Directors and their corporations may be at a loss to understand what they must do to minimize their risk of environmental liability in light of the recent Ontario Ministry of Environment order and settlement agreement concerning Northstar Canada.

The Northstar settlement agreement

The seminal Bata Industries case1 in 1992 set benchmarks to measure the standard of care a director of a corporation should demonstrate in exercising the director’s role. A “minimum due diligence profile” was established in assessing a defence of due diligence. The guidelines developed in this and subsequent cases were the foundation that we believed should serve to delineate the content of the liability of directors. Has all of that been thrown overboard as a result of the Northstar case? Likely not, but the Environmental Review Tribunal’s (ERT) approval of the $4.75-million settlement agreement between 10 former directors and officers and the Ministry of the Environment (MOE) in Northstar2 has effectively closed the opportunity for possible clarity from the ERT and/or the courts respecting the environmental liability of former directors and officers of a bankrupt company.

This leaves a lingering uncertainty as to when they may be personally liable. Had the case not settled, it likely would have taken years to wind its way through all potential litigious proceedings. Even if all or some of the directors might have ultimately won their cases (difficult to say), they likely would not have recovered the $100,000-a-month remediation and added legal costs they would have incurred in required ongoing remediation.

Northstar is an unfortunate precedent for directors. Current and even former directors of Ontario companies, as well as directors and officers of parent companies, may face liability for environmental remediation costs, regardless of individual fault and whether they caused contamination or were negligent in preventing it.

Differentiating Northstar

There is nothing new in directors and officers being subject to liability for environmental remediation. In addition to Bata, cases such as Currie3, General Chemical4, Caltex Petroleum5, Uniroyal Chemical6, Varnicolor7 have all held directors liable arising from their management and control of an undertaking, property or source of contaminant or as a result of their active roles in a company’s operations or through their negligence.

What differentiates Northstar is most of the directors had not been directors when events leading to the Cambridge site contamination took place or at the time Northstar began to actively monitor the site’s contamination. Many directors had resigned before the MOE issued orders requiring them to carry out the remedial work at an estimated annual cost of $1.4 million ($15 million overall). Some were not even on the Northstar Canada board. For example, one was an innocent independent director of a publicly traded parent company.

In 2005, Northstar Canada had commenced a voluntary remediation of serious groundwater contamination of its site and remedial/preventive measures on hundreds of neighbouring residential properties. It spent about $20 million in investigations, mitigation and remediation efforts before it ran out of money and ultimately sought creditor protection in June 2012.

The court approved the sale of most of Northstar’s assets, except for the problem site. The sale closed August 24. Northstar Canada was adjudged a bankrupt on August 2, 2012, and the bankruptcy trustee abandoned the site as of August 24, directing the MOE to take over remediation of the site, which it did. In November 2012, the MOE formally issued its order against the prior directors and officers. The directors and officers had already paid approximately $800,000 to comply with the order.

Fault-based cases respecting director liability are understandable. What is less so, is where directors are innocent and could not have prevented the contamination or did what was reasonable to manage and clean it up.

According to the MOE the “fault” (if we can call it that) of the Northstar directors was failing to anticipate the insolvency or allowing the filing under the Company’s Creditors Arrangement Act without the remediation being dealt with, and neglecting to set aside any funds for a 10-year remediation program.

Northstar’s public annual reports for 2008 to 2010 estimated the future remediation cost at several million dollars, but the funding thereof was not secured by Northstar Canada or its parent through a trust account or other means. The message seems to be that corporations and directors need to obtain reliable technical and financial data on which to set aside a reserve or fund some other instrument, long before there is a risk of the company going under. Had that been done, would the MOE have pursued the directors to the same extent?

As the Northstar directors argued, the process for bankruptcy did not allow them to finance environmental cleanup ahead of the rights of secured lenders. It is not clear from what source the company could have obtained the money, or how it could have shielded it from its other creditors.

Minimizing uncertainty—risk management

It is difficult to predict whether the Northstar settlement will embolden the MOE to continue to pursue directors personally, regardless whether they were involved or caused or permitted contamination in the first place. What seems abundantly clear is that someone has to clean up serious environmental contamination that poses a risk to the public.

Between directors and officers of an insolvent or bankrupt company and the taxpayers who are also innocent, the MOE appears inclined to hold directors personally liable. In light of this development, it would be prudent for directors of corporations whose operations pose significant environmental risk to thoroughly review risks, how they are being addressed and options available to directors and officers to minimize personal environmental liability exposure. While there are unique circumstances surrounding the Northstar bankruptcy and long-standing, serious and widespread environmental contamination concerns in the Cambridge community, there are certain “take-aways” emerging from this and prior cases.

Take-aways

  • The MOE is willing to look to current and former directors of Canadian companies and their parents to fund remediation of seriously contaminated sites, particularly in insolvency and bankruptcy situations where the public interest warrants it. However, we do not yet have the benefit of an ERT ruling or binding court decision on the approach taken by MOE in assessing broad liability on past directors and officers in the absence of clear statutory language to this effect.
  • The MOE has argued in more than one case that director and officer liability does not require any proof of fault. It flows from the mere fact that they are, or were, directors and officers. They have the onerous burden of proving they lacked personal management or control over the assets of a corporation and if they cannot do so, they may be held liable. In order to rebut the presumption of a corporate director’s or officer’s involvement in the affairs of a corporation, they have to present “a very convincing case” to the contrary.
  • Corporations need to evaluate and estimate future costs of remediation of their sites and of off-site impacted properties and arrange some form of financial assurance to ensure funds will be available to address the contamination before issues about the financial viability of the corporation arise.
  • According to the ERT and the MOE, the issue is not so much whether directors and officers maintained “management and control” to the present time, but whether the environmental risk present when they did have management and control persisted to the present time.
  • Current case law directs the ERT to focus primarily on furthering the purposes of the Environmental Protection Act, namely, to provide for the protection and conservation of the natural environment. The naming of an innocent party, in appropriate circumstances, can contribute to the purpose of the EPA, therefore “fairness factors” may take a back seat to having innocent parties remedy environmental contamination when the responsible polluters are deceased, bankrupt or wound up.
  • The applicability of the Northstar precedent in jurisdictions other than Ontario is difficult to assess at this stage. This will certainly depend on ministerial policy but also on the framework of environmental statutes in force in other Canadian jurisdictions.
    For strategic advice respecting director and officer environmental liability and measures that may be taken by a company and its directors to minimize the risk of personal environmental liability, kindly contact the lawyers below.