ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)
IN THE MATER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
BETWEEN
IN THE MATTER OF A PLAN OF COMPROMISE OF ARRANGEMENT OF GRANT FOREST PRODUCTS INC., GRANT ALBERTA INC., GRANT FOREST PRODUCTS SALES INC. and GRANT U.S. HOLDINGS GP, Applicants
- and -
GE CANADA LEASING SERVICES COMPANY, et al, Defendants
BEFORE: C. CAMPBELL J.
COUNSEL: Craig J. Hill, Roger Jaipargas for West Face Capital
Alex Cobb, for PWC, Pension Administrator
Mark Bailey, for Superintendent of Financial Services
Richard Swan, Jonathan Bell, for Peter Grant Sr.
David Byers, Daniel Murdoch, for Ernst & Young
Jane Dietrich, for the remaining applicants
HEARD: July 23, 2013
REASONS FOR DECISION
[1] This decision deals with issues in respect of two defined benefit pension plans of Grant Forest Products Inc. (GFPI) both now in the process of being wound up.
Procedural Issues
[2] The motion seeking relief was originally made returnable June 25, 2012 and adjourned on several occasions, the latest being to enable counsel to make submissions following the release in February of this year of the decision of the Supreme Court of Canada in Sun Indalex Finance, LLC v. United Steelworkers 2013 SCC 6, [2013] SCJ No.6. (Indalex).
[3] The several specific issues arise based on certain of the facts of this case which give rise to a priority claim by pension beneficiaries in respect of the remaining funds in the hands of the Monitor following the sale of the assets of GFPI. The priority issue is between the Administrator on behalf of the pension plans of GFPI and a Second Lien creditor of GFPI, namely, West Face Capital.
[4] The Initial Order under the CCAA was made June 25, 2009 and provided for a Stay of proceedings to enable a restructuring (liquidation) of the assets of the various entities which for the purposes of this decision can be referred to as the remaining applicant or GFPI.
[5] As at June 25, 2009 there was an outstanding Petition in Bankruptcy issued March 19, 2009 in respect of GFPI initiated by various senior secured creditors which has not to date been proceeded with.
[6] The Initial Order contained a term (standard model order language) that “entitled but not required” GFPI to make pension contributions among other ongoing expenses.
The Pension Plans
[7] As at the date of the Initial Order there were 4 pension plans of GFPI, two of which were defined benefit plans and are the ones at issue here.
[8] The relevant dates with respect to the windup of the two defined benefit plans are as follows:
Salaried Plan:
The initiation of windup was as a result of an Order dated February 27, 2012. The effective date of windup was made as of March 31, 2011.
Executive Plan:
The initiation of Plan windup was undertaken by the Superintendent of Financial Services as a result of the Order dated February 27, 2012 with the effective date of wind up being June 30, 2010.
[9] The “effective date” as the term appears in the Pension Benefit Act (PBA) Ontario is chosen for actuarial purposes as the last date of contributions to the Plans.
[10] None of the above dates preceded the Initial Order of June 2009. The major sale of assets to Georgia Pacific was by Order dated May 26, 2010 with the last significant sale of assets February 20, 2011.
[11] There were no deemed trusts in existence either at the date of the Initial Order of June 2009 or the last significant sale of assets in February 2011.
[12] The Court granted Orders that were unopposed on the 26th day of August and the 21st day of September 2011 which authorized the following:
i) GFPI to take steps to initiate windup of the Timmins Salaried Plan, the appointment of a replacement administrator of such plan;
ii) GFPI to take steps to initiate a windup of both the Salaried and Executive Plans.
[13] The orders directed the Monitor to hold back from any distribution to creditors of GFPI the amount estimated at that time to be the windup deficit in the plans. The Monitor began holding in escrow an amount of $191,245 with respect to the Salaried Plan and $2,185,000 with respect to the Executive Plan.
[14] The issue of deemed trust arising as a result of the Windup Orders was not sought to be determined by any party at the time of the August and September 2011 Orders.
[15] When motions now before the Court first came on for hearing on August 27, 2012 the Court was advised that the Supreme Court of Canada had under reserve its decision in Indalex which among other things was to deal with the existence and priority of deemed trust amounts under the PBA in the context of CCAA proceeding.
[16] The motion returnable on August 27, 2012 by the applicant was for direction with respect to the payment of amounts held in escrow by the Monitor in respect of pensions.
[17] The position of both the Monitor and GFPI at that time was that there should be no further payments made on behalf of the pension plans or distribution of any further amounts to the Second Lien Lenders until following release of the decision of the Supreme Court of Canada in Indalex.
[18] The Monitor reported for the motion of August 2012 that the expectation of a windup deficit of both plans would be in excess of $2.3 million. The position of PWC as Administrator of the Plans was that amounts available by way of windup deficit under both plans should be made pursuant to the provisions of the PBA.
[19] The position of the Monitor and GFPI prevailed, and the motion for direction adjourned to November 2012 when both that motion and the companion motion of West Face on behalf of Second Lien Lenders for a lifting of the stay under the CCAA to permit the petition in bankruptcy to proceed were heard.
[20] Following submissions in November 2012, decision was reserved and following the decision of the Supreme Court of Canada in Indalex in February 2013 the parties to this proceeding were invited to provide further submissions based on that decision together with updated figures on amounts held and sums claimed due under the windup of the Pension Plans.
[21] In addition Counsel and their clients did attempt to see if the issues could be resolved without the necessity of further decision. Not surprisingly, given the complexity of issues that still remain following Indalex and despite diligent efforts a determination on the motions is required.
Legal Analysis
[22] In the Indalex decision — the members of Supreme Court of Canada were divided and in particular on the issue of deemed trust arising on windup in the context of a CCAA proceeding.
[23] Justice Cromwell in the introduction to his reasons in Indalex at paragraph 85 of the decision describes the general problem associated with pensions and insolvent corporations.
[85] When a business becomes insolvent, many interests are at risk. Creditors may not be able to recover their debts, investors may lose their investments and employees may lose their jobs. If the business is the sponsor of an employee pension plan, the benefits promised by the plan are not immune from that risk. The circumstances leading to these appeals show how that risk can materialize. Pension plans and creditors find themselves in a zero-sum game with not enough money to go around. At a very general level, this case raises the issue of how the law balances the interests of pension plan beneficiaries with those of other creditors.
