The Ontario Court of Appeal released its decision in Indalex Limited (Re), 2011 ONCA 265 on April 7, 2011. The decision comes as a surprise to many pension and insolvency professionals, lenders and pension plan sponsors. The court, essentially, directed that monies held in reserve by the monitor appointed under the federal Companies Creditors Arrangement Act should be used to pay off pension fund deficits in preference to secured creditors.

In 2009, Indalex Limited (a Canadian company) and its U.S. parent sought protection from their creditors under the CCAA and Chapter 11 of the U.S. Bankruptcy Code respectively. The court authorized a loan to Indalex under a debtor-in-possession credit agreement and gave the lenders a super-priority charge on Indalex’ property, in priority to “all other security interests, trusts, liens, charges and encumbrances, statutory or otherwise.” Indalex’ U.S. parent guaranteed the loan.

Later that year, the court approved a sale of Indalex’ assets on a going-concern basis. Indalex and the lender rightly understood the sale proceeds would be used first to pay off the loan, given the super-priority granted to the lender. However, two groups of pension plan members argued that a portion of the proceeds should be reserved for payment of pension fund deficiencies. This amount was ordered withheld, with the result that the loan was not fully repaid from the proceeds of the sale. The U.S. parent guarantor made up the shortfall of $10.75 million (U.S.).

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