Court Considers the Priority of Pension Claims in Timminco CCAA

PL AN INSOLVENCY
Court Considers the Priority of Pension Claims
in Timminco CCAA Proceedings
T
he Ontario Superior Court of Justice—
Commercial List recently issued two decisions on two separate motions that were
brought in connection with proceedings under
the Companies’ Creditors Arrangement Act
(CCAA) involving Timminco Ltd. and Becancour
Silicon Inc. These decisions (collectively, the Timminco decisions) addressed the priority to be
granted to pension claims in an insolvency. In its
holdings, the court considered some of the principles that were set out by the Ontario Court of
Appeal in Re Indalex, which was reported in the
August 2011 issue of this magazine. Unlike Indalex, however, the court in the Timminco decisions found that the pension claims did not have
priority over other claims/charges.
Background
Timminco and Becancour Silicon (collectively,
the Timminco entities) applied for and obtained
protection under CCAA on January 3, 2012. At
that time, they also requested an “administration charge” and a “directors’ and officers’ charge”
(D&O charge). Both of these charges were granted. The administration charge related to the fees
of the monitor and other professionals engaged
by the Timminco entities as part of the proceeding under CCAA. The D&O charge related to the
indemnification provided to the directors and officers of the Timminco entities.
The Timminco entities sponsored three registered pension plans. One of these plans was registered under Ontario’s Pension Benefits Act (the Ontario plan) and two were registered under Quebec’s
Supplemental Pension Plans Act (the Quebec plans).
Each of the pension plans had a deficit. The funded
position of the plans may be summarized as follows:
• The Ontario Plan was wound up effective
August 1, 2008. As of the wind-up date, the
Ontario plan had a deficit of approximately
$5.6 million. Ontario’s Pension Benefits Act
requires that a wind-up deficit be paid
down in equal annual instalments over no
more than five years. The wind-up deficit in
the Ontario plan had not fully been eliminated when the CCAA proceedings commenced. As of August 1, 2011, the estimated
wind-up deficit remaining in the Ontario
plan was approximately $3.1 million.
• The Quebec plans were each ongoing pension plans when the CCAA proceeding
commenced. The most recently filed actuarial valuations for the Quebec plans indicated that one had a solvency deficit of approximately $3.2 million and that the other
had a solvency deficit of approximately $7.9
million as of September 30, 2010. Given the
solvency deficits, monthly special payments
were required of approximately $41,710 per
month for one and approximately $95,300
per month for the other.
On January 12, 2012, the Timminco entities brought a motion for an order, among other
things:
• Suspending the Timminco entities’ obligations to make special payments to the pension plans
• Granting super priority to the administration charge (to a maximum amount of $1
million) and the D&O charge (to a maximum amount of $400,000).
The Timminco entities brought a motion for
an order approving a debtor-in-possession lending facility (DIP facility) in the amount of $4.25
million (USD) and granting a priority charge on
the current and future assets, undertakings and
properties of the Timminco entities in favour of
the lender under the DIP facility (the DIP lender).
The Timminco Decisions
The court issued two separate decisions in respect of these motions. The order requested by the
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by | Lesa MacDonald
july/august 2012 plans & trusts
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Timminco CCAA Proceedings
continued from previous page
Timminco entities in the motion related to the administration
charge and D&O charge was granted and reasons were released
on February 2, 2012 (Timminco Decision 1). The order related
to the DIP facility and DIP charge was granted and reasons
were released on February 9, 2012 (Timminco Decision 2).
The court determined that it was both
necessary and appropriate to grant a
super priority to both the administration
charge and the D&O charge, and to suspend
the obligation of the Timminco entities
to make special payments.
In the Timminco decisions, the court considered certain
principles that were set out in Indalex. In that case, the Ontario Court of Appeal found that the amount an employer is
required to contribute to fund a pension plan on wind-up
was subject to the deemed trust provisions of Ontario’s Pension Benefits Act. Further, the debtor-in-possession financing charge that had been granted in the CCAA proceedings
did not have priority over the statutory deemed trust for
the pension claims. The decision in Indalex holds that the
court has the authority to override provincial statutes and
provide a DIP lender with super priority. However, the decision also indicates that such a determination must be made
on a case-by-case basis where not overriding the provincial
statutes would “frustrate the company’s ability to restructure
and avoid bankruptcy.” Leave to appeal the Ontario Court of
Appeal’s decision in Indalex to the Supreme Court of Canada
was granted. The appeal to the Supreme Court of Canada was
scheduled for hearing in June 2012.
Timminco Decision 1
In Timminco Decision 1, the court accepted that it was
unlikely the advisors would participate in the CCAA pro-
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ceedings unless the administration charge was granted to
secure their fees and disbursements and evidence that their
participation was critical to the efforts of the restructuring of
the Timminco entities. Similarly, the court concluded that it
was not reasonable or realistic to expect the directors and officers to continue without the protection of the D&O charge.
