Canada: Liability Of Directors And Officers For Environmental Remediation: No Longer Just Theoretical

Directors and officers have long since been subject to potential liability for environmental remediation under the Ontario Environmental Protection Act (EPA). With the recent resolution of Baker et al v. MOE (Director), however, potential has given way to actual, as a group of "innocent" directors have found themselves forced to pay for a portion of a bankrupt corporation's obligation to manage contamination.

BACKGROUND: DIRECTORS OF A COMPANY IN FINANCIAL DIFFICULTY

Northstar Canada operated a manufacturing and processing facility in Cambridge, Ontario, that produced waste containing heavy metals. Beginning in 2004, Northstar actively monitored contamination at the site and undertook voluntary remediation. In the late spring of 2012, the Ministry of the Environment (MOE), concerned that Northstar would be unable to carry out the remediation because of increasing financial difficulties, issued two orders: one requiring Northstar to remediate the contamination, and one requiring Northstar to post financial assurance. Shortly thereafter, Northstar filed for creditor protection under the Companies' Creditors Arrangement Act (CCAA). Northstar ceased its remediation activities at the Cambridge site. In July 2012, the CCAA court held that the orders issued by the MOE were stayed by the CCAA proceedings, and as a result, the MOE had to carry out the remediation itself. All of the assets of the company, with the exception of the Cambridge site, were sold, and Northstar declared bankruptcy.

THE MOE LOOKS BROADLY

In November 2012, after the initial stay was made in the CCAA proceedings, the MOE issued an order pursuant to sections 17 and 18 of the EPA, naming Northstar's directors as respondents. Among other things, the order required the directors personally to carry out the remediation of the Cambridge site, which was estimated to cost approximately C$150,000 per month for several years, for a total of approximately C$15-million. The order was issued by the MOE even though most of the directors had not been directors with Northstar when the event leading to the contamination had taken place or at the time Northstar began actively monitoring the contamination at the site. Some of the directors had resigned from the board at the time the MOE issued the order against the directors. From the MOE's perspective, the directors had allowed the company to both file for CCAA protection and stop its remediation efforts, which made them liable for the remediation under the EPA.

AN OBLIGATION NOT EASILY SHED

The directors appealed the MOE's order to the Environmental Review Tribunal (ERT) and also sought a stay of the order. The directors' request for a stay was denied, despite the likelihood that any money the directors spent on the remediation of the Cambridge site would not be recoverable if the appeal was successful. The directors' appeal of the dismissal of the stay to the Ontario Superior Court was denied.

AN UNCERTAIN OUTLOOK

The day before the hearing of the appeal, having already spent approximately C$800,000 on remediation, the directors settled with the MOE. As part of the settlement, the directors agreed to provide C$4.75-million as financial assurance to the MOE, in exchange for the withdrawal of the MOE's order against them.

It's not clear whether the facts of this case would have supported a finding of liability for remediation on the part of the directors. Regardless, the potential for liability was sufficiently tangible to cause the directors to settle with the MOE. The directors' requirement to post financial assurance has been approved by the ERT and has been included in an ERT order.

This case demonstrates that the MOE is willing to (and will) look to all potential sources of liability to impose the costs of remediating environmental contamination, whether or not the parties were involved or caused the contamination in the first place. Together with the recent Ontario Court of Appeal decision in Kawartha Lakes (City) v. Ontario (Environment), which upheld an MOE order issued against an "innocent" landowner, the recent jurisprudence shows a willingness of the MOE to issue orders, and of the ERT and reviewing courts to uphold these orders, regardless of fault.

This case should encourage directors and officers to review the environmental practices and policies of the companies on whose boards they serve, as well as carefully consider the insurance and indemnities available to them.

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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