A landmark Ontario Court of Appeal ruling last year buoyed the hopes of retirees across the country who were facing drastic cuts to their pension income after the companies for which they worked went belly up. But so far, the ripple effects of ruling have been hard to measure.
More than 10 months after the decision in the case of an insolvent Toronto-based aluminum processor called Indalex Ltd., the ruling has surfaced in courtrooms across Canada as insolvent companies struggle to restructure their operations and their pensioners look on anxiously.
The Indalex ruling gave that company's pensioners priority over its other creditors. In so doing, it appeared to upend the traditional pecking order when a company seeks protection from its creditors, putting underfinanced pension plans ahead of key lenders.
The complex decision relied on the Indalex case's particular facts. But it attracted widespread attention, given the well-publicized plight of pensioners for defunct companies such as Nortel Networks Corp., who saw their nest eggs disappear.
The Indalex ruling remains a focus in the arcane world of insolvency and pension lawyers on Bay Street, who warned at the time that the decision would make it difficult to secure financing for companies in distress.
Companies in court-supervised restructuring proceedings rely on what is known as "debtor-in-possession" or DIP loans from last-resort lenders, who would be reluctant to participate without being guaranteed first place in the payback line.
The Indalex decision itself now faces a hearing before the Supreme Court of Canada, scheduled for June 5. In the meantime, it has come up in several cases in which companies sought protection from their creditors in order to restructure, under the Companies Creditors' Arrangement Act (CCAA).
In what may be the latest, one group of pensioners of struggling Catalyst Paper Corp., based in Richmond, B.C., have hired the same law firm that acted for pensioners in the Indalex case, Koskie Minsky LLP.
But a B.C. Supreme Court judge approved an arrangement that will see the DIP lender, JPMorgan Chase & Co., remain first in line when it comes time to be paid.
Lawyer Andrew Hatnay of Koskie Minsky said Catalyst's pension plan is underfunded by $75-million, and that a previous attempt to restructure the company failed: "This case has all the ingredients for a bad result for the pensioners."
Gary McCaig, 63, of Port Alberni, B.C., has been advocating on pension issues since he retired as a manager with the company. He said the company's defined-benefit plan has been underfunded for years and pensioners could lose 25 to 40 per cent of their income if the plan was wound up. (Defined-benefit plans guarantee how much the pensioner will receive, while payouts from defined-contribution pensions depend on the financial performance of the plan.)
"The company has really let us down, I think, in failing to deal with deficits in the pension plan," said Mr. McCaig, who has sat through what he said were tense proceedings.
He said he felt the Indalex ruling was a sign courts were moving in the right direction.
"Indalex …was a ray of hope," he said. "It may or may not apply to our case. … At least, for once, there was something done for the pensioners."
Catalyst and its lawyers declined to comment on the case. But both the company and the pensioners say their hope is the company can safely emerge from CCAA.
Two Ontario Superior Court rulings earlier this month in CCAA proceedings for metals producer Timminco Ltd. and its affiliate Bécancour Silicon Inc. also saw DIP lenders receive priority over any pension claims.
Lawyers for unions involved opposed the moves. But Mr. Justice Geoffrey Morawetz, referring to the Indalex ruling, decided that putting the DIP lenders first was the only way to avoid a fully fledged bankruptcy, in which pensioners would again end up losers.
James Gage, an insolvency lawyer with McCarthy Tétrault LLP in Toronto, said the Timminco rulings should reassure DIP lenders that they can still win priority in CCAA proceedings despite Indalex.
"The Timminco decisions [are]providing some comfort to potential DIP lenders that they can and will get priority, notwithstanding Indalex," said Mr. Gage, who was not involved in the case.
However, the ruling has also had an effect on lenders where there is not a CCAA filing in sight. Lenders are taking closer looks at providing money to companies with big defined-benefit pension plans, for fear of being squeezed out by pensioners if things go badly.
Darrell Brown, a lawyer with Sack Goldblatt Mitchell LLP, who represented unionized workers in the Indalex case, said Bay Street has exaggerated the ruling's implications.
Judges in CCAA proceedings will give DIP lenders what they want "99 per cent of the time" if they show why they need it, he said, and if pension plans are not completely ignored. Any increased lending costs caused by concern over the ruling will likely subside, he added.
"I do believe that it is still quite overblown, in terms of reaction, in some circles," Mr. Brown said. "In part, it's been a self-fulfilling prophecy. A lot of lawyers who are providing counsel to lenders sounded the alarm after the release of the decision."