A complex ruling from the Ontario Court of Appeal last year delivered rare good news to retirees left with slashed pensions after their employer fell into insolvency. But critics say the ruling threatens the very system that allows struggling Canadian companies to seek protection from their creditors and restructure.
Now it's up to the Supreme Court of Canada to decide what to do.
Lawyers for both sides made their case on Tuesday as the top court weighed a challenge of the Ontario Court of Appeal's decision in the restructuring of Toronto-based aluminum processor Indalex Ltd., which sought court protection from its creditors in 2009.
The restructuring sold the company and drastically reduced benefits for retirees dependent on two of its pension plans. But in April last year, Ontario's appeal court shook the arcane world of Bay Street pension and insolvency lawyers by putting the pensioners ahead of the company's other creditors – upending the accepted pecking order under the Companies' Creditors Arrangement Act (CCAA).
Indalex's underfunded pension plans, the court ruled, were entitled to $6.75-million left from the sale of the company – even before repayment of a key creditor. And the court chastised the company for breaching its fiduciary duty to the pensioners by failing to address the underfunded plans.
It was seen as a victory for the growing number of pensioners across Canada facing reduced benefits after their former employers ran into financial problems, a trend illustrated by the much-publicized plight of Nortel Networks Corp. retirees.
But Bay Street insolvency lawyers warned the uncertainty created by the Indalex ruling would have negative side-effects. They predicted sources of the last-ditch "debtor-in-possession," or DIP, loans that restructuring companies desperately need while under protection would either dry up or become more expensive if DIP lenders feared they would not be repaid first.
On Tuesday, the complex dispute arrived before the Supreme Court, after lawyers for the company's creditor, Sun Indalex Finance LLC, and the court-appointed monitor in the CCAA process, FTI Consulting Canada ULC, appealed the Ontario ruling.
Watching closely from the public gallery was Leon Kozierok, 70, a former executive with Indalex who saw his pension slashed from more than $5,000 to just $2,000 a month.
"We have a lot at stake here," Mr. Kozierok said in a phone interview. "We're hopeful. … It has a lot to do with integrity. When I was hired on, I was told that the company has a very generous pension plan that will take care of you in your old age … That's what we bet on."
But lawyers for the company and its court-appointed monitor warned that the Indalex ruling threatened the ability of companies to use the CCAA for its intended purpose: to create breathing room from creditors' demands so a company can restructure and survive without plunging into full-blown bankruptcy – and, in the process, save jobs.
"The approach of the Court of Appeal would undermine the purpose of the CCAA," said Benjamin Zarnett of Goodmans LLP, acting for Sun Indalex, in court Tuesday. "The CCAA's important public purpose is to provide an alternative for insolvent corporations to liquidation. Liquidation has significant social and economic costs."
But the justices were quick to pepper Mr. Zarnett with questions, including zeroing in on the pensioners' concern about the lack of notice they received of the insolvency arrangements.
Chief Justice Beverley McLachlin asked Mr. Zarnett to address the argument that the pensioners were "faced with this fait accompli, stamped with a court order" and unable to propose alternatives: "It strikes me as a little unfair, at least as I read the submissions opposite."
The amount of money is relatively small in this case. But David Byers of Stikeman Elliott LLP, acting for FTI Consulting, warned that creditors of a big company facing a potentially billion-dollar pension shortfall would prefer bankruptcy to waiting behind pensioners in a CCAA restructuring.
Appearing before the Supreme Court for the pensioners were Andrew Hatnay of Koskie Minsky LLP, who represents a small group of former company executives, and Darrell Brown of Sack Goldblatt Mitchell LLP, who acts for another group of pensioners represented by the United Steelworkers union.
Mr. Hatnay reminded the justices on Tuesday that Indalex "took active steps against the retirees to prevent them from recovering anything for their pension plan."
Mr. Kozierok hopes a ruling that goes his way from the Supreme Court would help the many other pensioners in his situation with whom he has had contact since his battle began. "Everybody relates horror stories of what companies have done to people who have been with them for a long time, put in a life's work, and then got screwed in the end."