Canada: Insolvency v. Environmental Legislation - Still A Lot Of Clean Up To Do

The Supreme Court of Canada (the "SCC") released its decision in Newfoundland and Labrador v. AbitibiBowater Inc.1 today. As insolvency practitioners and environmental lawyers know, this case dealt fundamentally with the question of whether or not environmental remediation orders issued by a regulator pursuant to environmental legislation constitute "claims" subject to a stay and compromise inside a Companies' Creditors Arrangement Act ("CCAA") proceeding, with the collateral constitutional jurisdiction question. The short answer? A rather unsatisfactory, "It depends."

While this decision should be seen to definitively put the constitutional jurisdiction issue to rest – that this question is legitimately one that the CCAA court must answer – by holding that not all orders issued by regulatory bodies are monetary in nature (and, therefore, provable claims in an insolvency proceeding), but some may be – and it is up to the CCAA court to make this determination on consideration of the full factual matrix pertaining to the particular case – the SCC has essentially left this to be a litigated issue in each case.

In attempting to provide some guidance, the SCC held that there are three requirements that must be met for a regulatory order to be considered as a claim that can be compromised inside an insolvency proceeding: (1) there must be a debt, liability or obligation to a creditor; (2) the debt, liability or obligation must be incurred as of a specific time; and (3) it must be possible to attach a monetary value to the debt, liability or obligation. As to the third point, in the context of environmental protection orders, this means that there must be sufficient indications that the regulatory body that triggered the enforcement mechanism will ultimately perform remediation work and assert a monetary claim -- in other words "sufficient certainty" in this regard. Two of the nine judges dissented on this point as in their view such "sufficient certainty" in this case had not been adequately proven.2

The SCC's decision, however, still leaves most of the hard questions in this area unanswered. The one question it did squarely address was to make it clear that as soon as a regulator initiates enforcement mechanisms it becomes a creditor for the purposes of an insolvency proceeding. This should eliminate any future uncertainty on this point based on the argument that the obligations in question are not "owed" to the regulator per se. That said, the decision does not clearly address what is to happen with continuing environmental liability. If environmental damage occurred prior to the insolvency filing, then it meets the second test enumerated above. However, what happens to the obligation to remediate if the environmental damage is of a type that is continuing during the insolvency proceeding and will continue after it? There is no clear answer in this decision.

The other hanging hard question was touched upon by the two dissenting judges. Section 11.8 of the CCAA provides a claim for the costs of remedying any environmental condition or environmental damage affecting real property and provides the relevant government with a first ranking charge over such real property (and related contiguous real property) for such remediation costs. However, what if the remediation costs greatly exceed the value of the real property even after it is remediated? If there are no health and safety issues, the regulator may well choose not to actually incur any remediation costs. If this is the case, then the "sufficient certainty" test to incurring such costs cannot be met but leaves a debtor facing a continuing remediation order whether or not the debtor has chosen to abandon the property.

The majority in this case deferred to the trial judge's conclusions that there essentially was "sufficient certainty" that the regulator would incur such remediation costs. In doing so, this decision appears to support the feasibility of "quarantining" or otherwise abandoning environmentally damaged properties in insolvency proceedings given that two important factors in this case were the debtor's lack of control over the properties in question and its inability to complete any remediation due to timing and financial constraints. However, the facts of the case as outlined in the trial judge's decision also leave some doubt about the "sufficient certainty" conclusion given the stated possible remediation costs relative to the value of the underlying properties in question – an issue seized upon by the two dissenting judges.

Suffice it to say, this particularly critical issue in this area is not clearly dealt with in the CCAA and this SCC decision does not do much to clean it up.


1. 2012 SCC 67.

2. One of the dissenting judges (McLachlin C.J.) in fact supported a more onerous threshold of "likelihood approaching certainty" but held that not even the "sufficient certainty" standard had been met.

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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