Canada: No Stay For Order To Former Officers And Directors

Last Updated: April 10 2013
Article by Dianne Saxe

The Environmental Review Tribunal has refused to stay a multimillion dollar order to the former officers and directors of a bankrupt company and its parent, pending appeal, whether or not the Ministry of the Environment had jurisdiction to issue the Order. See Baker v. Director, Ministry of the Environment, Case Nos.: 12-158 to 12-169.

What does this mean for officers and directors of companies with past or present operations or properties in Ontario? It means that it is not enough for you to comply with the duties of officers and directors set out in s. 194 of the Environmental Protection Act. If the Ministry issues an order some day, all of your personal assets may be at stake, unless you are well covered with millions of dollars of directors' and officers' insurance, and unless the insurance will continue to cover you after the corporation stops paying premiums and after you leave the board. All of this whether or not your corporation caused the contamination, and whether or not the Ministry had the legal right to issue the Order against you. Until the appeal is decided, you must pay.

The Bankrupt Company

Northstar Aerospace (Canada) was the last owner and occupier of an industrial facility in Cambridge, Ontario. For about half a century, Northstar Canada and its predecessors made metal parts, many of which they degreased with a chlorinated solvent, trichloroethylene. In the early years, it was common practice to dispose of waste chlorinated solvents by pouring them on the ground, where they were believed to disappear.

In 2004, TCE groundwater contamination was discovered. During the next eight years, Northstar Canada spent $15 million to delineate, control and cleanup the contamination, on and off its site. Substantial future remediation costs were also recognized as liabilities on the balance sheet. As of December 31, 2010, the remaining provision for environmental testing and remediation costs was $7.5 million. In 2011, the Ministry's cleanup standards became more stringent.

In 2012, the company received CCAA protection and ultimately declared bankruptcy. The Superior Court of Justice rejected Ministry of the Environment attempts to claim priority over other company assets for cleanup costs at the Cambridge site. The Ministry appealed; the case will be argued before the Court of Appeal next month.

Personal liability of officers and directors

Meanwhile, the Ministry of the Environment ordered the former officers and directors of the bankrupt company, and of its parent company, to personally fund the cleanup, at an estimated cost of $15 million (about $1.25 million per year). The Order does not allege that the officers and directors had any personal involvement in creating the contamination. Nor does it allege that they were officers and directors at the time the TCE was discharged into the natural environment. Instead, it blames them for not setting aside the cost of cleanup into a special trust account before declaring insolvency. The Order does not identify any source from which the company could have obtained the  money, nor how it could have protected the funds from its other creditors. The Order simply says:

2.13 Northstar's publicly released Annual Reports for 2008, 2009 and 2010 estimated that the future cost of the remediation of pollution related to the Site amounted to several million dollars. Nevertheless, the funding of such future work was not secured by Northstar or Northstar Canada through a trust account or other means.

2.20 The Parties are former directors and/or officers of the companies named in the Remediation Order and as such had management and control of those companies. The Parties were directors or officers during the period from approximately 2005 to 2012 during which the results of indoor air sampling were analyzed and mitigation strategy was developed with respect to the Contamination.

2.21 As no provision has been made for the continuation of the investigations, monitoring, mitigation and remediation of the Contamination, the Parties have failed to carry out their duty and exercise their authority as a director/officer to make adequate provision to ensure implementation of the remediation strategy generally and in accordance with the obligations imposed by section 93 of the EPA as well as the Remediation Order. Further, the Parties have caused or permitted the discharge of a Contaminants so that human health or safety is endangered or is likely to be endangered a result of the failure to make adequate provision to ensure implementation of the remediation strategy and compliance with the Remediation Order.

Appeal and request for stay

The former officers and directors appealed the Order to the Environmental Review Tribunal, arguing that the Ministry has no jurisdiction to make the officers and directors vicariously liable for the environmental obligations of their bankrupt company, whose assets have been disposed of by order of the Superior Court of Justice, in accordance with federal insolvency law. They say that they could not have set aside $15 million, prior to insolvency, as the ministry demands, because the company did not have the money.

They also argued that, if they ultimately succeed on the appeal, they will not be able to recover from the Ministry any of the funds they will be forced to spend on the contamination, at a rate of more than $100,000 per month. Instead, they offered to put the entire monthly cost into trust, to guarantee that the Ministry will be able to recover the monthly cost from them should the Ministry win the appeal.

The Ministry rejected the offer, and the Environmental Review Tribunal rejected the directors and officers' motion for a stay pending appeal. According to the Tribunal, the former directors and officers flagrantly defied the statutory scheme in refusing to accept responsibility for the cleanup pending appeal, no matter how unjustified they may believe the Ministry's Order to be:

[94] The Tribunal emphasizes that there is no automatic stay of most orders under the EPA, including this Order. Appellants seeking a discretionary remedy such as a stay should make efforts to comply with the Order pending the determination of their appeals or pending the issuance of an interim stay (a hearing for which can be arranged on short notice) or stay by the Tribunal. The Tribunal notes that, in many situations, the hearing of an interim stay motion or a stay motion will take place before the first deadlines in an order and compliance and conduct issues will not arise.

[95] If the Tribunal were to routinely grant stays to those who simply ignore their statutory obligations, this would amount in practice to a situation where there is an automatic stay pending appeal. The Legislature clearly opted for another approach when it amended the stay provisions of the EPA. The present statutory scheme is one where orderees are required to comply unless a stay is granted. The Tribunal finds that there would be significant harm to the public interest if the Tribunal were to grant a stay in the circumstances of this case. For these reasons, the Tribunal finds that even if the harm to the Appellants were considered to be irreparable or there were no bar to the issuance of a stay for aspects of the Order under s. 143(2), the balance of convenience favours the Director.

 The ERT's refusal to grant the stay has been appealed to the Divisional Court.

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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Dianne Saxe
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