The Supreme Court of Canada has ruled against the pension plan members of a bankrupt Ontario company, saying they do not have priority over secured creditors.
The landmark pension ruling on Friday is a major boost for companies with pension obligations that face tough restructuring issues. It is a setback for workers whose employers fall on hard times and have to wind up once-lucrative pension plans.
The ruling centres on the financial hardship of Indalex, a Toronto-based aluminum company that sought bankruptcy protection in 2009 with shortfalls in its two pension plans.
Pensioners are usually at the end of the line to be paid when the assets of a failed company are sold, but the Ontario Court of Appeal changed that in a 2011 ruling on the Indalex case.
The Supreme Court, by a 5-2 margin, overturned that decision.
When the company, a Canadian subsidiary of a U.S. firm, entered creditor protection, it was ordered to borrow money to pay lenders, leaving the pension members further down the payout line.
The employees will still receive what they paid into the plan, but they will lose about half of what they would have received under their full pensions.
The total amount of money involved in this case is relatively low, about $7 million.
But the ruling has much bigger implications.
It offers broad relief for companies facing hard times and steep pension obligations to their employees.
Business groups were watching the case closely because they saw the Ontario Court of Appeal ruling as a threat in the current economic climate, where restructuring is often a necessity.
The case also strikes a raw nerve with workers everywhere, especially in light of the freeze out that hit retirees at Nortel Networks after the telecom giant folded.
"Insolvency can trigger catastrophic consequences," Justice Marie Deschamps, who has since retired, wrote for the majority. "In insolvency situations, the promise of defined benefits made to employees during their employment is put at risk."
But in the complex, lengthy ruling, a majority of the justices sided with the company's creditors against the pensioners.
"Although the employer in this case breached a fiduciary duty, the harm suffered by the pension plans' beneficiaries results not from that breach, but from the employer's insolvency," Deschamps wrote.
Two justices, Louis LeBel and Rosalie Abella, disagreed with the majority. They said the breach of fiduciary duty should have been remedied with the creation of a constructive trust to protect the pensions.
But five justices disagreed with them, saying that, even though there had been a breach, that did not override the priority that was given to the lenders who helped keep the company going.
The pension holders argued that under Ontario law they were protected by a "deemed trust" that should have protected their full pensions once the plans were wound up, a view the company opposed.
"The parties disagree on the scope of the deemed trust," Deschamps wrote.
"In my view, the relevant provisions and the context lead to the conclusion that it extends to contributions the employer must make to ensure that the pension fund is sufficient to cover liabilities upon wind up," she added.
"In the instant case, however, the deemed trust is superseded by the security granted to the creditor that loaned money to the employer."
In their appeal, the company argued that if the Court of Appeal ruling was allowed to stand it would have created uncertainty for companies trying to recover under the Companies' Creditors Arrangement Act, which allows companies protection while they work out ways of avoiding bankruptcy.
"Although the employer, as plan administrator, may have put itself in a position of conflict of interest by failing to give the plan's members proper notice of a motion requesting financing of its operations during a restructuring process," Deschamps wrote, "there was no realistic possibility that, had the members received notice and had the CCAA court found that they were secured creditors, it would have ordered the priorities differently."