Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Environmental Law/ Restructuring & Insolvency, April 2010
On March 31, 2010, the Superior Court of Québec (Court), in Re AbitibiBowater Inc., issued an important decision on when a government regulatory order may be treated as a creditor claim in proceedings under the federal Companies' Creditors Arrangement Act (CCAA). The Court ruled that a number of environmental cleanup orders issued by the Government of Newfoundland and Labrador (Newfoundland Government) against a group of Abitibi and Bowater companies (Abitibi) were really claims for the payment of money. As a result, the Court held that the claims were subject to the stay of proceedings that had been issued in Abitibi's CCAA debt restructuring case and subject to being compromised.
The Newfoundland Government had argued that its clean-up orders were regulatory orders that were specifically excluded from the CCAA stay. The CCAA order issued with respect to Abitibi specifically stated that government "powers, rights or duties in relation to matters involving public health, safety, security, public order or the environment" were not stayed. However, the same section of the Court order said that government "financial or monetary fines or orders shall be stayed." Accordingly, the Newfoundland Government took the position that the orders were not monetary "claims" and were therefore not subject to the CCAA stay order and process established to compromise creditor claims against Abitibi.
The Court rejected the Newfoundland Government's arguments on a number of grounds. The Court drew a distinction between compliance with regulatory orders made in connection with a CCAA debtor's continuing business operations and Abitibi's situation, where the government's environmental orders related to long-standing historical contamination of lands that Abitibi no longer owned. In fact, most of Abitibi's lands in Newfoundland had been expropriated by the Newfoundland Government in December 2008 in what many saw as a highly unusual reaction to Abitibi's financial difficulties.
The Court concluded that the real purpose of the environmental orders was to create claims by the Newfoundland Government that it could assert in response to Abitibi's claims for compensation for the expropriation of its Newfoundland assets. As such, the claims were really claims for money and not just a regulatory matter. The Court also noted that if Abitibi had to comply with the environmental orders, the effect would have been to give the Newfoundland Government a super-priority over the claims of other creditors. The Court held that this would be contrary to the principles of the CCAA and unjust to Abitibi's other creditors.
The Factual Background
Abitibi carried on extensive industrial activities in the province of Newfoundland and Labrador for most of the 20th century. Facing economic difficulties, it decided to end its operations in the province in December 2008. Shortly after Abitibi announced the closure of its last mill, the Newfoundland Government nationalized substantially all of the company's assets in the province, without compensation.
AbitibiBowater Inc., being a U.S. corporation, filed a notice of intent in April 2009 to submit the matter to arbitration under Chapter 11 of the North American Free Trade Agreement (NAFTA). A notice of arbitration requesting compensation in excess of C$300-million was filed on February 25, 2010. From July through November 2009, the Newfoundland Government carried out environmental site assessments on former Abitibi properties across the province. It also sought access to the company's financial information, which request was denied by the Court in November 2009.
Three days later, the Newfoundland Government issued five ministerial orders under the provincial Environmental Protection Act (EPA) requiring Abitibi to (i) submit remediation action plans for five properties to the Newfoundland Government by January 15, 2010; (ii) complete site remediation actions by January 15, 2011; and by the same date, (iii) close all landfills and lagoons/impoundments associated with those properties. Complying with the orders involved costs estimated at over C$100-million. Similar environmental orders may be issued by all Canadian provincial governments.
Abitibi did not comply with the first deadline. It contended that the Newfoundland Government was using the orders to dissuade it from pursuing compensation or to offset any future compensation awarded to Abitibi. As proof, counsel for Abitibi pointed to a declaration by the provincial premier that "there would not be a net payment to Abitibi." In the context of this intense dispute, the Newfoundland Government asked the Court to declare that its EPA orders were unaffected by the CCAA stay and claims procedure order under which creditors of Abitibi were required to file proofs of claim in connection with their claims against the company.
Position of the Parties
According to the Newfoundland Government, EPA orders are not the same as monetary fines because they simply require Abitibi to honour statutory obligations by carrying out work to restore the environment. As such, EPA orders are not "claims" that are subject to the claims process and stay imposed by the Court pursuant to the CCAA. Additional constitutional arguments were also made but not ultimately ruled upon.
For its part, Abitibi contended that the EPA orders were a tactical move by the Newfoundland Government, which chose to deliberately ignore the CCAA claims process. Permitting the enforcement of the EPA orders would give the Newfoundland Government an unwarranted preference over other creditors and, since it would primarily benefit confiscated land, would give the Newfoundland Government a windfall by enhancing the value of land it seized without compensation. Abitibi also argued that since the assets had been confiscated, the Newfoundland Government bore the primary responsibility for dealing with their environmental condition.
