Legal Trends: Lender protection from most environmental remediation orders and Personal liability of officers and directors are reinforced

Legal trends ’14: a forecast of the year ahead – environmental by Blake Cassels & Graydon LLP Canada, January 14 2014
Canadian courts reaffirmed the general insolvency and bankruptcy priorities and found that, in most cases, environmental orders will not displace these priorities. In October 2013, the Ontario Court of Appeal released concurrent decisions in Re Northstar Aerospace Inc. and Re Nortel Networks Corporation. Both considered whether Ministry of the Environment (MOE) environmental remediation orders (RO) were subject to compromise in the company’s insolvency proceedings or whether such orders “survived,” requiring ongoing compliance and subject to post-restructuring enforcement. If an RO “survives” the general stay in insolvency proceedings, the MOE is effectively granted a super-priority over the company’s assets. If the RO is stayed, it can be compromised and the MOE’s statutory super-priority claim is only over the contaminated property and the contamination’s source. In determining whether the ROs were stayed, the court asked whether it is more likely than not that the MOE will do the remediation work itself. If so, these claims are tantamount to “monetary claims” and would be stayed.

Lenders can draw comfort from the court’s reaffirmation that the insolvency and bankruptcy priorities are not displaced by environmental ROs. However, subsequent owners can become subject to environmental ROs when purchasing contaminated property, even if they were not involved in the contamination. The practical outcome of these decisions is that Canada’s regulators are becoming increasingly vigilant about seeking financial assurance in a range of circumstances, including for most remediation activities, a trend that will likely continue as we head into 2014.

After the Superior Court found that the RO against Northstar was stayed, the MOE issued an RO naming Northstar’s directors as respondents. Among other things, the order required that the directors personally carry out the remediation at an estimated monthly cost of approximately C$150, for several years (total cost approximately C$15-million). The order was issued even though most of the directors had not been Northstar directors when the event leading to contamination occurred or when Northstar began actively monitoring contamination at the site. Some directors had resigned when the MOE issued its order.

The day before the appeal hearing, the directors settled, agreeing to provide C$4.75-million as financial assurance to the MOE in exchange for withdrawal of the order against them. The potential liability was sufficiently tangible to convince the directors to settle. The Environmental Review Tribunal approved the financial assurances requirement and included it in an order.
This case demonstrates the MOE’s willingness to consider all potential liability sources when imposing costs for remediating environmental contamination. Together with the recent Kawartha Lakes (City) v. Ontario (Environment) Ontario Court of Appeal decision, which upheld an MOE order issued against an “innocent” landowner, recent jurisprudence shows a willingness of the MOE to issue orders and reviewing tribunals and courts to uphold such orders, regardless of fault and without consideration of any principle of fairness. [Emphasis added]

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