The recent decision in ITB Marine Group Ltd. v. Northern Transportation Company Limited, 2017 BCSC 2007 ["ITB"] confirms the priority of pension claims in the insolvency context. The decision will be of interest to practitioners involved in priority disputes between secured creditors and beneficiaries of statutory deemed trusts, particularly those arising out of pension legislation. This decision follows other similar attempts to reconcile the protective purposes of pension legislation with the need for commercial certainty for lenders, whose funding is of long term benefit to the stakeholders of a company, including the employees.
ITB confirms that: (i) statutory deemed trusts attach to the assets of an insolvent debtor subject to the existing interests of secured creditors, unless the legislation creating the deemed trust expressly gives the trust beneficiaries priority over existing security interests; and (ii) in the context of insolvency proceedings, the provisions of the Bankruptcy and Insolvency Act R.S.C., 1985, c. B-3 (“BIA”) and the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (“CCAA”), and not the relevant pension legislation, govern the priority afforded pension beneficiaries’ claims.
In October 2013, ITB Marine Group Ltd. (“ITB Marine”) sold a fleet of 19 marine vessels and related equipment (collectively, the “Vessels”) to Northern Transportation Company Limited (“NTCL”). The Vessels were sold to NTCL pursuant to a conditional sale agreement (the “Conditional Sale Agreement”) under which ITB Marine retained title to the Vessels until NTCL completed its payment obligations. ITB Marine duly registered financing statements in the relevant personal property registries, thereby perfecting its purchase-money security interest in the Vessels.
Prior to this, in July 2012, NTCL had entered into a “workout agreement” with its union whereby NTCL agreed to make payments over 10 years in order to make up a funding shortfall identified in respect of NTCL’s defined benefits pension plan.
In April 2016, prior to completion of payment under the Conditional Sale Agreement, NTCL sought and was granted protection under the CCAA. The majority of NTCL’s assets, other than the Vessels, were sold during the CCAA proceedings and upon the conclusion of those proceedings NTCL was assigned into bankruptcy. NTCL subsequently obtained an order appointing a receiver over the Vessels. The receiver sold the vessels and the proceeds of sale (the “Proceeds”) were retained pending the resolution of a dispute between ITB Marine and Morneau Shepell Inc. (the “Administrator”), the administrator of NTCL’s pension plan, as to which had priority to the proceeds.
The Positions of the Parties
In asserting its entitlement to the Proceeds, the Administrator relied upon the federal Pensions Benefits Standards Act, 1985, c. 32 (2nd Supp.) (“PBSA”), which provides that, upon the liquidation or assignment into bankruptcy of an employer, a deemed trust arises over the employer’s assets for the amounts owing to the pension fund, including amounts owing under a workout agreement, and those assets do not form part of the employer’s estate. Accordingly, the Administrator asserted that the Proceeds were held in trust for the Administrator and did not form part of the estate to which ITB Marine’s security interest attached.
In opposition, ITB Marine argued that: (a) a deemed trust could not attach to assets that were not the property of the debtor, including assets sold to a debtor under an agreement which reserved title to the vendor pending complete payment; (b) the deemed trust under the PBSA was ineffective as against a security interest which existed at the time the deemed trust arose (i.e. the date of bankruptcy); and (c) there was inconsistency between the PBSA deemed trust provisions and sections 81.5 and 81.6 of the BIA which was to be resolved in favour of the priority scheme under the BIA.
The court agreed with ITB Marine on all three points. On the first point, Mr. Justice Bowden noted that a purchaser under a conditional sales agreement has a proprietary interest in the goods being purchased, even before title passes, but that interest is limited to the purchaser’s contractual rights under the conditional sales agreement to make additional payments and, ultimately, become entitled to a transfer of title. In the case at bar, this proprietary interest was of no practical value to the Administrator as NTCL had no equity in the Vessels.
On the second point, the Court noted that if legislators wished to give absolute priority to a deemed trust beneficiary, with the effect of extinguishing the interests of existing secured creditors, then the law must have very clear language of such intent. The Court found that the PBSA does not include clear language assigning an absolute priority to the deemed trust.
In considering the third point, Mr. Justice Bowden considered several recent decisions, including Bloom Lake General Partners (Re), 2015 QCCS 3064 and Indalex Ltd. (Re), 2013 SCC 6, which addressed the conflict between pension and insolvency legislation. The court noted that while in other instances the conflict had been resolved on the basis of the doctrine of paramountcy, in ITB that was not an option as both the BIA and the PBSA are federal statutes. Instead, the Court found that the BIA provisions concerning the priority of pension obligations governed as they were more recently enacted than the deemed trust provisions of the PBSA.
The end result was that ITB Marine was entitled to the Proceeds in priority to the Administrator.