The Non-Polluter Pays: Creditor Roulette and Director Liability

In our post dated December 7, 2012, Provincial Clean-up Orders Can be Stayed and Compromised in  Canadian Insolvencieswe discussed the decision of the Supreme Court of Canada in Newfoundland and Labrador v. AbitibiBowater Inc. (Abitibi).

That case decided that provincial environmental clean-up orders may be “claims” that can be stayed and compromised in a corporate insolvency under the federal Companies’ Creditors Arrangement Act (CCAA).

To qualify for such treatment, the court said, there must be sufficient certainty that the enforcing regulatory body will ultimately perform remediation work and assert a monetary claim; there was sufficient certainty in Abitibi.

Creditor Roulette

Since then Ontario’s Court of Appeal has applied that test in two cases: Re Nortel Networks Corporation (2013 ONCA 599) (Nortel) and Re Northstar Aerospace Inc (2013 ONCA 600) (Northstar) to reach differing conclusions.

Speaking for the court in Nortel, Juriansz J.A. set out the following prerequisite

Ongoing environmental remediation obligations may be reduced to monetary claims that can be compromised in CCAA proceedings only where the province has performed the remediation work and advances a claim for reimbursement, or where the obligation may be considered a contingent or future claim because it is “sufficiently certain” that the province will do the work and then seek reimbursement.

In Northstar and for one of the five Nortel properties, the court found that it was sufficiently certain that the Ministry of the Environment (MOE) would carry out the company’s remediation obligations and seek reimbursement. Accordingly, the MOE orders were compromisable as a claim under the CCAA process.

In Nortelthe court concluded  it was not certain that the MOE would undertake the company’s cleanup obligations and seek reimbursement for the remaining four properties. The MOE’s orders were not reduced to compromisable CCAA monetary claims.

Some will view a test that is based  on when and if the MOE decides to carry out remediation work, a “stroke of the pen” risk. The MOE may well have some latitude to manage the timing of its decision and so to protect its order from the insolvency process.

Not only does this prejudice other creditors, it may also prejudice the timely protection of the environment by deterring the MOE from carrying out remediation promptly.

In Nortel, the existence of other parties against whom the MOE could make orders was a key factor in the court’s decision that the orders were not compromisable monetary claims.

In Northstar, however, in reaching its decision that the MOE’s order was a compromisable monetary claim,  the court chose to ignore the MOE’s then unresolved enforcement action against the Northstar directors and officers.

That enforcement action and its recent settlement are discussed below but it is difficult to see why the prospect of successful enforcement action against directors and officers could not be a consideration for a court in determining this question in the future

Director Liability

We argued at the time of the Abitibi decision that “provinces would take another long hard look at their powers to pursue shareholders, directors and officers of insolvent companies.”

Nearly a year later that prediction has been borne out in the form of MOE clean-up orders against directors and officers of insolvent companies.

The recent settlement of an appeal before the Ontario Environmental Review Tribunal, Baker v MOE (Case Nos: 12-158 to 12-169) (Baker) is a case in point.

In Baker, a Director of the MOE  issued an order in 2012 (Order) to former directors and officers of  Northstar Aerospace (Canada) Inc. (Northstar Canada), and its American parent company, Northstar Aerospace Inc. (Northstar Inc.).

The Order was made under sections 17, 18 and 196 of the Environmental Protection Act (EPA). It required, among other things, remediation of contamination at  Northstar Canada’s facility in Cambridge, Ontario (Site). The contamination originated from a spill in 1995 that had migrated to the neighbouring Bishop’s Street community, resulting in elevated levels of contaminants affecting 500 homes.

From 2004 to 2012, Northstar Canada had carried out investigations, mitigation and remediation on a voluntary basis with the agreement of the MOE under an Interim Remedial be Plan (IRAP).

In early 2012, however, concerns about Northstar Canada’s continued solvency caused the MOE to issue two Director’s Orders  under the EPA against the companies, one requiring compliance with the IRAP the other requiring those companies to provide financial assurance in excess of $10 million.

The financial assurance was not provided and, in June, 2012, the companies sought creditor protection under CCAA. In August 2012,  Northstar Canada was adjudged bankrupt and the MOE commenced remediation work on the Site later that month.

On November 14, 2012,the MOE issued the Order to former directors and officers of the companies (and to Northstar Canada) requiring them to carry out the work that had been required by the original Director’s Order to the companies.

The directors and officers appealed and asked the ERT to stay the Order pending the outcome of the appeal. The ERT refused to grant the stay, rejecting the appellants’ argument that the question of whether they were properly named in the Order should be decided before any liability was imposed.

The ERT decision does not distinguish situations where there was no jurisdiction to make the order in the first place. So, for example, a person incorrectly registered as a director may find themselves the subject of an order from the MOE and, according to the ERT, potentially stuck with the interim costs of complying with the order pending the outcome of the appeal.

The ERT has no power to order a refund of costs incurred by the orderee in the event of a successful appeal, so the appellants were left having to pay a substantial monthly outlay to comply with the Order. (By the time of the settlement, they had already paid $800,000.)

In the circumstances it is unsurprising that the appellants settled the matter  in October for a payment of $4.5 million (considerably less than the totals originally touted for cleanup)  in return for a release from further liability.

This leaves Ontario’s jurisprudence on personal liability for Directors and Officers up in the air. That may suit the MOE. It has recovered some money for the public purse; it has also kept alive the impression that innocent directors and officers can be held strictly accountable for clean-up of contaminated corporate sites.

If the MOE is correct then

  • Innocent directors and officers are vulnerable to open-ended liability for clean-up of corporate sites even when they are no longer directors.
  • This is not just a question of whether the director was at fault. Even a person, as in Baker, who did not become a director until decades after the contamination occurred may be liable.
  • Their liability is absolute. Paradoxically, this is more stringent than the strict liability standard in the prosecution of environmental offences, where it may be a defence to demonstrate due diligence.
  • Directors of a company near to insolvency may have a duty to set aside sufficient funds within the company to undertake environmental remediation, whether or not the MOE has requested the company to provide financial assurance in a timely fashion.

However, the matter has not yet been tested through the ERT and the courts. Until it is, the uncertainty will doubtless give pause for thought to aspiring directors and officers. Perhaps of greater concern to Ontario’s government, which prides itself that Ontario is “Open for Business”, it may also serve as a disincentive to those seeking to do business in Ontario.

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