[86] Indalex Limited, the sponsor and administrator of employee pension plans, became insolvent and sought protection from its creditors under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c.C-36 (“CCAA”). Although all current contributions were up to date, the company’s pension plans did not have sufficient assets to fulfill the pension promises made to their members. In a series of sanctioned steps, which were judged to be in the best interests of all stakeholders, the company borrowed a great deal of money to allow it to continue to operate. The parties injecting the operating money were given a super priority over the claims by other creditors. When the business was sold, thereby preserving hundreds of jobs, there was a shortfall between the sale proceeds and the debt. The pension plan beneficiaries thus found themselves in a dispute about the priority of their claims. The appellant, Sun Indalex Finance LLC, claimed it had priority by virtue of the super priority granted in the CCAA proceedings. The trustee in bankruptcy of the U.S. Debtors (George Miller) and the Monitor (FTI Consulting) joined in the appeal. The plan beneficiaries claimed that they had priority by virtue of a statutory deemed trust under the Pension Benefits Act, R.S.O. 1990, c. P.8 (“PBA”), and a constructive trust arising from the company’s alleged breaches of fiduciary duty.
[24] Justice Deschamps described in paragraph 44 the importance of the deemed trust under the PBA:
The deemed trust provision is a remedial one. Its purpose is to protect the interests of plan members. This purpose militates against the adopting the limited scope proposed by Indalex and some of the interveners. In the case of competing priorities between creditors, the remedial purpose favors an approach that includes all wind up payments in the value of the deemed trust in order to achieve a broad protection.
[25] The majority position as set out above in the reasons of Justice Deschamps prevailed over the reasons of Justice Cromwell (for himself Chief Justice McLachlan and Rothstein J.) which held in essence the deficiency amounts could only “accrue” as that word is used in s.57(4) of the PBA when the amount is ascertainable. All of the justices agreed that the deemed trust provision contained in s.57(4) of the PBA does not apply to the windup deficit of a pension plan that has not been wound up (the Indalex Executive Plan) at the time of CCAA proceedings.
[26] The legal analysis in Indalex commenced with the 2010 decision of the Supreme Court of Canada in Century Services Inc. v. Canada (Attorney General) 2010 SCC 60.
[27] In addition to providing definitive guidance on the purpose of the CCAA and the relationship between the CCAA and the BIA, more specifically on the facts of Century Services the Court held the deemed trust provisions of the Federal Excise Tax Act did not give rise to a priority over other creditors in a CCAA proceeding.
[28] It was held in Century Services that the CCAA and the BIA are to be read harmoniously and further that in the absence of express language carving out an exception for GST claims the provisions in both statutes nullify statutory deemed trusts in favour of the Crown.
[29] In summary, the more limited and general provisions of the CCAA permit insolvent corporations to restructure or indeed liquidate in a flexible and less formal fashion than would otherwise prevail with respect to priorities under the BIA.
[30] Prior to the arrival of Indalex in this Court in 2009[^1], the governing decision dealing with pension claims of a deemed trust under the PBA seeking priority for unpaid pension contributions over secured creditors in a CCAA proceeding where the companies were unable to restructure and secured creditors sought to put the company into bankruptcy is Ivaco (Re) 2006 34551 (ON CA), [2006] OJ No. 4152 (C.A.).
[31] Laskin JA for the Court of Appeal dealt with the argument that the provincial deemed trust takes priority based on a gap that exists between the CCAA and the BIA in the following passage:
[61] The Superintendent’s submission that the motions judge was required to order payment of the outstanding contributions rests on the proposition that a gap exists between the CCAA and the BIA in which the Provincial deemed trusts can be executed. This proposition runs contrary to the federal bankruptcy and insolvency regime and to the principle that the province cannot reorder priorities in bankruptcy.
[62] The federal insolvency regime includes the CCAA and the BIA. The two statutes are related. A debtor company under the CCAA is defined in s.2 by the company’s bankruptcy or insolvency. Section 11(3) authorizes a thirty-day stay of any current or prospective proceedings under the BIA, and s.11(4) authorizes an extension of the initial thirty-day period. During the stay period, creditor claims and bankruptcy proceedings are suspended. Once the stay is lifted by court order or terminates by its own terms, simultaneously the creditor claims and bankruptcy proceedings are revived and may go forward.
[63] For the Superintendent’s position to be correct, there would have to be a gap between the end of the CCAA period and bankruptcy proceedings, in which the pension beneficiaries’ rights under the deemed trusts crystallize before the rights of all other creditors, including their right to bring a bankruptcy petition. That position is illogical. All rights must crystallize simultaneously at the end of the CCAA period. There is simply no gap in the federal insolvency regime in which the provincial deemed trusts alone can operate. That is obviously so on the facts in this case because the Bank of Nova Scotia had already commenced a petition for bankruptcy, which was stayed by the initial order under the CCAA. Once the motions judge lifted the stay, the petition was revived. In my view, however, the situation would be the same even if no bankruptcy petition was pending.
[64] Where a creditor seeks to petition a debtor company into bankruptcy at the end of CCAA proceedings, any claim under a provincial deemed trust must be dealt with in bankruptcy proceedings. The CCAA and the BIA create a complementary and interrelated scheme for dealing with the property of insolvent companies, a scheme that occupies the field and ousts the application of provincial legislation. Were it otherwise, creditors might be tempted to forgo efforts to restructure a debtor company and instead put the company immediately into bankruptcy. That would not be a desirable result.
[65] Also, giving effect to the Superintendent’s position, in substance, would allow a province to do indirectly what it is precluded from doing directly. Just as a province cannot directly create its own priorities or alter the scheme of distribution of property under the BIA, neither can it do so indirectly. See Husky Oil, supra, at paras, 32 and 39. At bottom the Superintendent seeks to alter the scheme for distributing an insolvent company’s assets under the BIA. It cannot do so.
[66] The Superintendent relies on one authority in support of its position: the decision of the motions judge in Usarco, supra. In that case, although a bankruptcy petition had been brought, Farley J. nonetheless ordered the receiver to pay to the pension plan administrator the amount of the deemed trusts under the PBA. However, the facts in Usarco differed materially from the facts in this case.
