July 8, 2016
On June 25, 2015 Co-op Atlantic, a co-operative wholesaler operating across Atlantic Canada and Quebec obtained protection from its creditors under the CCAA. Ten months later, in April, 2016, Co-op’s pension plan members received a letter that no retiree ever wants to receive. An actuarial and consulting firm, which had been appointed by the New Brunswick Superintendent of Pensions to wind up the underfunded pension plan, sent notice to the retirees that their monthly pension benefits were being cut by 32%. As a result, many elderly retirees have had to return to the workforce to make ends meet – hardly the notion of a happy retirement.
The Co-op Atlantic CCAA became a perfect storm of bad events for the non-union employees and retirees (“Salaried Members”), some of which might have been prevented if they had legal representation at an early stage.
Co-op non-union employees and retirees did not have legal representation in the CCAA proceedings
All of the other major parties involved in the CCAA proceeding (e.g., banks, lenders, unionized employees) had legal counsel to protect and advance their interests. Indeed, on July 20, 2015, shortly after the CCAA proceeding commenced, the two unions involved in the case applied to the CCAA judge for representation orders for their members, which the CCAA Judge issued. Unfortunately, no one sought or recognized the need for the same type of order for the Salaried Members. This group of individuals were left unrepresented as the CCAA quickly moved forward.
What is a representation order?
A representation order is an order of the court which can be issued under the CCAA, the Bankruptcy and Insolvency Act (for bankrupt companies) and the various provincial rules of civil procedure. The purpose of such an order is to facilitate the representation of a large group of individual creditors who are impacted by complex insolvency proceeding so that all of the group members can be represented by a single voice, and the rights of all the group members are protected and advanced by independent legal counsel. Representation orders are commonly issued by courts across Canada for employees and retirees in insolvency proceedings, as well as other creditor groups such as payday loan borrowers, class action claimants, and even shareholders. Courts across Canada have recognized the need and benefit of such orders for individuals who have little means to pursue representation in legal proceedings of significant complexity. Justice Sarah Pepall summarized the rationale behind representation orders in the Canwest CCAA, which has been followed in numerous subsequent cases:
In my view, this watch and wait suggestion is unhelpful to the needs of the Salaried Employees and Retirees and to the interests of the Applicants. I accept that the individuals in issue may be unsecured creditors whose recovery expectation may prove to be non-existent and that ultimately there may be no claims process for them. I also accept that some of them were in the executive ranks of the LP Entities and continue to benefit from payment of some pension benefits. That said, these are all individuals who find themselves in uncertain times facing legal proceedings of significant complexity…. It would be of considerable benefit to both the Applicants and the Salaried Employees and Retirees to have Representatives and representative counsel who could interact with the Applicants and represent the interests of the Salaried Employees and Retirees. (2010 ONSC 1328, at para. 24)
No prior notice of the motion to approve the Settlement Agreement
Another major advantage of a representation order is that representative counsel actively participates in the CCAA proceedings and will receive prior notice of all court motions so that they can be reviewed and effectively addressed. In Co-op, the unrepresented Salaried Members were not given prior notice of the most important event in the CCAA proceeding: the motion brought by the company to approve a settlement agreement that had been negotiated between the company, the secured creditors and the appointed administrator. As the Salaried Members later learned, the settlement agreement mandated the distribution of the bulk of the funds in the estate of Co-op. Without prior notice, the Salaried Members had no opportunity to review or provide input on the settlement prior to it being presented to the court by other parties for approval. The terms of the Co-op settlement agreement provide for the secured creditors to be paid 80-95% of their loans, plus their legal costs, while Co-op’s pension plan recovered a mere 7% of its claim.
What happened to the pension priorities?
In 2013, in a landmark case, Supreme Court of Canada in Indalex confirmed the applicability of the statutory deemed trust in provincial pension benefits statutes for amounts owing to a pension plan as a priority over secured creditors. The Supreme Court’s ruling in Indalex led to a meaningful settlement for retirees in that case, and also led to a priority recovery to unions in the subsequent CCAA case in Timminco. Further, considering that the New Brunswick Superintendent of Pensions had ordered a partial wind up of the Co-op Atlantic pension plan as of June 20, 2015, which was before the CCAA filing, the poor recovery to the Co-op Pension Plan in the Settlement that was approved by the court is difficult to understand.
When the pension reduction letters started arriving in the retirees’ mailboxes in late April, 2016, many retirees realized something was wrong. A group of about 100 retirees quickly formed and contacted Koskie Minsky LLP for assistance. On June 27, 2016 a motion was brought before the CCAA Judge in St. John, New Brunswick for a representation order for the Salaried Members. The company, CCAA monitor and the appointed administrator opposed the motion and argued that the Salaried Members had been adequately covered by other “pension interests” such as the unions and the appointed administrator. However, the Salaried Members argued that those who were alleged to have “covered” their interests did not in fact represent them. Further, while the administrator may be able to compromise its statutory lien and charge priority, the statutory deemed trust claim is only for the pension plan beneficiaries to compromise not any other party. The CCAA Judge dismissed the motion for a representation order. The reasons seemed to be largely that it was too late in the CCAA proceeding and a concern of the court about the Salaried Members possibly challenging the Settlement.
What does this mean for employees and retirees who become subject to an insolvency proceeding?
Insolvency proceedings by their nature involve battles among competing creditors fighting over a limited pool of funds. Banks, lenders and other creditors have independent and specialized counsel to represent them, and typically arrange in their loan documentation that all their legal costs are to be paid by the company in any insolvency proceeding. Employees and retirees who find themselves involved in such a proceeding should reach out to legal counsel quickly. Had a representation order been sought and issued earlier for the Salaried Members of Co-op Atlantic and their pension priorities vigorously advanced, the outcome for them would likely have taken a different and more favorable turn.
*This post was authored by members of Koskie Minsky’s Insolvency Group.
Pension and Benefits