In today's regulatory environment, environmental law is no longer an isolated concern—it is a fundamental part of doing business in Canada and integrated with business risk analysis on a broader level. Whether you are acquiring property, managing industrial operations, or navigating insolvency, environmental obligations are embedded into many stages of a company's lifecycle.
Legislative overview: What you need to know
Directors and officers face significant personal risks under environmental legislation, particularly in provinces like Ontario. The Environmental Protection Act(EPA) creates a range of corporate and personal duties related to environmental protection, including:
- Section 6: Prohibits the discharge of contaminants by anyone with "charge, management or control;"
- Section 194: Establishes that corporate directors and officers must take reasonable care to prevent the corporation from violating environmental obligations, and can be personally prosecuted, even if the corporation is not;
- Part X (Spills): Sets out mandatory duties to report, prevent, and remediate spills of pollutants, extending liability to individuals with control over the source or affected property; and
- Part XV.2: Provides limited protection to secured creditors, but only when certain conditions are met and not in cases of gross negligence or imminent harm.
This legislative framework provides regulators broad authority – and limited tolerance – for inaction.
Environmental liability of corporate directors and officers
Business decisions can lead to environmental consequences, and regulators have increasingly broad powers to hold directors and officers personally liable, even if the corporation itself is not prosecuted.
Under provincial statutes like Ontario's EPA, directors and officers are required to take all reasonable steps to prevent environmental violations. This includes preventing spills, ensuring timely reporting of incidents, and complying with ministry orders. Failure to act can result in:
- Personal fines up to $100,000 and potential imprisonment;
- Liability for cleanup costs, regardless of fault; and
- Orders issued regardless of corporate insolvency or prosecution.
Investors and lenders: Know your exposure
Investors and secured creditors are not immune from environmental responsibility. Courts across Canada have confirmed that parties with "management, care or control" over operations may be held liable for environmental remediation/obligations.
Whether financing equipment, acquiring distressed assets, or participating in turnaround strategies, businesses and investors must conduct:
- Environmental due diligence (Phase I/II assessments);
- Financial risk analysis relating to potential liabilities; and
- Strategic planning for funding equipment upgrades, decommissioning and cleanup.
Environmental considerations in insolvency
Recent court decisions (e.g., Orphan Well Association v. Grant Thornton Ltd. and decisions relying on this case in the last 2-3 years) have reshaped the legal landscape for environmental obligations during insolvency proceedings. Provincial regulators have a super-priority over secured creditors when it comes to environmental cleanup orders. This means:
- Environmental liabilities under provincial orders will likely be paid before secured creditor claims;
- Assets in a debtor's estate, possibly including unrelated equipment, may be used to fund remediation; and
- Directors may still face personal exposure if reasonable environmental reserves were not established.
Who is at risk?
Environmental liability is not limited to those directly handling pollutants. Canadian regulators and courts have consistently held a broad range of parties accountable:
- As a director or officer of a corporation you may be liable if you:
- Fail to prevent environmental harm under your watch;
- Fail to ensure the corporation meets its environmental regulatory obligations; or
- Take no action when you know – or ought to know – about environmental risks.
- As an investor you may be liable if you actively have "management, care or control" of the property, business, or financing to support environmental risk management, and the corporation fails to comply with its environmental obligations.
- As a secured creditor you may be liable if, despite lending on unrelated assets, you understood environmental risks were an integral component of the business and the business failed to meet its environmental obligations and became insolvent. However, at this juncture in the evolution of the law of secured creditors, the case law largely deals with extractive industries and there has yet to be a broader challenge to other environmental obligations. Recent cases such as Orphan Well Association v. Grant Thornton Ltd., Manitok Energy Inc (Re), Orphan Well Association v Trident Exploration Corp, and Mantle Materials Group, Ltd (2023 ABKB 488 and 2023 ABCA 302) confirm that:
- Environmental obligations can be required to be funded from the debtor's asset pool in priority to secured creditor repayments;
- Assets unrelated to environmental harm (e.g., equipment) may be used to fund remediation; and
- "Secured" may no longer mean "shielded" when environmental issues arise.
Key takeaways for business owners and executives
- Personal environmental liability risk exists. Even without direct involvement, you may be named in orders or legal proceedings based on your position or control.
- Fairness is not a defence: Courts and regulators may prioritize environmental protection over arguments of equity and/or business hardship.
- Environmental due diligence is critical. Before acquisitions, joint ventures, loans or other investments, ensure proper assessments are completed.
- Set aside financial reserves. Regulators expect contingency planning for cleanup and decommissioning, especially in high-risk industries.
- Regulatory orders can survive insolvency. Regardless of priority rankings for secured creditors, regulators will look for debtor assets or personal liability to fund environmental obligations.
- Deal structuring matters. Allocate environmental risk carefully between parties, including past and future directors and officers.
- Insurance is a critical aspect of deal gaps. Environmental and D&O insurance could address gaps in environmental exposure, especially for businesses with legacy liabilities.
The bottom line
Environmental liabilities are central risk management issues for Canadian businesses. The legal landscape continues to evolve, with regulators taking increasingly aggressive approaches to environmental protection.
Understanding corporate and personal potential exposure and implementing robust safeguards can mean the difference between sustainable business growth and potentially devastating legal and financial consequences. Whether you operate in manufacturing, real estate, natural resources, or financial services, environmental law touches your business.
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.