Opinion of the Court
The Court noted certain peculiarities in the environmental assessment reports prepared on behalf of the Newfoundland Government. For example, they were addressed to the lawyers representing the Newfoundland Government in the NAFTA and CCAA proceedings. Also, they failed to indicate whether the land was owned by Abitibi. Finally, they failed to account for pollution by third parties, which appeared probable for some sites. After reviewing the legal framework of the CCAA and the EPA, the Court explained that the key issue in this case was whether the EPA orders gave rise to statutory non-monetary or monetary obligations. In arriving at its decision, the Court found six considerations were particularly important.
- The CCAA has broad and remedial goals and clearly establishes, through recent amendments, that Courts can make appropriate orders to limit regulatory actions against a debtor, especially when monetary orders are in play (although the amendments did not directly apply in Abitibi's case, because they came into effect after the case began, the judge found the policy underlying them to be persuasive).
- This was not a case where the current owner of a site is asked to remedy an environmental condition with respect to ongoing operations. The Newfoundland Government, now owner of most of the sites, would be the primary monetary beneficiary of the improvements it was asking Abitibi to undertake. As such, the Newfoundland Government was acting more like a creditor than a regulator.
- The Newfoundland Government was targeting Abitibi specifically and not attempting the general enforcement of its statutory duties. The deadlines set in the EPA orders, and the fact that Abitibi had no legal right to access most of the sites, showed that the Newfoundland Government likely expected that Abitibi would end up having to pay compensation in lieu of complying with the orders.
- The facts show that the Newfoundland Government had begun requesting proposals for some of the remediation work. As a result, the EPA orders were now akin to contingent claims, which Courts routinely evaluate during CCAA proceedings.
- While previous decisions in which a public authority was found to be acting as a regulator rather than as a creditor, they were distinguishable from the Abitibi case. In those cases, authorities were seeking to enforce a general law and did not stand to benefit financially. Here, since Abitibi did not own most of the properties, and since it no longer carries on business in the province, the Newfoundland Government would likely have to carry out the remediation work itself and pursuant to another provision of the EPA, charge Abitibi for it. Consequently, the Newfoundland Government appeared to be acting much more like a creditor than a regulator.
- Finally, granting the Newfoundland Government a super-priority above all other creditors would seriously hamper the restructuring of Abitibi under the CCAA – a federal law that, under the paramountcy doctrine, cannot be overridden by provincial legislation. In particular, the Court noted that the Newfoundland Government's position was inconsistent with amendments made to the CCAA between 1992 and 2009 that provided Canadian governments with a limited priority or lien against a debtor's real property that is the subject of a claim "for costs of remedying any environmental condition or environmental damage affecting real property of the company" and only against such real property. Subsection 11.8(9) of the CCAA specifically states that such an environmental claim against a debtor company shall be a claim under the act, although this still begs the question of when is an environmental order regulatory in nature as opposed to a claim for environmental costs or otherwise monetary in nature.
For those reasons, the Court denied the Newfoundland Government's demand and stayed the EPA orders for the duration of the stay order issued by the Court under the CCAA. The Court held that the Newfoundland Government could file its environmental claims in accordance with the claims procedure order. However, seeing as the government was already out of time and all claims had been barred, the government would need to request and be granted an extension of time to do so.
Although recent amendments to the CCAA and the Bankruptcy and Insolvency Act (BIA) have clarified how courts should treat government environmental orders, the Abitibi case provides a useful example of how the struggling forestry industry in Canada is at the centre of face-offs between companies, their creditors and governments. This decision provides some helpful certainty to an important and hopefully equitable process of making the best of a sad situation. Canadian courts can be expected to analyze regulatory orders closely under both the CCAA and the BIA, to determine their true nature The key issue is whether the order is a simple statutory compliance order or a disguised monetary order.
Sections 11.1 of the CCAA and 69.6 of the BIA now provide (as of September 18, 2009) a statutory exception for regulatory action from the effect of stays under both acts. Such regulatory action includes an "investigation" and "suit or proceeding" but does not include the "enforcement of a payment ordered by the regulatory body or a court." Both statutes provide the following procedure:
(3) On application by the [company/insolvent person]
and on notice to the regulatory body and to the persons who are
likely to be affected by the order, the court may order that
[the stay exception for regulatory action] not apply in respect
of one or more of the actions, suits or proceedings taken by or
before the regulatory body if in the court's opinion
(a) a viable [compromise, arrangement or proposal] could not be made in respect of the [company/ insolvent person] if that subsection were to apply; and
(b) it is not contrary to the public interest that the regulatory body be affected by the [stay] provided by [s. 11.02 of the CCAA or ss. 69 or 69.1 of the BIA].
(4) If there is a dispute as to whether a regulatory body is seeking to enforce its rights as a creditor, the court may, on application by the [company/insolvent person] and on notice to the regulatory body, make an order declaring both that the regulatory body is seeking to enforce its rights as a creditor and that the enforcement of those rights is stayed.
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.