Monthly Archives: March 2013

An interesting development for former students in debt…

An interesting development, and one that might be important for former students out there…

Under the Bankruptcy and Insolvency Act (BIA) Section 178(1) (g), a proposal or bankruptcy does not release a person from their Canada Student Loans. However, there are qualifications to that rule that can enable a person to speed up that process.

In the decision of Mr. Justice Wilton-Siegel, a debtor applied to have his student debt incorporated into his proposal.

This debtor had dropped out of university, because he had a medical issue. He had a student loan, but he had never completed school, and is currently working at a Canadian Tire parts department. It is reasonable to infer that due to his lack of education, and his health issues, he will continue to have financial problems to the point that he will not be able to pay back his student loans.

This debtor was filing for a proposal, in which the Crown had raised no objection. The Registrar in Bankruptcy had previously ruled that this decision was beyond her jurisdiction, and therefore she could not allow the proposal to continue even though there was no objection from the Attorney General on behalf of the Ministry of Training, Colleges and Universities, or the Minister of National Revenue.

The Judge ruled that since 66(1) and 66.4 of the BIA allows for act to apply to proposals in its entirety with such modifications as required.

Therefore, while the student loans were not explicitly allowed for in the proposal, the Master believed that there was a violation of 66.28(2.1). However, the Judge ruled, in accordance with other precedent from other provinces, that since the opportunity under 178(1.1) for the court to release a debtor from student loans requires court approval, the creditors are protected.

Therefore, in order to encourage the filing of proposals and to ensure uniformity, proposal applicants will be afforded this same opportunity. Proposal applicants may be able to incorporate their student loans into their payback schedule, depending on the circumstances of the loans, and the lack of objections from the Crown.


Sun Indalex Finance, LLC v. United Steelworkers…

Indalex was a major North American manufacturer of aluminum extrusions, with plants in Canada and the USA. In early 2009, it sought US and Canadian Bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA), and similar provisions in the USA.

In order to maintain operations while these proceedings were occurring, Indalex obtained a court order authorizing a debtor in possession loan, which was secured by an ultra priority charge over Indalex’s property.

Indalex Limited was the sponsor and administrator of two pension plans: one for the executives and one for the employees.  However, there were major deficiencies in the pension and they did not have enough funds to cover off either of them.

In 2009, when the assets of Indalex were sold, the pension beneficiaries argued that proceeds of the sales should be retained in order to pay off the deficiencies in the pension. They argued that there was a deemed trust created by the Pension Benefits Act (PBA), and that this trust should have priority to the security created by the debtor in possession loan.

The Supreme Court of Canada, in a split 5:2 decision, ruled that the debtor in possession loan superseded the deemed trusts created by the Pension Benefits Act.

The majority applied the doctrine of federal paramountcy in Canadian Law.  This means that if there is an inconsistency between two laws that the federal government will always win over the provincial government. The ruling was that the debtor in possession loans created under the authority of the federal CCAA court, has priority to the deemed trusts created under the provincial Pension Benefit Act.

The court also held that Indalex breached its fiduciary duty to pensioners, by failing to take steps to ensure that the plan beneficiaries had the opportunity to be fully represented in proceedings. However, the SCC denied any concept that the breach of fiduciary duties would lead to the creation of a constructive trust over the money received from the sale in equity. Further, it held that there was no breach of fiduciary duty by taking CCAA proceedings.

The provincial deemed trust under the PBA would continue to apply to CCAA proceeding, subject to the doctrine of federal paramountcy. So, at the end of the CCAA liquidation period, priorities may be resolved through the provincial Personal Property and Security Act (PPSA) scheme, rather than the federal Bankruptcy and Insolvency (BIA) scheme – subject to federal paramountcy.

This just reiterates that concept of dual compliance, and uses a framework for Canadian Western Bank v Alberta.

It is my own belief that the SCC did not give enough weight to the breach of fiduciary duty by the pension administrators. While they did address the issue, and recognized that there was a breach of fiduciary duty, it did not give enough credit or reprieve to the pensioners. While I understand the imminent danger in allocating a pension plan a constructive trust over the profits of a sale of a company, I do not think there would have been any harm in pushing the company further. Instead the breach of fiduciary duty is minimized, and a slap on the wrist is given at best.

A quick google search reveals that the pensioners and many others protested the CCAA provisions as ‘legalized theft of pensions’ and questions the vast ramifications of this case on pensions. But as the SCC said in its judgment, when a company goes insolvent there are always going to be effects that cannot be predicted, cannot be settled, and where everyone will not be happy. Unfortunately, in this case, the pensioner got hit with a major shortfall. But why would it be fair, and equitable, to hit the DIP financiers, SAPA Group or anyone else not involved in this breach of FD with this loss…

As always…well thought out, thought provoking questions and comments are welcome…