Audit, Compliance and Risk Blog

Canadian Clean-Up Order Must be Decided by Environmental Appeal Tribunal, Not Court

Posted by STP Editorial Team on Fri, Nov 22, 2013

By Dr. Ronald Davis

Former directors of Northstar Aerospace Inc. (Northstar) lost their bid to have their appeal of a Ministry of Environment clean-up order heard by the Ontario Superior Court of Justice conducting the insolvency proceeding for Northstar instead of the Ontario Environmental Review Tribunal (Re Northstar Inc. 2013 ONSC 2719). Groundwater contamination by carcinogenic substances as the result of a spill had been discovered in 1995 at Northstar’s Cambridge, Ontario site and the contamination had spread to surrounding homes. Northstar had been involved in monitoring and remediation activity since that time.

On March 15, 2012, the Ontario Ministry of the Environment (MOE) issued a Director’s Order that Northstar clean-up the contaminated groundwater and on May 31, another Director’s Order required Northstar to provide more than ten million dollars of financial assurance to the MOE within a week. Northstar entered insolvency proceedings under the Companies’ Creditors Arrangement Act (CCAA) on June 14, 2012 and obtained a stay of the MOE orders from the court. Northstar sold all of its assets except the Cambridge property on August 24, 2012 and became bankrupt on that date. After the sale proceeds were distributed to its creditors, it had no funds to conduct the remediation.

The Ontario Minister of the Environment ordered the MOE to assume control of the remediation of the Cambridge site, and it is estimated that the final cost of the clean-up will be approximately fifteen million dollars over ten years. The MOE then issued an order pursuant to the Ontario Environmental Protection Act (EPA) to Northstar’s former directors and officers as “persons who has [sic] or had management and control of the undertaking or property” requiring them to conduct the remediation (Environmental Protection Act, R.S.O. 1990, ss. 17, 18 & 196). The former directors had been unsuccessful in previous motions seeking an injunction against the MOE to prevent them from issuing the order once the CCAA stay expired (2012 ONSC 6362), and seeking indemnification from a director’s charge created in the CCAA proceeding to indemnify them for liability from their postinsolvency acts as Northstar’s directors (2013 ONSC 1780).

The former directors appealed the Director’s Order requiring them to pay the costs of remediation to the Environmental Review Tribunal and sought a stay of the Order from the Tribunal pending the determination of their appeal, but the request for a stay was denied leaving the former directors responsible for substantial costs pending the determination of their appeal (para. 12). In this motion to the court, the former directors were seeking an order that the court assume jurisdiction over the merits of their appeal, rather than the Environmental Review Tribunal. The former directors argued that since the MOE had filed a claim based on the MOE Director’s Order seeking payment from the Directors’ Charge in the CCAA proceeding, the court should determine the validity of the MOE Director’s Order in order to maintain the single proceeding model for the insolvency process (paras. 23 – 25).

The former directors also argued that the integrity of the CCAA process was protected by constitutional doctrines of federal paramountcy and interjurisdictional immunity. The court rejected these arguments because they relied on the existence of on-going CCAA proceedings for their applicability. In this case the CCAA proceedings were at an end and there was no plan of arrangement that might have contained a compromise of claims against directors in its provisions. Instead, the corporation was bankrupt, the MOE Order was against its former directors and there was no operational conflict between federal legislation and provincial legislation that would require the application of paramountcy. Instead the court held that it was bound by a Supreme Court of Canada decision (R. v. Consolidated Maybrun Mines, [1998] 1 S.C.R. 706), which held that the appeal provisions in the EPA were part of a complete code that excluded the jurisdiction of the courts until an appeal from the Environmental Review Tribunal decision on a matter of law was filed. The court held that the appeal of the MOE Director’s Order was to be adjudicated by the Environmental Review Tribunal.

This case reinforces the need for directors, as persons “having management and control of the undertaking,” to take steps to ensure that spills of pollutants do not occur and that adequate spill response is available to contain the effects of a spill. As well, directors should note that while the CCAA contains provisions permitting a compromise of claims against the directors as part of the larger compromise of claims against the debtor corporation in a plan of arrangement, where the assets are sold and no plan of arrangement is used to distribute the proceeds, the courts may be reluctant to intervene in claims against the directors.

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Tags: Corporate Governance, Business & Legal, Health & Safety, Environmental risks, Environmental, Hazcom, Canadian