[67] In Usarco, CCAA proceedings did not precede the bankruptcy petition. Moreover, in Usarco the petitioning creditor was not proceeding with its bankruptcy petition because its principal had died, and no other creditor took steps to advance the petition. Thus, unlike in this case, in Usarco it was unclear whether bankruptcy proceedings would ever take place.
[68] Recently in Re General Chemical Canada Ltd., [2005] 0.J. No. 5436, Campbell J. relied on this distinction, followed the motions judge’s decision in the present case and refused to order payment of the amount of the deemed trusts under the PBA. He wrote at para. 35:
To conclude otherwise (absent improper motive on the part of Company or a major creditor) would be to negate both CCAA proceedings and bankruptcy proceedings by preventing creditors from pursuing a process of equitable distribution of the debtor’s property as they believe it to be when making their decisions.
I agree. The factual differences between General Chemical and this case on the one hand, and Usarco on the other, render Usarco of no assistance to the Superintendent on this appeal.
[69] Because the federal legislative regime under the CCAA and the BIA determines the claims of creditors of an insolvent company, if the rights of pension claimants are to be given greater priority, Parliament, not the courts, must do so. And Parliament has at least signalled its intention to do so.
[32] The further argument of unfairness in permitting a petition into bankruptcy to proceed if the companies was rejected (see paragraph 77 in Ivaco):
The motions judge took into account the likely result of the Superintendent’s claims if the Companies are put into bankruptcy. He recognized that bankruptcy would potentially reverse the priority accorded to the pension claims outside bankruptcy. Nonetheless, having weighed all the competing considerations, he exercised his discretion to lift the stay and permit the bankruptcy petitions to proceed. In my view, he exercised his discretion properly. I would not give effect to this ground of appeal.
[33] The issues in Indalex involved, as those in this instance do, pension plans, but with a difference. While both the plans faced funding deficiencies when Indalex filed for an Initial Order under the CCAA and requested a stay, the financial distress threatened the interests of all plan members. Following the Initial Order the Company was authorized to borrow US$24.4 million from DIP (Debtor in Possession) lenders who were granted priority over all other creditors.
[34] The plan members in Indalex sought, at the time of the Sanction and Approval Order a declaration that a deemed trust equal in amount to the unfunded pension liability was enforceable by way of priority over secured creditors with respect to the proceeds of assets sold. The parties reached agreement on an amount to be held by the Monitor subject to the Courts’ determination as to whether or not the funds held were being held subject to a deemed trust.
[35] This Court’s decision in Indalex[^2] held that the deemed trust did not prevail over the priority of DIP financers was appealed. On appeal to the Court of Appeal of Ontario the claims of deemed trust, of breach of fiduciary duty against the company and the requested remedy of constructive trust were successful.
[36] At the time of the Initial Order in Indalex the Indalex salary plan was in windup with a windup deficiency order. As at the date of the Indalex Initial Order the executive plan had not been wound up.
[37] The Supreme Court of Canada in Indalex was divided on the issues before it. Four of the judges being Deschamps, Moldaver JJ joined by Lebel J. and Abella J. on the issue held that the deemed trust provision of s.57 (4) of the PBA did provide a statutory scheme to provide a deemed trust in respect of the plan which had been wound up, which trust extended to the windup deficiency payments required by s.75(1)(b) of the Act which had “accrued” but were not yet due at the time of the sale of assets.[^3]
[38] The three judges of the minority on the issue, being Chief Justice McLachlin, Justices Rothstein and Cromwell JJ., concluded that given the legislative history and evolution of the provisions the legislature never intended to include windup deficiency in a statutory deemed trust — rather the legislative intent is to exclude from the deemed trust liabilities that arise only on the date of wind up.
[39] Five of the judges, which excluded Lebel and Abella JJ., concluded that given the doctrine of federal paramountcy the DIP charges superseded the provincial statutory deemed trust which Abella J., Lebel J., Deschamps J. and Moldaver J. had found.
[40] Those same five judges concluded that the circumstances for the application of a constructive trust were not met notwithstanding a breach of duty by the applicant to give all plan members notice prior to the return of the motion seeking an Initial Order.
[41] The context of Indalex’s distress was set out in the following paragraph from the reasons of Deschamps J.:
- Indalex’s financial distress threatened the interests of all the Plan members. If the reorganization failed and Indalex were liquidated under the Bankruptcy and Insolvency Act, R.S.C, 1985, c.B-3 (“BIA”), they would not have recovered any of their claims against Indalex for the underfunded pension liabilities, because the priority created by the provincial statute would not be recognized under the federal legislation: Husky Oil Operations Lid v. Minister of National Revenue, 1995 69 (SCC), [1995] 3 S.C.R. 453. Although the priority was not rendered ineffective by the CCAA the Plan Members’ position was uncertain.
[42] As was noted by the Supreme Court of Canada in Century Services[^4] the CCAA and the BIA are two statutory regimes for re-organization and or liquidation. Of the two federal statutes the CCAA provides the opportunity for orderly restructuring and or liquidation with supervision by the Court.
[43] The BIA deals with priority distribution when there is no further purpose for the application of the CCAA. In the ordinary case under the CCAA an applicant company, following the Initial Order, seeks out agreement with its creditors and the formulation of a proposed Plan to be voted on by the creditors which when approved by the Court in effect creates a contract between the company and its creditors. (see Red Cross (2002) 2002 49603 (ON SC), 35 CBR (4th) 43 (SCJ).
[44] What has become more prominent in recent times has been the occurrence of what has become to be known as the liquidating CCAA of which both Indalex and GFPI are leading examples.
The Factual Distinction between Indalex and GFPI
[45] In this case the 29th Report of the Monitor dated February 21, 2013 describes the nature of the business of GFPI and its subsidiaries which manufactured Strand Board from facilities located in Canada and the United States.
[46] The Report goes on at paragraphs 29 to 32 to detail the deficiencies in the special payments required to be paid under the PBA to fund the windup deficiencies in the plans. Unlike the situation in Indalex neither of the pension plans of GFPI were in windup process at the time of the Initial Order or for some time after. Unlike Indalex there was no request made for DIP prior to a sale of assets following the Initial Order.
