On October 3, 2013, the Court of Appeal for Ontario (the “Court”) released its rulings in Nortel Networks Corporation (Re)1 (“Re Nortel”) and Northstar Aerospace Inc. (Re)2 (“Re Northstar”), two decisions that help clarify when regulatory orders issued by the Province of Ontario (the “Province”) become provable claims subject to the restructuring process of the Companies’ Creditors Arrangement Act3 (the “CCAA”). A provable claim is any valid claim or liability of a creditor that can be compromised under a plan of arrangement in CCAA proceedings.

Remedial orders issued by the Minister of the Environment (the “MOE”) may be reduced to monetary provable claims that can be compromised in CCAA proceedings only where (i) the Province has performed the remediation work and advanced a claim for reimbursement; or (ii) 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.

  1. BACKGROUND

The decisions of the Court in both Re Nortel and Re Northstar were rendered after the decision of the Supreme Court of Canada (the “SCC”) in Newfoundland and Labrador v. AbitibiBowater Inc.4 (“AbitibiBowater”), in which the SCC examined when MOE orders become classified as provable claims under the CCAA.

AbitibiBowater involved remediation orders issued by the Minister of Environment and Conservation of Newfoundland and Labrador after the applicant, AbitibiBowater Inc. (“Abitibi”), was granted protection from its creditors under the CCAA. The remediation orders were in respect to multiple sites, many of which had been expropriated by the province of Newfoundland and Labrador.

In reaching its decision, the SCC analyzed subsection 11.8(9) of the CCAA, which sets out three requirements for establishing a provable claim:

  • there must be a debt, liability or obligation to a creditor;
  • a claim must be founded on an obligation that falls within the time limit for claims; and
  • it must be possible to attach a monetary value to the obligation.

With regards to the third requirement, the SCC noted at paragraph 30 of AbitibiBowater that, “the question is whether orders that are not expressed in monetary terms can be translated into such terms.” In making that determination, the SCC held that courts must consider the substance of a remediation order, rather than its form, to determine whether there are sufficient indications that the regulatory body that made the remediation order will ultimately perform the remediation work itself.

In AbitibiBowater, the province’s Minister of Environment and Conservation had no realistic alternative but to perform the work itself. The province had expropriated most of the properties and remained the owner. As it was sufficiently certain that the province would do the work and then seek reimbursement, the regulatory order was held to be a provable claim subject to the CCAA restructuring process.

It is against this backdrop that the Court analyzed Re Nortel and Re Northstar.

  1. Re Nortel

In the late 1990s, Nortel Networks Corporation (“Nortel”) identified various environmental impacts that arose from its past operations at a number of Ontario sites. On January 14, 2009, Nortel was granted protection from its creditors under the CCAA. At that time, Nortel had disposed of its interests in all of its sites (the “Disposed Sites”), except for a partial interest in its London site (the “London Site”).

After Nortel’s CCAA filing, the MOE issued remediation orders (the “Orders”) for the Disposed Sites and the London Site that would require further expenditures of approximately $18 million.

On March 9, 2012, Mr. Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) found that the Orders were subject to the stay of proceedings contained in the initial order (the “Initial Order”) and, therefore, had to be addressed as provable claims in the CCAA proceeding.

On June 22, 2012, the MOE was granted leave to appeal the decision to the Court. While the appeal was pending, the SCC released its decision in AbitibiBowater which, unfortunately for Mr. Justice Morawetz, was not available when His Honour rendered his decision.

  1. Re Northstar

The MOE issued two remediation orders against the respondents (collectively, “Northstar”) in early 2012. Northstar subsequently sought and obtained protection from their creditors under the CCAA in June 2012. A CCAA judge approved the agreement for the sale of substantially all of Northstar’s assets in July 2012. Northstar’s contaminated site in Cambridge was not included in the sale.

Northstar advised the MOE that if the sale of its assets was approved, Northstar would abandon its contaminated site in Cambridge and terminate the remediation work. Not surprisingly, no bidder was interested in purchasing the Cambridge location. After Northstar went bankrupt and the trustee abandoned the Cambridge property, the MOE commenced remediation activities at the Cambridge site.

  1. COURT OF APPEAL: Re Nortel and Re Northstar
  1. Re Nortel

The ratio of AbitibiBowater was set out by Juriansz, J.A., writing for the majority of the Court, at paragraph 31 of Re Nortel:

“As I read [AbitibiBowater], the Supreme Court’s decision is clear: 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.”

