A sprawling, complex Supreme Court of Canada decision Friday has reversed a victory for private-sector pension plan members and handed them a hollow one in its place. Although the ruling, concerning the rank of pensioners in insolvency cases, is a setback for pensioners, it is also a necessary protection of the reasonably well-functioning system that allows for troubled companies to be restructured in Canada.
The case involves Indalex Ltd, an aluminum extrusion company that filed for bankruptcy protection in 2009. Its two pension plans were in deficit at the time, and plan members went to court to argue their claim – a $6.75-million funding shortfall – should rank above those of other creditors. The Ontario Court of Appeal agreed. It put the claims of Indalex pensioners ahead of even the provider of debtor-in-possession financing secured to finance continuing operations when the company filed for protection under the Companies' Creditors Arrangement Act (CCAA). The Supreme Court has now put those insolvency financiers back on top, where they were before.
The high court decision undoubtedly hurts pensioners. But upholding the appeals court ruling would have caused a lot more damage. The CCAA system may be slow and imperfect, but it is designed to save jobs and mitigate the losses of creditors. A system where pensioners ranked ahead of all others would have scared off insolvency financiers who provide crucial financing to get companies through reorganizations as going concerns. Without them far more companies would have failed outright, throwing many more people out of work and disrupting the economy.
The high court did throw a bone back to pensioners, albeit a meatless one. Before the Court of Appeal decision, private-sector pensioners faced heartache and limited options if their employers went into financial difficulty and had unfunded pension deficits needed to wind up the plans. Outside of CCAA, companies only had to cover a limited amount of those unfunded obligations, and once they went into CCAA, pensioners ranked well down the list of creditors.
As part of Friday's ruling, employees will have the right to claim the full amount required to erase the deficit and close the plan; furthermore, they will have first claim on their employer's assets – unless it files for CCAA. Once there, restructuring debt-financiers will bump them to second place.
It's a bit like losing the championship game – second place in CCAA means you don't share nearly as much in the spoils of victory, and pensioners will have to contend with taking a steep haircut on their claims. Furthermore, it will push more troubled companies to file for CCAA, as lenders will otherwise shy away from financing them outside of CCAA, knowing their claims will rank behind those of a costly underfunded pension plan.
It's one more reminder of why private-sector defined benefit pension plans are vanishing. For employers, they have transformed over the last two decades from a cost-effective enticement for talent to a money-sucking millstone. For employees, they have provided less of a guaranteed long-term benefit than they originally thought, as contributions have been raised and benefits rolled back. But hey, it's a great day for bankruptcy lawyers.
Sean Silcoff