Pension Claims Update - Whose Rights Prevail?

Author:Mr Steven Weisz
Profession:Blake, Cassels & Graydon LLP

Many Canadian companies entice prospective employees to join them by promising attractive pension plans. With a downturn in the market and declining revenues, these pension plans have become increasingly difficult to sustain. Indeed, many high-profile companies have massively underfunded plans.

These pension deficits can be extremely problematic when a corporation becomes insolvent and finds itself seeking the protection of the Bankruptcy and Insolvency Act (the "BIA") or Companies' Creditors Arrangement Act (the "CCAA").

The market downturn and resulting increase in the number of restructurings have unfortunately coincided with a time when the Canadian population is aging. More and more employees are looking forward to retirement, feeling secure in the value they have amassed over the years in their pension plans. When their employer goes bankrupt or restructures, however, how much are their pension plans really worth?

Priorities Outside Bankruptcy

In Ontario, an employer's obligation to make contributions to a pension plan is enforced by a statutory lien under section 57(5) of the Pension Benefits Act (Ontario) (the "PBA") and by a deemed trust under the PBA sections 57(1), (3) and (4).

The Statutory Lien. The statutory lien under the PBA has priority and applies only to employer contributions that were due but unpaid at the time the security interest of a secured party arose. An additional statutory lien and charge on the assets of a pension plan sponsor may arise in the wind-up of a pension plan, but that lien ranks behind perfected security interests that existed at the time it arose.

The Deemed Trust. The more significant issue in determining priority is the deemed trust. Ontario's Personal Property Security Act (the "PPSA") states that a security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is the beneficiary of a deemed trust arising under the PBA. This priority does not apply against a perfected purchase money security interest in inventory or its proceeds. This section does not distinguish between deemed trusts that arose before or after the security interest was granted, so the deemed trust has a broader application than a statutory lien.

Under the PBA, the deemed trust applies to:

One. Employee contributions to a pension plan withheld by the employer.

Two. Employer contributions due and not paid into a continuing pension fund.

Three. In the case of a pension plan that is being wound up, employer contributions accrued to the date of the wind-up, but not yet due under the plan or regulations.

The PBA provides that these sections apply whether or not the money has been kept separate and apart from other money or property of the employer. So, employer and employee contributions in the ordinary course to a pension plan are subject to a deemed trust and, by virtue of the PPSA, these amounts have priority over a security interest in accounts or inventory.

Priorities In Bankruptcy

While pensioners can look to the statutory protections available to them, these rights are limited, particularly in bankruptcy.

So, what happens to the deemed trust priority in bankruptcy? Many provincial statutes contain provisions that create deemed trusts. In general, cases have held that the deemed trusts created under provincial statutes do not have priority under the federal BIA. In a series of court decisions...

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