The court concluded that the Timminco entities would be
“directionless and unable to effectively proceed with any type
or form of restructuring under the CCAA” without the advisors or a functioning governance structure.
The court also found that the evidence clearly indicated
that the Timminco entities did not have sufficient liquidity
to make the special payments to the pension plans. After examining various cases that considered the status of special
payments and their priority in a bankruptcy, the court found
that the employees and former employees of the Timminco
entities would not be prejudiced if the special payments were
suspended. In this regard, the court noted that bankruptcy
was the likely alternative if the restructuring efforts failed
and that bankruptcy would not produce a better result for
the employees and former employees.
The court determined that it was both necessary and appropriate to grant a super priority to both the administration
charge and the D&O charge, and to suspend the obligation of
the Timminco entities to make special payments. The court
summarized its conclusions as follows:
In my view, in the absence of the court granting the
requested super priority and protection, the objectives
of the CCAA would be frustrated. It is not reasonable to
expect that professionals will take the risk of not being
paid for their services, and that directors and officers will
remain if placed in a compromised position should the
Timminco entities continue CCAA proceedings without
the requested protection. The outcome of the failure to
provide these respective groups with the requested protection would, in my view, result in the overwhelming
likelihood that the CCAA proceedings would come to
an abrupt halt, followed, in all likelihood, by bankruptcy
proceedings.
If bankruptcy results, the outcome for employees and
pensioners is certain. This alternative will not provide a
better result for the employees and the pensioners. The
lack of a desirable alternative to the relief in question
only serves to strengthen my view that the objectives of
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BC Retirees Not Entitled to Premium-Free Benefits
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ment based on promises made by the province, and that this
was a finding of fact made after careful consideration of all
the evidence. As such, it could not be overturned unless there
was a palpable or overriding error. The court concluded that
there was no error arising from the trial court’s reasons, and
refused to interfere with its findings on this basis.
On the second argument, the court analyzed the distinction between promises and representations, underscoring
that a promise contains an undertaking to do or not do something, not a statement of fact. The documents put before the
court only contained descriptions of the benefits available at
the time, and did not constitute promises to the class to pay
benefit premiums indefinitely.
With respect to whether the class had a vested statutory
right to premium-free MSP and EHB insurance, the court
found that it was not intended that any particular premium
contribution level prescribed for a group was immutable, and
that if the legislature had intended this it ought to have stipulated this in the legislation. Further, the court noted the unfairness that would result from creating classes of retirees, stating:
As the trial judge observed (at para. 65), to accede to
Timminco CCAA Proceedings
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the CCAA would be frustrated if the relief requested was
not granted.
...
I have also concluded that it is both necessary and appropriate to suspend the Timminco entities’ obligations
to make special payments with respect to the pension
plans.
Timminco Decision 2
In Timminco Decision 2, the court considered a motion
commenced by the Timminco entities seeking approval of a
DIP facility and an order granting a priority charge in favour
of the DIP lender.
The court concluded that it had jurisdiction to override
the provisions of Ontario’s Pension Benefits Act and Quebec’s
Supplemental Pension Plans Act. In addition, the court noted
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the appellant’s submission would be to create two classes
of retirees, those who elected to receive the insurance
at a time when the premium contributions were fully
subsidized and those who elected to receive the insurance after the legislation changed to require retirees to
make contributions to the premiums. It follows from the
appellant’s submission that, if the rates of contribution
should change in future, new classes of retirees would be
created with each change. That is not a reasonable intention to attribute to the Legislature in the absence of some
clear indication in the legislation that it was intended
that discrete groups of retirees would be treated differently depending on the timing of their election. I see no
such indication.
This decision is in contrast to the decision in Lacey v.
Weyerhaeuser Company Limited, also discussed in this issue,
where retirees were successful in their claim to lifetime, unaltered benefits. This decision was integrally tied to the fact
that the former employees worked in the public sector and
the benefits were provided under statute, and does not derogate from the proposition that postretirement group benefits
may be part of a contract of employment. Bennett v. British Columbia, 2012 BCCA 115.
that CCAA provides the court with the authority to grant a
DIP financing charge and outlines the factors to be considered
by the court in deciding whether to grant such a charge.
Based on its review of the evidence and the factors under
CCAA for granting a DIP financing charge, the court concluded that the DIP facility was necessary. The court commented that it was not realistic to expect any commercially
motivated DIP lender to advance funds without being granted a priority, and that not granting the priority would likely
result in a failure of the CCAA process. The court noted that
it was “satisfied that bankruptcy was not the answer and, in
order to ensure that the objectives of the CCAA are fulfilled,
it is necessary to invoke the doctrine of paramountcy” to
override the provisions of the applicable pension benefits
standards legislation. Therefore, given the facts, the court approved the DIP facility and the DIP charge was granted super
priority. Re Timminco Limited, 2012 ONSC 506 and 2012 ONSC 948.