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LEGAL REPORT/INSOLVENCY Ontario court gives priority to pensions over secured creditors in case of insolvent company. BY ANDI BALLA Pecking order I t's the type of news no retired person wants to get in the mail. Their former company is insol- vent and their pension pay- ments are going to stop or be cut drastically. But that's the type of letter Indalex Ltd. sent to retired executives in April 2009. Their supplementary pensions were gone. Later, they found their income from a registered pension plan the company administered would also be cut by 30 to 40 per cent. Toronto-based Indalex, an aluminium extrusions manufacturer, had obtained protection from its creditors under the Companies' Creditors Arrangement Act, leaving behind no cash for the supple- mentary pension plan. The company also had two underfunded registered retire- ment savings plans it managed for its executives and unionized workforce. The former executives called their lawyers, because the changes meant they lost between one-half and two-thirds of their pension benefits. Later, the United Steelworkers union joined the fight too. Both groups wanted to make sure the registered pension plans would be fund- ed before the company made any other payments. Once Re Indalex Ltd. reached Ontario's highest court, the decision would illus- trate a shift in how companies and their lawyers deal with credit agreements and registered pension funds. The Ontario Court of Appeal ruled in April the rights of pensioners with reg- istered plans have priority over those of secured creditors in an insolvent compa- ny. The court said underfunded pension plans, like those of Indalex's retired exec- utives and workers, must be taken care of before secured creditors are paid under the CCAA proceedings. It also found the company in breach of its fiduciary duties as manager of the registered plans. The sale of assets by the insolvent company did not provide enough fund- ing to repay loans Indalex had taken under a debtor-in-possession agreement with its U.S. parent company, which meant the pension funds would remain underfunded. "The claims of USW and the former executives take priority over the claim asserted by Indalex U.S./Sun Indalex," Justice Eileen Gillese wrote in the unanimous April 7 decision, with justices James MacPherson and Russell Juriansz agreeing. Gillese also came down hard on Indalex when it came to explaining why the company breached its fiduciary duty as administrator of the pension plans. "Indalex did nothing in the CCAA pro- ceedings to fund the deficit in the under- funded plans," she wrote. "In fact, Indalex took active steps which undermined the- possibility of additional funding to the plans. It applied for CCAA protection without notice to the plans' beneficiaries. It obtained a CCAA order that gave pri- ority to the DIP lenders over 'statutory trusts' without notice to the plans' benefi- ciaries. It sold its assets without making any provision for the plans. It knew the purchaser was not taking over the plans." In 2009, when Indalex filed for CCAA www.CANADIAN Lawyermag.com JUNE 2011 43 KATHRYN JANKOWSKI