[47] Unlike Indalex, the Initial Order re GFPI contemplated in this case that the business of the company would continue for the purpose of the orderly disposition of various assets being various types of mills in Canada and the United States. The most significant of which were sold to Georgia Pacific, which has continued the operation of some of the mills.
[48] The summary of the position of the Plans as of the date of July 2013 is as follows:
The Salaried Plan Wind Up Report disclosed an estimated windup deficit of $726,481. The Required Salaried Plan Payment as of August 24, 2012 was $328,298 plus interest from March 31, 2012, which amount was due to be paid by GFPI into the Salaried Plan.
The required Salaried Plan Payment as at November 27, 2012 was $339,923. This amount includes interest in the amount of $11,625 (determined using the same rate used in determining the amount of the annual special payments needed to liquidate the windup deficiency). It is contested that interest should be included.
The Required Salaried Plan Payment as at March 31, 2013 was $485,715, including interest in the amount of $15,883. It is contested that interest should be included.
The Executive Plan Wind-Up Report disclosed an estimated wind-up deficit of $2,384,688.
The required Executive Plan Payment as of August 24, 2012 was $1,263,186 plus interest from February 29, 2012, which amount was due to be paid by GFPI into the Executive Plan.
The required Executive Plan Payment as at November 27, 2012 was $1,281,639, including interest in the amount of $18,453. It is contested that interest should be included.
The required Executive Plan Payment as at March 31, 2013 was $1,764,275, including interest in the amount of $20,803. GFPI does not accept that interest should be included.
[49] Submissions with respect to the Pension Motion were heard on November 27, 2012. During the same hearing, submissions were also heard on a motion by West Face Capital Inc. for an order lifting the stay of proceedings herein to facilitate a bankruptcy order against GFPI (the Bankruptcy Motion). Following that hearing, further written submissions were provided by the parties concerning the impact of the decision of the Supreme Court of Canada in Re Indalex on the issues in the two motions.
[50] The GFPI situation is a prime example of the flexible operation of the CCAA. The assets of the liquidating company were sold in a manner to provide the maximum benefit possible to the widest group of stakeholders.
[51] In this case the sale of certain of the assets on a going concern basis permitted the continuation of employment and benefits for many in the locality of the plants that they had previously worked in. The alternative in bankruptcy under the BIA might well have resulted in loss of employment for many and less recovery for all the secured creditors.
[52] The liquidation of the applicant under the CCAA did not proceed under an explicit Plan voted on by the creditors and approved by the Court.
[53] What did proceed was an Initial Order that in addition to a stay of proceedings (which has continued), permitted, but did not require the Applicant to pay ordinary operating expenses in the course of liquidating assets under the CCAA for the benefit of all stakeholders.
[54] The Initial Order specifically provides in paragraph 5 as follows:
[5] THIS COURT ORDERS that the Applicants shall be entitled but not required to pay the following expenses whether incurred prior to or after this Order;
(a) all outstanding and future wages, salaries, employee benefits and pension contributions, vacation pay, bonuses, and expenses payable on or after the date of this Order, in each case incurred in the ordinary course of business and consistent with existing compensation policies and arrangements, which, for greater certainty, shall not include any payments in respect of employee termination or severance; and
[55] No creditors including those representing the members of the pension plans opposed the granting of the Initial Order; the representatives of pension plans did not oppose the sale of assets on the occasions in which approval was sought and did not raise the issue of deemed trust until the windup orders made in August 2012.
[56] There was no objection on the part of any party to the payment which the Applicant made to the pension plans being the regular and ordinary contributions under the plans from 2009 until the wind up date.
[57] Up to August 2012 there was no request made on the part of the pension plans to set aside the Initial Order and provide for what might have been expected to be a deemed trust under wind up.
THE FIRST ISSUE
Are any funds held by the Monitor and/or GFPI deemed to be held in trust pursuant to subsections 57(3) or 57(4) of the PBA for the beneficiaries of each of the Pension Plans as a result of the wind-up of the Pension Plans, and if so, what amounts of the funds held by the Monitor and/or GFPI are deemed to be held in trust?
[58] As noted above one of the two defined benefit pension plans at issue in Indalex was wound up prior to the commencement of the CCAA proceeding, and the other pension plan was wound up after the filing and the sale of Indalex’s assets. The Supreme Court of Canada in Indalex did not find a deemed trust in respect of the latter pension plan. In considering this first issue, therefore, it is necessary to address the threshold issue of whether a deemed trust can be created during the pendency of a stay of proceedings.
[59] The majority in the Supreme Court of Canada in Indalex concluded that prior to an Initial Order a deemed trust did indeed arise when a pension plan was wound up in respect of windup deficits notwithstanding the difficulty in ascertaining the precise amount of the trust.
[60] One of the arguments made before the Supreme Court of Canada in Indalex and was rejected was that the priorities under the CCAA should parallel those under the BIA with the result that at the time of the Initial Order under the CCAA the BIA priorities by which pension claims would be unsecured would prevail. The following passage in the decision of Deschamps J. for herself and the majority that dealt with that issue rejected the proposition:
[50] The Appellants’ first argument would expand the holding of Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, 2010 SCC 60, [2010] 3 S.C.R. 379, so as to apply federal bankruptcy priorities to CCAA proceedings, with the effect that claims would be treated similarly under the CCAA and the BIA. In Century Services, the Court noted that there are points at which the two schemes converge:
Another point of convergence of the CCAA and the BIA relates to priorities. Because the CCAA is silent about what happens if reorganization fails, the BIA scheme of liquidation and distribution necessarily supplies the backdrop for what will happen if a CCAA reorganization is ultimately unsuccessful. [para. 23]
[51] In order to avoid a race to liquidation under the BIA, courts will favour an interpretation of the CCAA that affords creditors analogous entitlements, Yet this does not mean that courts may read bankruptcy priorities into the CCAA at will. Provincial legislation defines the priorities to which creditors are entitled until that legislation is ousted by Parliament. Parliament did not expressly apply all bankruptcy priorities either to CCAA proceedings or to proposals under the BIA. Although the creditors of a corporation that is attempting to reorganize may bargain in the shadow of their bankruptcy entitlements, those entitlements remain only shadows until bankruptcy occurs. At the outset of the insolvency proceedings, Indalex opted for a process governed by the CCAA, leaving no doubt that although it wanted to protect its employees’ jobs, it would not survive as their employer. This was not a case in which a failed arrangement forced a company into liquidation under the BIA. Indalex achieved the goal it was pursuing. It chose to sell its assets under the CCAA, not the BIA.
