Canada: Environmental Liability In A CCAA Proceeding

In Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, the Supreme Court of Canada was called upon to consider whether orders issued by a regulatory body with respect to environmental remediation work are "provable claims" in a proceeding commenced under the Companies' Creditors Arrangement Act, R.S.C. 1985, c.C-36 (the "CCAA").

In its decision released on December 7, 2012, Deschamps J., writing for the majority of the Court, upheld the decision of Gascon J. of the Quebec Superior Court, sitting as a CCAA Court, which had characterized the environmental orders as "provable claims" in the insolvency proceeding. As a result, the claim was stayed by the Initial Order pronounced to commence the CCAA proceeding.

The Court considered Section 11.8(9) of the CCAA which states:

"A claim against a debtor company for costs of remedying any environmental condition or environmental damage affecting real property of the company shall be a claim under this Act, whether the condition arose or the damage occurred before or after the date in which proceedings under this Act were commenced."

In reaching her decision, Deschamps J. held that, in considering the nature of a regulatory order, the Courts should examine its substance rather than its form. If a province's actions indicate that, in substance, it is asserting a "provable claim" within the meaning of federal insolvency legislation, then the claim will be subject to and stayed by the CCAA insolvency process. In statements which will provide comfort to insolvency professionals, although not environmental regulators, the Court confirmed established jurisprudence that a province cannot disturb the priority scheme established by federal insolvency legislation and that environmental claims do not have a higher priority than as provided for in the CCAA.

Deschamps J. held that if Parliament had intended that a debtor in insolvency proceedings always satisfy all remediation costs, it would have granted the Crown a priority with respect to the totality of the debtor's assets.

In its decision, the Court recognized that orders relating to the environment may or may not be considered provable claims. In considering whether a claim is provable in the CCAA process, Deschamps J. held that there are three requirements the courts must consider. First, there must be a debt, a liability or an obligation to a creditor. In this case, the first criterion was met because the Province had identified itself as a creditor by resorting to environmental protection enforcement mechanisms. Second, the debt, liability or obligation must be incurred as of a specific time. This requirement was also met since the environmental damage had occurred before the time the CCAA proceeding had commenced. Third, it must be possible to attach a monetary value to the debt, liability or obligation. In this case, the Court had found that it was "sufficiently certain" that the regulatory body that triggered the enforcement mechanism would ultimately perform remediation work and assert a monetary claim.

In the course of her judgment Deschamps J. noted that, as a matter of principle, the reorganization of a company does not give it a licence to disregard regulatory orders. To subject regulatory orders to the CCAA claims process is not to invite companies to restructure in order to rid themselves of their environmental liabilities. However, as Deschamps J. observed, reorganization made necessary by insolvency is hardly ever a deliberate choice.

In a forceful dissent, Chief Justice McLachlin found that remediation orders made under a Province's environmental protection legislation imposed ongoing regulatory obligations on the company required to clean-up the pollution. They are not monetary claims. In narrow circumstances, specified by the CCAA, these ongoing regulatory obligations may be reduced to monetary claims, which can be compromised under CCAA proceedings. However, this will only occur where a Province has done the work, or where it is "sufficiently certain" that it will do the work. In these circumstances, the regulatory obligations would be extinguished and the Province would have a monetary claim for the cost of remediation in the CCAA proceedings. Otherwise, the regulatory obligation survives a restructuring.

In this case, the Chief Justice found, that with a minor exception, the orders for remediation work were not claims that could be compromised in the restructuring as, on the evidence, the Province neither did the clean-up work nor was it sufficiently certain that the Province would in fact perform the remediation.

In the course of her reasons, the Chief Justice questioned the "sufficient certainty" test adopted by the majority. The Chief Justice held that where environmental obligations are concerned, the courts to date have relied on a high degree of probability verging on certainty that the government will in fact step in and remediate the contaminated property. Consequently, the Chief Justice found that the "sufficient certainty" test adopted by the majority should be replaced by a "likelihood approaching certainty" test in considering whether a Province will step in to conduct the environmental remediation work and thus have a contingent or monetary claim that can be compromised in the restructuring process.

In a further dissent, LeBel J., although he agreed with the rationale posited by the Chief Justice, preferred the test of "sufficient certainty" proposed by Deschamps J., rather than the "likelihood approaching certainty" test proposed by the Chief Justice.

Insolvency professionals should bear in mind that the Abitibi case does not stand for the proposition that all environmental orders are provable claims and therefore subject to the CCAA claims process. The majority and the dissenting opinions were ad idem that not all orders issued by regulatory authorities are monetary in nature and thus provable claims. However, Abitibi confirms that some orders- namely, those found to be monetary in nature- are provable claims and subject to the CCAA claims process. Everything will turn on the factual matrix. In this case, the SCC noted that AbitibiBowater had no means to perform the remediation work and that, under the timetable set by the Province in the regulatory orders, the Province never truly intended that AbitibiBowater perform the remediation work. As the CCAA judge found, "the intended, practical and realistic effect of the ... Orders was to establish a basis for the Province to recover amounts of money to be eventually used for the remediation of the properties in question". In his words, the situation did not involve a "detached regulator or public enforcer issuing [an] order for the public good" and it was "the hat of a creditor that best [fit] the Province, not that of a disinterested regulator".

It was the Court's conclusion in this case that it was "sufficiently certain" that the Province would perform the remediation work and impose this liability on AbitibiBowater that led it to the conclusion that the Province fit the definition of a creditor with a provable monetary claim in the CCAA proceeding.

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