Canada: Parent Corporation And Director Liability

An upcoming Environmental Review Tribunal (ERT) case in Ontario will provide an important precedent on the critical questions of liability of parent corporations and directors for environmental clean ups in Ontario.

The Ontario Ministry of the Environment (MOE) has issued three Director's Orders to a now-insolvent Canadian company (General Chemical) requiring investigation and clean up of a former General Chemical site in southwestern Ontario. The clean up cost estimates range into the tens of millions of dollars.

The interesting feature of the case is that the Director's Orders have also been issued to the US parent company of General Chemical, as well as to several individuals who were or are directors of one or both of the Canadian and US companies in question. A particularly unusual feature of the Orders in this case is that the Orders have been issued to three lawyers at a prominent Toronto law firm who served as directors of General Chemical and its Canadian holding company.

Certain provisions of the Ontario Environmental Protection Act (EPA) permit an MOE Director to issue clean up or preventive measures orders, including to persons who have or had "charge, management or control" of an undertaking or property. The MOE is relying upon these provisions in this case to issue the Orders against the US parent company, as well as the Canadian and US individual directors. The Director asserts that all of the named parties have or have had charge, management and control of the site and responsibility for operation of the undertaking for several years.

The US parent company is resisting the Orders, as are the individual directors, on the basis that none of them owned or "controlled" the site in question within the meaning of the EPA. In the case of the US parent company, the Orders have been appealed on the basis that the US parent company's sole interest in General Chemical was as a shareholder and that it is a basic principle of corporate law that shareholders of a corporation are not responsible for the obligations of the corporation.

The US parent company asserts in its appeal of the Orders that the type of corporate control a shareholder has by virtue of owning shares of a corporation is not the type of operating management or control contemplated by the applicable provisions of the EPA. Rather, it asserts that the business of General Chemical, including the manufacturing operation at the site in question, was undertaken by employees of the Canadian company. General Chemical's US parent argues that the fact that it provided financial support and certain administrative services to the Canadian subsidiary, and that some of its employees also served as officers and directors of the Canadian company, do not give it or them the type of "charge, management or control" upon which liability is intended to be founded under the EPA.

With respect to the individual directors named in the MOE Orders, the Canadian lawyers take the position that they were elected as directors of General Chemical solely to satisfy the requirements under Canadian corporate statutes for Canadian resident directors. Their role was nominal and generally limited, they assert, to executing corporate resolutions from time to time, as well providing outside legal advice on various matters. The US directors of General Chemical named in the order argue that they did not exercise any direct management or control over the plant site at any time.

McCarthy Tétrault Notes:

Somewhat surprisingly, very few Canadian cases have considered the potential liability of parent corporations and individual directors for environmental clean ups, particularly in circumstances involving large and complex corporate organizations. The MOE has issued similar orders in the past, but they have usually been resolved in some fashion prior to the ERT and the courts being asked to consider the issues involved. The relatively sparse ERT case law that does exist on these issues suggests that the ERT may set the liability bar fairly low.

The MOE has always taken the position that, as a matter of public policy, it is appropriate for the Ministry to seek to impose liability on potentially responsible parties in such circumstances, rather than asking the taxpayers of the province to foot the bill. The appellants in the General Chemical case argue that the Director's Orders, in addition to being contrary to recognized principles of limited corporate liability, are beyond the jurisdiction of the Ministry, are unfair and constitute an abuse of its powers.

Barring a last-minute settlement, this case will provide some important guidance on which of these two views is correct, at least with regard to the facts of this case. It bears careful watching and will be covered in a future issue.

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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