Canada: Environmental Orders And The Companies’ Creditors Arrangement Act ("CCAA")

Recently, the Ontario Superior Court of Justice in Nortel Networks Corporation ("Nortel") had to deal with the matter of Orders issued by the Ministry of the Environment ("MOE") for current and future remediation work at certain sites previously occupied by Nortel. Nortel sought an order repudiating or disclaiming any contractual obligations to carry out the remediation work and asserted that the MOE Orders being financial and monetary in nature should constitute claims to be paid as part of the CCAA proceedings. Nortel also took the position that the MOE Orders being monetary in nature were stayed by virtue of Nortel's CCAA proceedings.

Nortel once conducted manufacturing operations at these sites but they had been disposed of in the late 1990s. At the time of its CCAA filing, Nortel had already disposed of these sites which were not subject to any MOE remediation orders, although Nortel was aware of the environmental impact on the sites arising from its past operations. It had maintained a partial interest in one site in London, Ontario.

Subsequent to Nortel filing under the CCAA, the MOE issued a new order on the London site and prepared orders with respect to three other sites. The estimated cost of the remediation orders was $18 million. Nortel's position was that the MOE Orders were in substance orders to pay money. The MOE's position was that as a former and current owner of environmentally contaminated property, Nortel was subject to regulatory obligations under the Environmental Protection Act. The MOE also submitted that these performance obligations had not advanced to the point of being claims that could be stayed.

The Court had to determine whether the MOE Orders were subject to the stay. Nortel argued that the stay is critical to CCAA reorganizations as it enables the centralization and maximization of a debtor's assets for the benefit of all creditors. Nortel also pointed out that the MOE Orders require the expenditure of money to remedy past actions on lands Nortel no longer owned. If Nortel was required to pay the remediation costs of approximately $18 million, it would prioritize environmental liabilities over all other unsecured claims. Nortel further argued that the true nature of the MOE Orders was financial not regulatory.

Nortel further noted that Sections 11.8(8) and (9) of the CCAA provides the MOE with a specific remedy being "a super priority" over real property that is contaminated and owned by the debtor at the time the Orders are made.

The MOE's position was that Section 11.8(8) of the CCAA addresses the priority standing of the MOE only when it is acting in its capacity as a creditor to recover costs. The MOE claimed that if Nortel's position was accepted, the burden of the clean-up would be shifted from the creditors of Nortel to the taxpayers of Ontario.

The MOE insisted that the Orders were performance obligations and not monetary ones creating a debtor/creditor relationship. The Orders were to effect a clean-up, not to pay the Minister money. The Orders relate to a regulatory continuum from retaining a consultant, assessing the nature and extent of the contamination, developing a work plan to address the contamination and implementation of a work plan. It was not a monetary order at that stage. It was only if the entity did not do the work, and the MOE was required to do it, that an order may be made to recover those costs. The MOE contended that the MOE Orders were not claims that could be compromised. The MOE also pointed out that the steps in the continuum are regulatory obligations, not monetary.

The Court did not accept that it was easy to separate the continuum of regulatory activity. Once it starts, the end result is that Nortel has to spend money to comply. The bottom line is that either there is a direct claim against Nortel or a claim against third parties who would then have a claim against Nortel. The Court concluded that the effect of the MOE Orders, if issued, was to require Nortel to act and incur a financial obligation.

The Court reviewed the statutory provisions under the CCAA and the Bankruptcy and Insolvency Act. It concluded that if there are continuing operations, there has to be ongoing compliance with environmental legislation. But if there are no ongoing operations, the environmental regulator has to rely on the security, failing which it has unsecured claims. While Section 11.8(8) provides the MOE security on land owned by a debtor, Nortel, with the exception of one site in this case, no longer owned the affected lands. Accordingly, the MOE claims are unsecured. The MOE has a choice, it can maintain its position that it is not a creditor or it can file a claim and participate as an unsecured creditor and receive a portion of any distribution.

As a result, the Court ordered that if the draft MOE Orders are issued, they are stayed along with all proceedings before the Ontario Environmental Review Tribunal. Nortel was authorized to cease performing any remediation work and Nortel was released from all contractual obligations to carry out such work. The MOE could now decide if it wished to file claims against Nortel in accordance with the procedure and claims resolution Orders currently in place. The Court recognized that the MOE may have a secured status under Section 11.8(8) of the CCAA with respect to the land still owned by Nortel in London, Ontario.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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