|The Supreme Court of Canada building in Ottawa. (JOHN MAJOR/QMI Agency Files)
OTTAWA — The Supreme Court on Friday overturned a lower court ruling that gave pensioners first dibs before other creditors when a company becomes insolvent.
The decision will have an impact on companies facing insolvency that have pension obligations.
In a 5-2 decision, the top court ruled pension plan members at Toronto-based aluminum processor Indalex — which sought bankruptcy protection in 2009 — don't have priority over secured creditors.
But the court clarified that a company acting as the administrator of a trust has a duty to inform pension members of any action taken during insolvency proceedings that may be detrimental to their interests.
When Indalex sought protection under the Company Creditors Arrangement Act (CCAA) to avoid bankruptcy, it managed two pension plans.
At time of insolvency, both plans were underfunded. Indalex pensioners brought the case to the top court in a bid to have the company cover those underfunded plans.
In 2010, the CCAA court allowed the sale of Indalex, but the purchaser didn't take on the pension liabilities. The proceeds from the sale weren't enough to cover the pension plans.
It also allowed an emergency loan called debtor-in-possession financing, or DIP, to help Indalex pay the bills as it went through restructuring.
Those DIP lenders had priority for repayment.
In 2011, an Ontario appellate court overturned the CCAA court decision, arguing Indalex should pay into its two underfunded pension plans before paying the DIP lenders.