High court ruling places creditors before pensioners

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The Supreme Court of Canada has ruled that the U.S. parent of an insolvent Toronto company is entitled to the Canadian entity's last $6.75-million, instead of a group of the firm's retirees, whose pensions were cut after their employer went under.

The court's ruling in the case of Indalex Ltd., which plunged into bankruptcy protection in 2009, was is expected to have broad implications for other companies and pension plans across the country.

It comes amid widespread concern over the viability of many companies' pension schemes and public outrage after former employees of Nortel Networks Corp. and other large firms have been left with little after their employers went belly up.

Friday's decision reverses a controversial 2011 Ontario Court of Appeal ruling that surprised bankruptcy lawyers by siding with Indalex's retirees, who had fought for a piece of the proceeds from the sale of the company's assets to restore their pensions, which had been slashed cut by more than half.

While many cheered that Ontario ruling as a breakthrough victory for pensioners, bankruptcy law experts warned the decision would radically reorder Canada's insolvency regime. They said it could make it more difficult for struggling companies with large defined-benefit pension plans to borrow the money they need to weather financial storms.

Normally, in the scramble for money after a company has filed for bankruptcy protection under the federal Companies' Creditors Arrangements Act, pension plans rank far below the banks and hedge funds that lend last-ditch money to distressed companies. These "debtor-in-possession" or DIP loans usually come on the condition of a court-ordered guarantee they will be repaid first.

Indalex, an aluminum processor, had a $6.75-million pension shortfall when it entered bankruptcy protection. But all of the cash from the sale of its assets was bound for the company's U.S. parent, Sun Indalex Finance LLC, to cover some of its costs for paying back DIP loans made to Indalex by a group of banks.

The Ontario Court of Appeal's 2011 ruling said the money should go to the pensioners because Indalex had breached its duties to its retirees by failing to keep their pension plans fully funded and by failing to give proper notice that it was plunging into bankruptcy protection.

On Friday, Bay Street bankruptcy lawyers welcomed the Supreme Court's reversal of that decision, saying it restores certainty for DIP lenders. But they also singled out part of the decision as at least a consolation prize for pensioners – and something that could still create concern for those who lend money to companies.

Although it ultimately determined that the DIP lenders rank first because the court orders that grant them priority come under a federal law, the court also surprised observers by ruling the full amount of a pension shortfall at a plan's windup should be considered a "deemed trust" under Ontario's pension law. That could push pensioners' demands further ahead in the line of creditors, but still second to DIP lenders.

A lawyer for Sun Indalex Finance LLC said the company had no comment.

Andrew Hatnay, a Toronto lawyer with Koskie Minsky LLP who acted for former executives with Indalex whose pensions were slashed, said U.S. bankruptcy judges are much more likely to use their discretion in such cases to help employees: "The Supreme Court [of Canada] has gone in the opposite direction … leaving more room for potential abuse of the bankruptcy system."

Robert Leckie, a former executive with Indalex who lives in San Antonio, Tex., and whose pension was slashed in half, said he was disappointed with the Supreme Court's decision.

"To allow a pension plan to be underfunded by this amount, it's an indictment of the whole system, really," said Mr. Leckie, who recently had a bone marrow transplant to treat his leukemia.

The 65-year-old said he keeps his troubles in perspective: "On the one hand, it is outrageous, and I miss the money and I need the money. On the other hand, I am so aware that there's so many people both in Canada and in the United States that have been suffering these last few years that are so much worse off than I am."