THEY’RE NOT LENDERS
SEARS CANADA PENSIONERS MAY GET THE FULL COVERAGE THEY ARE ENTITLED TO. THAT’S BECAUSE THE SUPREME COURT APPEARS TO BE ON THEIR SIDE.
On Monday in Ottawa, a private member’s bill is expected to be tabled by NDP Hamilton Mountain MP Scott Duvall that will attempt to give corporate employees rock- solid protection for their pension benefits in the event their employer goes bankrupt. The bill, developed in the context of Sears Canada’s collapse with a $270-million pension fund shortfall, is good policy that is doomed to fail.
The bill will go nowhere, but that doesn’t mean Sears pensioners will not get what they are entitled to: full pension coverage. The Supreme Court appears to be on their side.
Duvall’s effort will fail because the dominant Liberal/ Conservative power duopoly will continue to waffle and fuddle through a policy change that should be a popular slam- dunk. As Duvall put it, Ottawa should fix bankruptcy laws that favour “big fat corporations and CEOs.”
Classic NDP rhetoric, but on this Duvall, union leaders and retiree advocates are right in principle. As Sears Canada clearly demonstrates, the pension benefits owed to employees of corporations represent savings and wages earned by employees. The value of those benefits should rank above the claims of all other creditors, which means pension plans are entitled to “super priority” over the claims of all other creditors and should get first crack at the assets of a bankrupt company.
The idea of giving pensioners super priority has been killed by a succession of Liberal and Conservative government over decades, all of them claiming that doing so would upset the delicate balance that protects banks and other creditors — including suppliers and their workers — who provide companies with vital credit, products and services that keep corporate Canada alive.
If we give pensioners savings and wages priority, the politicians say, companies will have less credit available to survive and grow. That’s the theory, described by one lawyer as “the Doomsday argument” that gets recycled every time a new corporate pension crisis develops.
With Sears heading for bankruptcy, the politicians were at it again. Innovation Minister Navdeep Bains and his parliamentary secretary said the subject is complicated, there’s no easy fix and they have “no plans” to follow the NDP initiative.
Former Conservative industry minister Tony Clement, who rode through the Nortel pension fiasco, said his “heart breaks” for Sears pensioners, but it’s tricky: “The real issue is: How do you make sure that lenders still lend to companies if the workers have higher priority than the lenders might.”
While t he politicians dicker and play politics, the good news for Sears pensioners is that their pension payouts are not dependent on Duvall’s bill, which in any case would come too late to change the laws that apply to Sears Canada. Instead, they can look to a Supreme Court decision in 2013 that clearly sides with pensioners in the event of bankruptcy. Sears employees are entitled to — and should receive — the full value of their pension benefits.
That’s t he case being made by Andrew Hatnay of Koskie Minsky, which is acting on behalf of Sears Canada employees. In arguments before an Ontario Superior Court judge overseeing the retailer’s Companies’ Creditors Arrangement Act ( CCAA) process, Hatnay says the laws of Ontario and judicial precedent make it clear that Sears employees are entitled to “first priority recovery for those ( pension) amounts ahead of the claims of all other creditors.”
The case looks convincing from the outside. In 2013, the Supreme Court decision in the 2009 bankruptcy of Indalex, a small aluminum manufacturer, concluded that when a corporate pension plan is wound up, the plan becomes a “deemed trust” priority. As a deemed trust, the employer has a responsibility to fulfil all the pension obligations.
In a majority decision, the Supreme Court, citing Ontario law, upheld the requirement that “employers must make to ensure that the pension fund is sufficient to cover liabilities upon windup.” If the windup “shows an actuarial deficit, the employer must make wind- up deficiency payments.”
In the Indalex case, there was no money left to make the payments. All of it had gone to repay special creditors, known as debtor-in-possession ( DIP) lenders, that had loaned Indalex money to keep it going through bankruptcy. Under federal law, DIP lenders get priority. There were no remaining assets to repay other creditors, including pensioners.
In the case of Sears Canada, however, loans from two major DIP lenders — $ 300- million from Wells Fargo and up to $175-million from a group of lenders including KKR Capital — have been or will be fully repaid, leaving hundreds of millions in corporate-asset value still undistributed. According to a Sears filing in June, the retailer had total assets worth $1.2-billion.
A move to put pensioners at the front of the line started in 2014, when Koskie Minsky asked the company and t he Financial Services Commission of Ontario ( FSCO) to initiate a windup of the pension plan and convert it into a deemed trust priority. As a deemed trust, the company would be required to pay about $ 160- million of the $ 270- million funding shortfall, with the balance covered by the Ontario Pension Benefits Guarantee Fund.
Somewhat surprisingly, Ontario’s financial regulator ( FSCO) has so far failed to act on behalf of pensioners. Maybe that will change now.
Beyond Sears, Ottawa’s politicians should rethink their long- standing acceptance of the doomsday scenarios put forward by industry, financial companies and bureaucrats. Sears pensioners might be safe, but employees of other companies on the brink of financial crisis might not be.
Contrary to the views of politicians in Ottawa, pensioners should be given super priority. Lenders and other corporate service providers are sophisticated operators who can make decisions and choices about whether to do business with a company. Corporate finances can or should be structured to accommodate pension liabilities. Employees with pension plans are in no position to make such choices.
Pensioners and employees, moreover, are not lenders to the corporation. It’s their earned money. The priority should be to pay pensioners in full.