[52] The provincial deemed trust under the PBA continues to apply in CCAA proceedings, subject to the doctrine of federal paramountcy (Crystalline Investments Ltd. v. Domgroup Ltd,, 2004 SCC 3, 2004 SCC 3, [2004] 1 S.C.R. 60, at para. 43). The Court of Appeal therefore did not err in finding that at the end of a CCAA liquidation proceeding, priorities may be determined by the PPSA’s scheme rather than the federal scheme set out in the BIA.
[56] A party relying on paramountcy must “demonstrate that the federal and provincial laws are in fact incompatible by establishing either that it is impossible to comply with both laws or that to apply the provincial law would frustrate the purpose of the federal law” (Canadian Western Bank, at para. 75). This Court has in fact applied the doctrine of paramountcy in the area of bankruptcy and insolvency to come to the conclusion that a provincial legislature cannot, through measures such as a deemed trust, affect priorities granted under federal legislation (Husky Oil).
[57] None of the parties question the validity of either the federal provision that enables a CCAA court to make an order authorizing a DIP charge or the provincial provision that establishes the priority of the deemed trust. However, in considering whether the CCAA court has, in exercising its discretion to assess a claim, validly affected a provincial priority, the reviewing court should remind itself of the rule of interpretation stated in Attorney General of Canada v. Law Society of British Columbia, 1982 29 (SCC), [1982] 2 S.C.R. 307 (at p. 356), and reproduced in Canadian Western Bank (at para. 75):
When a federal statute can be properly interpreted so as not to interfere with a provincial statute, such an interpretation is to be applied in preference to another applicable construction which would bring about a conflict between the two statutes.
[61] In the context of evaluating the important policy considerations of maintaining a stay of proceedings under a liquidating CCAA, it is important for the Court to consider the appropriate time for the CCAA proceeding to either come to an end or to lift the stay of proceedings to provide for an orderly transition from the CCAA process to the BIA. These proceedings are a good example. Initially, GE Canada initiated bankruptcy proceedings against GFPI. The response of GFPI was to seek protection under the CCAA and carry out an orderly liquidation of its assets. The Court permitted the orderly liquidation of the assets in the context of the CCAA to maximize recovery in the assets.
[62] Now, the usefulness of the CCAA proceedings has come to an end. Is it appropriate for the Court to allow the Second Lien Lenders to institute bankruptcy proceedings and to forthwith issue a Bankruptcy Order in respect of GFPI? The Second Lien Lenders urge that the regime that will be in place as a result of the Bankruptcy Order will be that contemplated by Parliament in the context of a liquidation and distribution of a bankrupt’s assets. The process carried out for the transition from the CCAA proceedings to the BIA will it is suggested be as intended by Parliament and consistent with the principles established by the Supreme Court of Canada in the Re Century Services case.
[63] It is clear that there are insufficient proceeds to pay the claims of all of the creditors of GFPI. Reversing priorities can be a legitimate purpose for the institution of bankruptcy proceedings. Lifting the stay provided for in the Initial Order at this time, the Second Lien Lenders submit is the logical extension of that legitimate purpose. Accordingly, it is said appropriate in the circumstances of this case that the stay be lifted and that a Bankruptcy Order be issued by the Court in respect of GFPI forthwith.
[64] I accept that to impose the same priorities under the CCAA as the BIA without careful consideration might well undermine the flexibility of the CCAA. For example the CCAA Court itself may make an order on application on notice declaring a person to be a critical supplier (s.11.4) with the charge in favour of that supplier. This is but one example of the flexibility of the CCAA that may not be available under the BIA once approved by the Court. The same is the case for DIP financing as was the case in Indalex.
[65] Where there is a CCAA Plan approved by creditors the effect of the contract created may alter what would otherwise be priorities under the BIA.
[66] Where there is a liquidating CCAA which proceeds by way of an Initial Order and the subsequent sale of assets with Vesting Orders all the creditors have an opportunity to object to the sales or process which is in effect an implicit CCAA Plan. A vote becomes necessary only when there is lack of consensus and a priority dispute requires resolution by a vote. In this case the claim of the secured creditors exceeded and continues to exceed, the value of the assets.
[67] There may be good and solid reasons acceptable to creditors and stakeholders who agree to a process under the CCAA either in a formal Plan or during the course of a liquidation to alter the priorities that would come into play should there be an assignment or petition into bankruptcy.
[68] The position of the Pension Administrator, the Superintendent of Financial Services and those parties in support of their position, in this case is that in the circumstances the deemed trust which they say arises under the PBA should prevail over other creditor claims notwithstanding the CCAA Initial Order.
[69] The arguments in support of a deemed trust arising upon windup of the pension plans within the CCAA regime are summarized as follows:
i) GFPI should not be excused from any obligation with respect to the pension plans.
ii) The wind ups which triggered the deemed trusts were the subject of specific judicial authorization and even assuming the stay of proceedings under the Initial Order applies, leave of the Court has been given to windup which triggers the deemed trusts.
iii) The deemed trusts are triggered automatically upon wind up by independent operation of a valid provincial law which has not been overridden by specific order.
iv) The Second Lien Creditor should not be permitted to challenge the deemed trusts at this stage since they did not challenge the windup orders.[^5]
[70] From my review of the decisions of the Supreme Court of Canada in Century Services and Indalex I am of the view that the task of a CCAA supervising judge when confronted with seeming conflict between Federal insolvency statute provisions and those of Provincial pension obligations is to make the provisions work without resort to the issue of federal paramountcy except where necessary.
[71] The decision of the Supreme Court of Canada in Indalex assists in the execution of this task. The deemed trust that arises upon wind up prevails when the windup occurs before insolvency as opposed to the position that arises when wind up arises after the granting of an Initial Order.
