A controversial Ontario Court of Appeal decision that boosts the rights of pension plan members when their employer heads into a restructuring could have wide ramifications, lawyers and lenders say.
The court ruled this week that two underfunded pension plans at Indalex Ltd. should rank ahead of a secured lender in the distribution of the proceeds of the sale of the company, which sought protection from its creditors in 2009 under the Companies Creditors Protection Act.
That reverses the conventional pecking order in CCAA proceedings, in which so-called debtor-in-possession (DIP) lenders agreed to lend companies emergency funds on the understanding that they would be paid back before anyone else.
While a win for pension plan members, many in the financial and legal worlds say the ruling could have negative unintended consequences not just for the CCAA process, but for Canada's credit markets in general.
Newton Glassman, head of Catalyst Capital Group Inc., Canada's largest distressed-debt investor, cautioned that he has not studied the ruling in detail, but said it could make it harder and more expensive for struggling companies to get DIP financing.
These kinds of loans will become inherently more risky and less predictable, he argued, because lenders can no longer be certain that they will be first in line to get their money back.
Even for companies not in court protection from their creditors, he said, borrowing money could get harder as senior lenders take another look at whether pension obligations are being met.
"If the case is not read narrowly, it actually does have very wide implications, and very bad implications," Mr. Glassman said. "Not just for DIP lending ... but I would argue for the credit markets generally."
Every partner at Catalyst has been told to read the decision over the weekend, he said, as pension and insolvency experts scramble to predict its impact.
Elizabeth Brown, a pension lawyer with Toronto firm Hicks Morley Hamilton Steward Storie LLP, said the case will have a major impact.
"This case has everyone in the insolvency and pension world turned upside down," Ms. Brown said, as unpaid pension deficits could now jump to the front of the line in an insolvency proceeding. "It's quite a far-reaching decision."
Lawyers who argued the case on behalf of the pension-plan members say the decision does not mean pension plans will always come first in future proceedings.
They say the ruling means that companies in a CCAA proceeding cannot automatically ignore an under-funded pension plan. Instead, companies will have to first make a case in court that they cannot meet their pension obligations.
Robin Schwill, a leading insolvency lawyer with Davies Ward Phillips & Vineberg LLP in Toronto, said the decision raises "thorny questions" and even creates uncertainty for CCAA cases currently under way.
The decision suggests that a formerly solid guarantee to a DIP lender could be thrown out by a court that later determines a company was guilty of a "breach of fiduciary duty" to pension plan members, he said.
"That's going to cause any DIP lender a lot of pause," Mr. Schwill said.
Kevin McElchern, a Toronto insolvency lawyer with McCarthy Tétrault LLP, said the decision could see creditors push ailing companies that are facing massive pension liabilities into full-blown bankruptcy. That's because in a bankruptcy, as opposed to a restructuring under court protection from creditors, pension claims are pushed back again to the end of the line, he said.
"It's a very big win for the pensioners, and of course every one is concerned about the pensioners, but I'm just not sure in the long run ... it won't actually have a negative or rebound effect," he said.
Some say predictions of widespread problems for CCAA financing are overblown.
"Practically speaking, it's just a question of dollars and cents and of return rates. There's still a lot of money to be made by being a DIP lender," said David Ullmann, an insolvency lawyer with Minden Gross LLP in Toronto.
He said he did not believe the ruling means that pension plans would always rank ahead of other lenders, but that the pension issue would now have to at least be addressed in court during a company's restructuring.
"It's something else to add to the list, more than it is some sort of cataclysm that would prevent DIP lending," Mr. Ullman said.
Jeff Gray