With this in mind, the Court bifurcated its analysis to those of Nortel’s properties that would satisfy the test in AbitibiBowater and become a provable claim and those that would fail.

The Orders regarding the Disposed Sites were directed to the current and former owners of the properties, as well as Nortel. At the Kingston site, the current and former owners named in the Orders were jointly and severally liable with Nortel to carry out the activities required by the Orders. Section 18 of the Environmental Protection Act (Ontario)5 gave the MOE the power to make orders against the other current and former owners of the Disposed Sites, in addition to Nortel.

As a result, the Court concluded that the MOE Orders in relation to the Disposed Sites were not provable claims subject to the restructuring process under the CCAA. Applying the test in AbitibiBowater, it was not sufficiently certain that the MOE would perform the remediations ordered.

Conversely, the Court found that Nortel’s retained portion of the London Site was worth less than the cost of remediation and that it was probable that the London Site would eventually be abandoned without being sold. The Court considered it sufficiently certain that the MOE would ultimately be forced to undertake Nortel’s obligations under the Orders. As a result, the MOE’s claim was held to be a provable claim that could be compromised in accordance with the CCAA – the effect being that the MOE does not, with respect to the London Site, have priority over Nortel’s assets.

The MOE’s appeal to the Court was allowed. Mr. Justice Morawetz’s declaration that the Orders were stayed by the Initial Order was modified such that the declaration only applies to the London Site. The MOE Orders in relation to the Disposed Sites were not established to be provable claims; such Orders are regulatory orders and are not subject to the insolvency claims process under the CCAA.

  1. Re Northstar

In light of its analysis in Re Nortel, which was incorporated by reference, the Court held that, in conducting the remediation activities, the MOE made it sufficiently certain that the Province of Ontario would do the work and then seek reimbursement. Therefore, the MOE orders were, in substance, provable claims subject to the CCAA restructuring process.

  1. LOOKING AHEAD
  1. CCAA

The case law in Ontario appears to be settled: ongoing environmental remediation obligations may be reduced to monetary claims that can be compromised in CCAA proceedings only where the Province has already performed the remediation work and then advances a claim for reimbursement, or where it is sufficiently certain that the Province will do the work and then seek reimbursement.

Under the CCAA, MOE orders that have become provable claims will be paid in accordance with the priority under the CCAA and can be compromised. The MOE does not have priority with respect to the debtors’ assets. On the other hand, MOE orders that have not become provable claims are not subject to the rules and requirements of the CCAA and, in those circumstances, the MOE enjoys priority over the debtors’ assets.

  1. BIA

Under the Bankruptcy and Insolvency Act6 (the “BIA”), MOE orders that become provable claims will be paid in accordance with their priority under that statute. Unlike the CCAA, however, the BIA imposes a timing restriction on claims: subsection 121(1) of the BIA requires claims to be founded on an obligation that was incurred before the date of bankruptcy. Given the challenges of identifying the date on which environmental damage occurs, the BIA lacks the temporal flexibility of the CCAA that is needed to establish environmental claims.

  1. Directors’ Liability

The directors and officers of insolvent companies that contaminate the environment are not immune from liability. The MOE held the former directors and officers of Northstar (the “Former Directors”) responsible for the environmental damage caused by Northstar, even though much of the contamination occurred prior to the tenure of any of the Former Directors named in the order.

On October 21, 2012, the MOE issued a remediation order against the Former Directors alleging that they had management and control of the Cambridge site and the related remediation systems. After an unsuccessful appeal of the MOE order, immediate liability was imposed on the Former Directors. On October 28, 2013, the Ontario Environmental Review Tribunal accepted the Minutes of Settlement between the MOE and the Former Directors. The Former Directors agreed to pay $4,750,000 to the MOE in exchange for the withdrawal of the MOE order that had imposed liability on the Former Directors for the remediation of the Cambridge site.

The MOE has shown a clear willingness to hold directors and officers liable in cases where a company is unable to finance the remediation costs. Directors and officers may be held liable for environmental contamination, regardless of whether they were directly involved in the contaminating activities. It would be prudent for directors and officers to ensure they are properly insured against such liabilities. Nevertheless, it remains to be seen whether these recent decisions will dissuade talented individuals from serving as directors or officers of organizations. 

Aaron Baer