[72] The Indalex decision provides predictability and certainty of entitlement to the stakeholders of an insolvent company. If on the application for an Initial Order any party seeks to challenge that priority for the purpose of providing DIP financing in furtherance of a Plan or work out liquidation they are free to do so at the time of the Initial Order. Secured creditors can then decide whether they are willing to pursue a Plan or immediately apply for a bankruptcy order.[^6]
Should GFPI be excused from wind up deficiency payments?
[73] I am of the view that the question advanced by the Pension Administrators should be put another way “Is GFPI obligated in view of the provisions in para. 5 of the Initial Order (see paragraph 54) above to make the special payments that arise by virtue of the provisions of the PBA?
[74] I accept the argument of the Pension Administrator and all those urging the deemed trust application that the Approval and Vesting Orders necessarily do not for all purposes freeze priorities at the point of sale. Absent other order of the Court, made at the time however, they do provide the certainty required by creditors who are asked to concur with the sales.
[75] In the situation of GFPI there was a recognition in para. 5 of the Initial Order that there may be a challenge to expenses on an ongoing basis.
[76] Where distribution to creditors is made following a sale of assets on full notice, that distribution in accordance with an Approval and Vesting Order does freeze the priorities with respect to that distribution, absent specific direction otherwise.
[77] In this case, the issue of priority is said to arise in respect of a specific sum of money in the hands of the Monitor in respect of funds from assets sold and not distributed and is said to be determined in accordance with the Court Order made at the time of determination which acknowledged all the pension obligations including wind up.
[78] To suggest that all claims and priorities never sought would apply to the Approval Orders past or future would, in my view, be entirely contrary to the principles and scheme of the CCAA. To conclude otherwise would risk that secured creditors to whom distribution had been made would be at risk of disgorgement and unpaid secured creditors to uncertainty of priority in future recovery.
[79] This is why in my view the only consistent and predictable operation of the CCAA should give predictability as of the Initial Order to enable an informed decision to be made whether or not to proceed with bankruptcy. This issue is implicitly revisited every time there is a sale and distribution of assets.
[80] The Supreme Court of Canada decision in Indalex stands for the proposition that provincial provisions in pension areas prevail prior to insolvency but once the federal statute is involved the insolvency provision regime applies.
[81] Justice Cromwell at paragraphs 177 and 178 in Indalex spoke of the problem of extending the deemed trust. While he was speaking of the entirety of the issue his comments below are equally applicable to a deemed trust said to arise during insolvency:
177 Second, extending the deemed trust protections to the wind-up deficiency might well be viewed as counter-productive in the greater scheme of things. A deemed trust of that nature might give rise to considerable uncertainty on the part of other creditors and potential lenders. This uncertainty might not only complicate creditors’ rights, but it might also affect the availability of funds from lenders. The wind-up liability is potentially large and, while the business is ongoing, the extent of the liability is unknown and unknowable for up to five years. Its amount may, as the facts of this case disclose, fluctuate dramatically during this time. A liability of this nature could make it very difficult to assess the creditworthiness of a borrower and make an appropriate apportionment of payment among creditors extremely difficult.
178 While I agree that the protection of pension plans is an important objective, it is not for this Court to decide the extent to which that objective will be pursued and at what cost to other interests. In her conclusion, Justice Deschamps notes that although the protection of pension plans is a worthy objective, courts should not use the law of equity to re-arrange the priorities that Parliament has established under the CCAA.
[82] That consistency prevails if the limitation on deemed trust is limited to those plans already in windup as of the date of the Initial Order.
[83] During the course of the sale of assets the Initial Order continued to operate presumably to the advantage of all stakeholders since the asset sale as here proceeded in an advantageous fashion for maximizing return on assets, for the benefit of those who were able to transfer employment and in an advantageous fashion for the pension plans which received the benefit of ongoing regular payments.
[84] The alternative had the bankruptcy petition proceeded would have seen a significant loss particularly to the pension plans.
[85] I note as have many judges before me that the solution to the problem created by section 67 of the BIA which leaves pension obligations unsecured and Provincial statutes which seek to raise the priority lies with the federal and provincial governments not with judicial determination. As Justice Deschamps noted in Indalex:
[81] There are good reasons for giving special protection to members of pension plans in insolvency proceedings. Parliament considered doing so before enacting the most recent amendments to the CCAA, but chose not to (An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005, S.C. 2007, c. 36, in force September 18, 2009, SI/2009- 68; see also Bill C-501, An Act to amend the Bankruptcy and Insolvency Act and other Acts (pension protection), 3rd Sess., 40th Parl., March 24, 2010 (subsequently amended by the Standing Committee on Industry, Science and Technology, March 1, 2011)). A report of the Standing Senate Committee on Banking, Trade and Commerce gave the following reasons for this choice:
Although the Committee recognizes the vulnerability of current pensioners, we do not believe that changes to the BIA regarding pension claims should be made at this time. Current pensioners can also access retirement benefits from the Canada/Quebec Pension Plan, and the Old Age Security and Guaranteed Income Supplement programs, and may have private savings and Registered Retirement Savings Plans that can provide income for them in retirement. The desire expressed by some of our witnesses for greater protection for pensioners and for employees currently participating in an occupational pension plan must be balanced against the interests of others. As we noted earlier, insolvency — at its essence — is characterized by insufficient assets to satisfy everyone, and choices must be made.
The Committee believes that granting the pension protection sought by some of the witnesses would be sufficiently unfair to other stakeholders that we cannot recommend the changes requested. For example, we feel that super priority status could unnecessarily reduce the moneys available for distribution to creditors. In turn, credit availability and the cost of credit could be negatively affected, and all those seeking credit in Canada would be disadvantaged.
[86] I conclude that given the uncertainty in this area of legal decision together with the provisions of paragraph 5 of the Initial Order that GFPI was not under an obligation to make the special windup payments and was correct is seeking direction from this Court.
[87] I can only presume that had GFPI sought to make the special payments that they would have been opposed on much the same grounds as now advanced by the Second Lien Lenders.
THE SECOND ISSUE
Did the Court Order authorize the Deemed Trust?
[88] It is urged in the second ground for priority of the deemed trust that this Court authorized the wind up of the Pension plans which by the operation of the PBA imposes the deemed trust.
