a complex 5-2 decision — the judges were all over the map on some of the issues — they overturned the Ontario Appeal Court and sided with the financiers over the pensioners. McSweeney says the SCC resolved the case by ruling that a judge appointed under the federal CCAA "can make a super priority charge that trumps out the provincial deemed trust." McSweeney notes the case also discusses important issues, such as when an employer who acts as a plan administrator is facing a conflict of interest between the corporate interests and the fiduciary duties it owes to the employees, when a wind-up deficiency is subject to a deemed trust and discussion around constructive trusts. "There is something for everybody in that case," McSweeney says. "[The judges] cross-agreed with each other on various points." — Jim Middlemiss 22 • a pr il 2013 INHOUSE It's an area of law that not many of us studied or specialized in. When you are in-house, you need to master it quite quickly. Fred Headon, Air Canada "It's an area of law that not many of us studied or specialized in," says Headon. "When you are in-house, you need to master it quite quickly." The legal department's efforts paid off for the airline. "We secured approximately a $1-billion reduction in solvency liabilities [which at press time were subject to regulatory approval]. We have a template with the unions to get there." Headon is not alone in facing pension problems. Management is increasingly calling on in-house lawyers to help deal with pensions. It's not just solvency issues that organizations and their in-house counsel face. Canada is undergoing an extraordinary round of pension reform at the provincial level, and almost every province has some sort of initiative underway. That, coupled with companies looking to reduce risk or possibly convert from DB to DC plans, has legal departments scrambling to keep up with the change and bring their boards up to speed on developments around pension risk.

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