Canada: Unlimited Personal No Fault Liability For Directors And Officers?

Last Updated: April 23 2013
Article by Dianne Saxe

The Ontario government is arguing in Superior Court today that former corporate directors and officers have presumptive unlimited, personal, no-fault liability to orders to pay all environmental costs associated with the assets of their former corporation, or of the subsidiaries of that corporation.

Northstar Aerospace (Canada), which is now bankrupt, owned 695 Bishop Street, Cambridge, Ontario, an industrial site with a substantial historic chlorinated solvent plume (TCE) that flows under part of the Bishop Street community. It spent close to $20 million to investigate, manage and remediate the contamination, under MOE supervision, until it ran out of money in 2012.

Last summer, the Ontario Ministry of the Environment failed to block the distribution to secured creditors of the proceeds of the marketable assets of Northstar Canada and of its parent company, Northstar Aerospace Inc. Justice Morawetz of the Superior Court (Commercial List) ruled that the money properly belonged to a secured creditor, which had priority over the MOE under federal insolvency laws (CCAA and BIA).

The MOE also filed a claim for the cleanup costs in the corporate insolvency proceedings, but there was no money left for any of the many unsecured creditors. The MOE was equally unsuccessful in seeking access to a corporate reserve that had been set aside for certain post-filing claims against the officers and directors.

In November, the MOE ordered the former officers and directors of both Northstar Canada, and Northstar Inc., to personally pay for about ten more years of cleanup work. Note: the order does not claim that the TCE contamination occurred while any of the officers or directors were involved with either company. It may pre-date them all.

The order is under appeal to the Environmental Review Tribunal, which has ordered the former officers and directors to pay the cleanup cost (exceeding $100,000/month), at least until the appeal is complete. (We act for one of the directors at the ERT).

The former officers and directors say the MOE has no jurisdiction to require them to pay for the corporate cleanup. They have also made a motion to the Superior Court to have the validity of the order determined as part of the insolvency proceedings. It is this venue motion that is being argued today.

The Crown factum for this motion is attached:  Crown Responding Factum -venue motion. It suggests that the officers and directors' liability does not require any proof of fault, but flows from the mere fact that they were officers and directors. It claims that the officers and directors have a difficult onus of proving they lacked personal management or control of the assets of the corporation and of the subsidiary of the corporation, and, if not, can be ordered to cleanup anything associated with those assets, even after bankruptcy:

"(i) The Former D&Os' Liability is independent of the CCAA Entities' Liability and is not dependent on Fault

87. Under the EPA, the MOE Director is empowered to issue orders against past owners, occupants and persons who were in charge, management or control of an undertaking, property or source of a contaminant.

88. The EPA specifically permits the Director to make various orders that impose obligations and personal liabilities upon persons who (i) cause or permit the discharge of a contaminant into the natural environment and/or (ii) had management or control of an undertaking or property from which a contaminant was discharged. EPA, ss. 17, 18(1), 18{2) and 196(1).

89. It is the MOE's position that the Former D&Os had management and control of Northstar Canada and Northstar Inc. during the period from 2003 to 2012 such that they must have been informed and aware of the environmental issues arising from the TCE contamination. Hess and Yuen had management and control of the two corporations during the Post-Filing Period. Corporation Point in Time Reports for Northstar Canada and Northstar Inc. – Exhibit "5″ to Exhibit "43″ to Sinnadurai Affidavit, MOE's Motion Record, Tabs 5 to 43.

 90. Section 18 of the EPA applies not only to persons who currently own, manage, or control undertakings or property but also to those who previously held such a status. The EPA provisions capturing past owners, managers and controllers are retrospective and apply to persons holding that status before 1990 when the provisions were passed. Sheridan v. Ontario (Ministry of Environment and Energy), [1994] O.E.A.B. No. 56 at 12, MOE's Book of Authorities, Tab 16.

91. In Currie v. Ontario (Ministry of the Environment) ("Currie"), the ERT quoted with approval from the decision of the Divisional Court in Ontario (Ministry of the Environment and Energy, Southern Region) v. 724597 Ontario Inc. (c.o.b. Appletex) which confirmed the Ontario Environmental Appeal Board's interpretation of "management and control". "Control" includes de facto control and control of the purse strings through means other than direct or daily participation in the corporation or its business. "Management" is not restricted to how the business was conducted as an 34 operating entity, but includes how the property was decommissioned when the business was abandoned. Currie v. Ontario (Ministry of the Environment), [2011] O.E.R.T.D. No. 26 at para. 76, MOE's Book of Authorities, Tab 17.

92. The ERT in Currie also confirmed that directors who have been named in a Director's order under section 18(1) of the EPA bear the onus of proving that they did not have management or control of the corporation whose operations caused the environmental contamination."

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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