On December 1, 2011, the Supreme Court of Canada (the "SCC") agreed to hear an appeal of the landmark Ontario Court of Appeal decision in the restructuring proceedings of Indalex Limited ("Indalex") under the Companies' Creditors Arrangement Act.

In April of this year, the Court of Appeal of Ontario, to the surprise of many, rendered a decision that was inconsistent with what many viewed as accepted law in respect of the priority of certain pension claims. Briefly, the decision stated that certain wind up pension deficiencies of Ontario regulated defined benefit pension plans (that the Ontario Court of Appeal held to be protected by provincial deemed trusts) may, in certain circumstances, have priority over the court ordered charge granted to lenders providing interim financing during the proceedings ("DIP Lenders") and other creditors relying on the security of the working capital assets of the debtor company. In its decision, the Ontario Court of Appeal also cast doubt over whether the use of bankruptcy proceedings to defeat the priority of provincial statutory liens and trusts for pension and other claims is still acceptable. In so holding, the Ontario Court of Appeal created material implications for working capital lenders to businesses with Ontario regulated defined benefit pension plans and for such businesses seeking funding.

In addition, the Ontario Court of Appeal held that when an employer is also the administrator of a pension plan (which is normal in Ontario and was the case in Indalex), the employer in its capacity as plan administrator continues to owe a fiduciary duty to the pension plan beneficiaries after it files under the CCAA. The Court held that that duty did not prevent the employer from filing under the CCAA. However, it was improper for the employer to do nothing to protect the rights of the pension plan beneficiaries or to put someone else in the position to protect those rights. As a result of Indalex's breach of its fiduciary duties, the Court of Appeal held that it was appropriate to supplement the statutory lien and trust with a constructive trust to protect the pension plan which was not being wound up at the time of the sale of the business.

It should be noted, however, that the Court of Appeal made it clear that CCAA courts have jurisdiction to grant a super-priority charge over pension deemed trusts, however, whether such a charge should be approved by a Court must be determined on a case by case basis. The decision will force counsel to take additional procedural steps to ensure that DIP Lenders are assured priority over provincial statutory liens and trusts.

A detailed account of the case is available at http://www.mcmillan.ca/indalex.

A review of the Ontario Court of Appeal judgment by the SCC is welcome news to many lenders; however until overturned, DIP Lenders and working capital lenders are advised to take steps in order to mitigate some of the effects of the decision. Please contact any member of the restructuring and insolvency group at McMillan to discuss such risk management strategies.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

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