Recent decisions in the Ontario courts have brought this issue to the forefront, which is salient during this time of economic uncertainty for the oil industry and its related environmental obligations. The courts have had to focus on balancing competing public interests: those of creditors and the general health and safety of the public when a debtor has an outstanding obligation to remediate its pollution. These decisions have emphasized that polluting debtors cannot escape liability because of insolvency protection; however, the treatment of remediation costs in insolvencies has effectively left remediation costs as an unsecured claim to be dealt with alongside other unsecured claims. Such a result has left the environmental regulatory authorities seeking to collect remediation costs elsewhere and issues regarding how wide of a net is cast in determining who is liable. Environmental legislation provides for those liabilities to be extended to management, and in the insolvency context, may result in a shift of liabilities from a polluting debtor to its management so as to protect creditors. Enforcing remediation costs against management provides a different avenue for regulatory authorities to collect, essentially providing a guarantee for those costs.
Newfoundland and Labrador v. AbitibiBowater Inc.7 (“AbitibiBowater”) was the first time that the Supreme Court of Canada (“SCC”) had an opportunity to consider the intersection between environmental and insolvency legislation. The Newfoundland government had issued remediation orders against several properties on which AbitibiBowater had conducted its operations. The issuearose as to the treatment of the remediation orders as provable claims in AbitibiBowater’s insolvency proceedings.
The SCC ruled that in order to be considered a provable claim, a tri-partite test must be satisfied:
- There must be a debt, liability or obligation owed to a creditor;
- Under section 121 of the Bankruptcy and Insolvency Act,8 the debt, liability or obligation must be incurred before the debtor becomes bankrupt or insolvent (although Justice Deschamps speaking for the majority of the SCC noted that section 11.8(9) of the Companies’ Creditors Arrangement Act 3 provides that a claim arises whether the damage may have arisen before or after the proceedings commenced);10 and
- It must be possible to attach a monetary value to the debt, liability or obligation.11
As a result of the AbitibiBowater case determining that remediation orders are provable claims in insolvency proceedings, thereby receiving the same treatment as unsecured creditors, environmental regulatory bodies have been forced to seek other routes to reimburse remediation costs.
Specifically, the Ontario Ministry of Environment (“MOE”) was unable to collect remediation costs from the insolvency proceedings of Northstar Aerospace Inc. (“Northstar”) due to the MOE’s claim being treated as a provable claim with other unsecured creditors.12 The MOE then proceeded to seek to compel a group of 17 former directors and officers of Northstar (the “Northstar Management”) for the remediation costs, which were approximately $15,000,000.13 The MOE issued an order against the Northstar Management pursuant to sections 17 and 18 of the Ontario Environmental Protection Act (“EPA”),14 which, similar to Alberta’s EPEA15, permits the MOE to issue an order against persons responsible for contamination.16 In justification of the order, the MOE argued that the Northstar Management had failed to ensure that monitoring, investigation and remediation would be carried out, potentially endangering nearby residents to one of Northstar’s facilities.17
The Northstar Management appealed the order issued against them to the Environmental Review Tribunal (the “Tribunal”), seeking a stay while also bringing a motion before the Ontario Superior Court to assume jurisdiction.18 The Tribunal refused to grant a stay based on section 143 of EPA, which prohibits the Tribunal from granting a stay of an order to “monitor, record and report”.19 The Northstar Management were personally responsible for paying approximately $150,000 per month to comply with the MOE order. 20 Ultimately, the day before the Tribunal hearing was to begin, the Northstar Management concluded a settlement of the matter with the MOE in which they paid $4,750,000 to the MOE.21
In conclusion, the law remains uncertain in this area and we expect to see developments in the near future. Levying the remediation costs against management of a polluting debtor does not accord with the polluter pays principle. This raises issues as to whether the insolvency legislation should once again be reformed to address a likely unintended result of the current provisions.
There is a likely prospect that insurance premiums for directors and officers of companies in environmentally- challenging industries will increase if directors may be found personally liable.