[89] The Order authorizing the windup in its operative provisions with respect to wind up is as follows:
This Court Orders that the Monitor is hereby authorized and directed, until further Court Order, to hold back from any distribution to creditors of GFPI an amount of $191,245.00 which is estimated to be the amount necessary to satisfy the wind-up deficit of the Timmins Salaried Plan. For greater certainty nothing in this order affects or determines the priority or security of the claims against these funds.
This Court Orders that with respect to the Remaining Applicants, the Stay Period as defined by the Initial Order, be and is hereby extended to November 30, 2011.
[90] Similar wording was in the order with respect to the Executive Plan.
[91] Nothing in those Orders dealt with the issue of deemed trust. No one appearing raised the issue of deemed trust. The paragraph above dealt with the issue presented and preserved the argument that arises today namely whether in context of a claimed deemed trust the estimated windup deficit was to be held from distribution.
[92] One can understand why the issue was not raised beyond setting aside the amount and leaving the issue for later determination. For their own reasons each side was content to have the CCAA process continued. It was to the benefit of all party stakeholders.
[93] When a pension plan is wound up the precise amount of money necessary to fulfill the obligation to each and every pensioner is at that time uncertain. Over time as windup occurs those amounts become more certain and that is why the deemed trust concept comes into play.
[94] It does seem to me that a commitment to make wind up deficiency payments is not in the ordinary course of business of an insolvent company subject to a CCAA order unless agreed to. Even if the obligation could be said to be in the ordinary course for an insolvent company GFPI was not obliged to make the payments, (See paragraph 45 of the Initial Order above).
[95] This is precisely the reason for the granting of a stay of proceedings that is provided for by the CCAA. Anyone seeking to have a payment made that would be regarded as being outside the ordinary course of business must seek to have the stay lifted or if it is to be regarded as an ordinary course of business obligation, persuade the applicant and creditors that it should be made. The decision of the Supreme Court of Canada in Indalex appears to stand for the proposition that once a valid Initial Order is made under the CCAA the Federal insolvency regime is paramount, and absent any agreement or other Order where there is conflict, the Initial Order prevails over an applicant’s obligation under the provincial statute.
[96] This conclusion provides the predictability and certainty that is necessary for those who are willing to consider financing a distressed entity. It is unlikely that lenders would be willing to support a distressed entity if they had little or no information on the amount or timing of pension obligations.
[97] The Supreme Court of Canada decision in Indalex alerts lenders who are aware or are taken to be aware prior to insolvency of the fact of a deemed trust when there is wind up even though the amount may not be known.
[98] Where a pension plan has not been wound up prior to insolvency the potential for a windup deficiency is entirely uncertain. Since a deemed trust does not arise until there is a windup order it would be entirely inconsistent with the insolvency regime of the CCAA (absent additional legislation) to expose lending creditors to an uncertain priority both in time and amount.
[99] It is to be noted that on the sale of assets as they occurred there was no issue raised about the priority of claims prior to those sales or distribution of assets as reflected in the fact that payments were made to entirely discharge the security of the First Lien Lenders and a portion of the obligation to the Second Lien lenders.
[100] The Court did not authorize a deemed trust to prevail in insolvency by granting windup orders.
Should the Stay be lifted to permit the petition in bankruptcy to proceed?
[101] If one accepts the above analysis a lifting of the stay to permit bankruptcy is not necessary to defeat a deemed trust said to arise after the Initial Order.
[102] The basis of the motion on behalf of West Face Capital Inc. (the Second Lien Lenders) is set out in paragraph 2 of their factum:
The Second Lien Lenders seek an Order lifting the stay of proceedings in respect of GFPI for the purpose of facilitating the issuance of a Bankruptcy Order in respect of GFPI forthwith. It is appropriate that a bankruptcy proceeding be put into place immediately, otherwise the priority secured interests of the Second Lien Lenders will be irrevocably prejudiced. In the absence of a bankruptcy proceeding, certain parties with an interest in advancing the claims of the pension beneficiaries have taken steps to re-position claims as priority claims or claims that must be paid immediately. The factual and legal basis for those claims have been advanced during the CCAA proceedings, notwithstanding the stay of proceedings.
[103] Those opposed to the motion to lift the stay (which is supported by GFPI and the Monitor) urge that what is being requested is extraordinary relief from the requirements of the PBA and GFPI should not be excused from its obligation to make special payments simply at the asking.
[104] While acknowledging that the court does have broad discretion, it is urged there is nothing in the circumstances of this case which would justify relieving GFPI of its obligation to make special payments.
[105] It is further submitted that there is no decision that stands for the proposition that bankruptcy is automatic at the end of a CCAA proceeding and no independent reason for granting the bankruptcy order.
[106] It is well settled that bankruptcy may well be an appropriate outcome of a CCAA process that has failed or has run its course. In Century Services 2010 SCC 60 at paragraph 23, Justice Deschamps noted “because the CCAA is silent about what happens if reorganization fails, the BIA scheme of liquidation distribution necessarily supplies the backdrop for what will happen if a CCAA is ultimately unsuccessful”.
[107] The issue of terminating a CCAA proceeding by permitting a petition in bankruptcy to proceed is one of discretion on the part of the supervising judge (see Ivaco (Re) [2006] 0.J. No. 4152 para. 77 and Nortel Networks Corp. (Re) 2009 ONCA 833 at para 41.)
[108] Those who seek to have a stay lifted or to oppose the stay being lifted to obtain other relief must be acting in good faith. There is no evidence of lack of good faith here beyond the suggestion of delay.
[109] The parties resisting the lifting of the stay urge that it not be granted on several grounds. The first is based on the delay on the part of West Face in bringing the motion. It is asserted that the motion should have been brought when the applicant first made it returnable on its motion for direction.
[110] It is also urged that given the passage of time that the Monitor should be directed to make payments of those amounts which would otherwise have been made to date under the windup orders of the Superintendent.
[111] The argument advanced by the Pension Administrator is that the CCAA process has completed what it set out to do, namely, liquidate the assets of GFPI and therefore there is no purpose to be served by lifting the stay and therefore the Order should not be granted to allow bankruptcy.
[112] West Face seeks to lift the stay of proceedings granted by the Initial Order to enable the Petition commenced in March 2010 to proceed.
