Canada: Supreme Court Of Canada Decision In Indalex Does Not Impact Equipment Finance Companies Or Purchase-Money Security Interests In Inventory

The Supreme Court of Canada's decision in Sun Indalex Finance, LLC v. United Steelworkers¹ has caused a flurry of activity amongst legal commentators as to how it may impact secured creditors generally. Over simplified, the Indalex decision determined that if a pension fund is being wound up, then pursuant to the Ontario Personal Property Security Act R.S.O. 1990, c. P.10 (the "PPSA"), any deficiency on the winding up of the pension plan would be a deemed trust which would rank in priority to secured creditors. As it is challenging for a secured creditor to quantify the size of the potential pension deficiency on an ongoing basis, this deemed trust could materially and negatively impact a recovery that a lender could anticipate on its advances in an insolvency. As with deemed trusts generally, a secured creditor can manage this risk by employing federal insolvency laws to flip the priority but this limits the options available to a secured creditor.

The above concerns, however, do not apply to the finance of equipment or inventory financing that satisfies the requirements of a purchase-money security interest under Section 33 of the PPSA. Although deemed trusts are taken outside the scope of the PPSA by Section 4(1)(b), deemed trusts arising under the Employment Standards Act, R.S.O. 1990, c. E. 14 or the Pensions Benefits Act, R.S.O. 1990 c. P. 8, are included pursuant to the exception in Section 30(7) of the PPSA. This section specifically provides that the deemed trust is superior to accounts and inventory, however Section 30(8) expressly denies the application of this subordination rule to a purchase money security interest in inventory. Equipment is not mentioned and therefore is not impacted by the special priority created by Section 30(7). Accordingly, the Indalex decision has no negative impact for equipment financiers whether they finance by lease, conditional sales contract, or specific note and security agreement, or to a financier who validly takes a purchase-money security interest in inventory. Further, to the extent that a secured creditor has a general security agreement and one of the assets secured is equipment, the charge on the equipment would not be subordinated to the deemed trusts arising from the legislation referenced in Section 30(7). Equipment financiers and lenders who take a valid purchase-money security interest in inventory may continue with their credit approval procedures employed prior to the Indalex decision.

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