[113] Like those opposing, West Face takes the position that the CCAA process has run its course and there is no likelihood of recovery on any other assets and adds therefore no reason for the applicant to continue to make any pension payments on account of pension plans. Since the security of West Face on behalf of the Second Liens Lenders is valid they are entitled to be paid from the assets on hand and a bankruptcy Order would expedite recovery.
[114] What then is the process that is involved under the CCAA when there is not one but several sales of assets of an insolvent company over a period of time during which no one objects to the continuation of “payments being made in the ordinary course” which include ongoing payments to pension plans.
[115] The CCAA continues to be sufficiently flexible to allow for an ongoing sale of assets without the necessity of a formal plan voted on by creditors. As I noted above, a sale of assets following an Initial Order is an implicit plan.
[116] In this case following the sale of the major assets to Georgia Pacific there was a distribution the effect of which was to pay out the First Lien Lenders in entirety and indeed some payments to the Second Lien Lenders.
[117] Following the granting of leave in Indalex by the Supreme Court of Canada all of the parties in this case recognized that the issue of priority of deemed trusts would likely be clarified by that Court’s decision in that case.
[118] From the time that the motion of GFPI for direction with respect to payments on windup deficiency was first brought before this court, there was agreement by all Counsel that the Supreme Court decision in Indalex if not determinative would provide considerable guidance on the issues in this case.
[119] To my knowledge no party has been prejudiced by the delay in dealing with the priority issue. For this reason I do not accept the proposition that West Face should be denied leave on the basis of delay.
[120] This leaves the question as to whether or not on the facts of this case leave to lift the stay should be granted. It was to the advantage of all stakeholders presumably including the pension plans and the Second Lien Lenders that the CCAA process be utilized for the sale of assets rather than the BIA process.
[121] I am of the view that in the absence of provisions in a Plan under the CCAA or a specific court order, any creditor is at liberty to request that the CCAA proceedings be terminated if that creditor’s position may be better advanced under the BIA.
[122] The question then is whether it is fair and reasonable bearing in mind the interests of all creditors that those of the creditor seeking preference under the BIA be allowed to proceed. In this Court’s decision in Indalex, I questioned whether it would be fair to permit the stay to be lifted if it was simply because of the uncertainty as to whether at that time prior to the later appeals that the deemed trust provisions of the PBA prevailed.
[123] In this case West Face urges its interests should prevail because otherwise a deemed trust which did not exist at the time of the Initial Order would de facto be given priority by the requirement that GFPI make wind up deficiency payments, to pay priorities that would not be recognized under the BIA.
[124] I conclude that the argument on behalf of West Face should succeed. The purpose of the process under insolvency is to provide predictability to the interests of creditors but at the same time allow for flexibility as under the CCAA where that provides a greater return than would the operation of the BIA. That has been the case here.
[125] If the purpose under the insolvency statutes is to maximize recovery to the extent possible for all concerned, then the imposition of a priority which arises only in the middle of insolvency except where made like a DIP financing, for the purpose of enhancing recovery would likely result in credit being much more difficult if not impossible to obtain in the first instance.
[126] The Supreme Court of Canada in Indalex limited the deemed trust provisions of the PBA to obligations prior to insolvency. To deny the relief sought by West Face would in my view be at odds with that decision.
[127] For the above reasons the Order sought by West Face will be granted. Those opposing the stay urged that all payments that should have been made under the deficiency wind up be made until the date of this decision.
[128] While I have some sympathy for the position of the pension plans in these circumstances I am satisfied that the amounts held by the Monitor should not be applied to the pension plans. From the time of the return of the motion for directions all parties were aware of the need for a determination to be made following the Supreme Court of Canada decision in Indalex.
Conclusion
[129] As noted above in this decision virtually all of the judges who have had to deal with this difficult issue of pensions and insolvency have commented that ultimately these are matters to be dealt with by the Federal and Provincial governments.
[130] The difficulty of dealing with these complex issues is not restricted to Canada. In her book of 2008[^7] Prof. Janis Sara has chronicled the way in which various countries around the world have sought to deal with the difficulty of pension priority in the context of business financing and insolvency. The conclusion is there is no easy answer.
[131] I have no doubt that the question of pensions will be an ongoing issue for some time to come. There is an urgency that legislators both Federal and Provincial address the issue.
[132] In this case and for the above reasons the priority of proceeds will be to the Secured Creditors in respect of those amounts that otherwise would be payable in respect of windup deficiencies.
[133] I would not think this is an appropriate matter for costs disposition but if any Counsel disagrees or there is any further issue with respect to an Order following from this decision I may be spoken to.
C. L. CAMPBELL J.
Date: September 20, 2013
[^1]: Decision in this Court at 2010, ONSC 1114 and in Court of Appeal for Ontario, 2011 ONCA 265. [^2]: 2010 ONSC 114, 2011 ONCA 265. [^3]: Pension Benefit Act RSO 1990, c. P.8 57 Accrued contributions (3) An employer who is required to pay contributions to a pension fund shall be deemed to hold in trust for the beneficiaries of the pension plan an amount of money equal to the employer contributions due and not paid into a pension fund. R,S.O. 1990, c. P.8, s. 57 (3). Wind up (4) Where a pension plan is wound up in whole or in part, an employer who is required to pay contributions to the pension fund shall be deemed to hold in trust for the beneficiaries of the pension plan an amount of money equal to employer contributions accrued to the date of the wind up but not yet due under the plan or regulations. R.S.O. 1990, c.P.9,s.57 (4). [^4]: 2010 SCC 60, 2010 SCC60 at para. 77. [^5]: submission was made in the factum of PWC that all funds held by the Monitor should be regarded as proceeds of accounts and inventory therefore resulting in priority being directed by the Personal Property Security Act (PPSA) s.30 (7) which would subordinate other security to the deemed trusts. This submission was not seriously pursued and in view of the conclusion I reached on other grounds it is not necessary to deal with the argument. [^6]: It is not entirely clear from the various decisions in Indalex as to precisely when the deemed trust which can take priority operates. The date of the Initial Order was given as one possibility the other being the date of sale of the assets. In this case it does not really matter which date applies as the Initial Order and primary asset sale pre-date any deemed trust. [^7]: Employee & Penson Claims during Company Insolvency – A Comparative Study of 62 Jurisdictions, Thomson & Carswell.