NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Edward Sellers, Patrick Riesterer and Dave Rosenblat. Edward Sellers is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Patrick Riesterer and Dave Rosenblat are associates in the insolvency and restructuring group.
The Ontario Court of Appeal recently released its decision in Northstar Aerospace Inc. (Re) (“Northstar”) regarding an appeal by the Ontario Ministry of Environment (“MOE”) of a lower court decision that an environmental remediation order was caught by the stay of proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) as equivalent to an order enforcing the payment of an obligation. The Court of Appeal upheld the trial decision after reviewing AbitibiBowater Inc., Re (“Abitibi”), a Supreme Court of Canada decision that was released while the MOE’s motion for leave to appeal was pending. Collectively, Northstar Aerospace Inc. (Re) and Abitibi shed light on the potential implications of regulatory orders in the context of insolvency proceedings.
Northstar Aerospace Inc., Northstar Aerospace (Canada) Inc., 2007775 Ontario Inc. and 3024308 Nova Scotia Company (collectively, “Northstar”) had brought a motion for, among other things, an order approving an asset sale agreement. The proposed purchased assets did not include a non-operating Canadian facility in respect of which certain historical environmental contamination issues arose prior to the commencement of CCAA proceedings. Northstar had been conducting remediation activities in connection with this facility on a voluntary basis. Three months prior to the commencement of the CCAA proceedings, the MOE issued an order under the Environmental Protection Act (Ontario) requiring Northstar to undertake certain activities to monitor, mitigate and remediate the contamination where necessary (the “Order”).
In connection with the sale approval motion, Northstar announced its intention to cease complying with the Order after the completion of the asset sale on the basis that the Order was stayed pursuant to the CCAA. The MOE sought a declaration that the Order was a regulatory order pursuant to section 11.1 of the CCAA and therefore not subject to the stay of proceedings. Alternatively, it sought a lift of the stay of proceedings in order to permit continued enforcement of the Order against Northstar.
The Court held that the result of the Order was to require Northstar to incur financial obligations to comply with the Order. Such a result was tantamount to enforcing a payment obligation, which was prohibited by the stay. We previously blogged on this case here. The MOE appealed the dismissal of its motion.
The Court of Appeal considered the MOE’s appeal in light of Abitibi, which dealt with the environmental obligations of a debtor company restructuring under the CCAA. According to the Court of Appeal, Abitibi stands for the proposition that ongoing environmental remediation obligations may be reduced to monetary claims that can be compromised in CCAA proceedings in two circumstances: first, such claims could be compromised where the MOE performed remediation work and made a claim for reimbursement; second, such claims could be compromised where the obligation could be considered as a contingent or future claim because it is “sufficiently certain” that the MOE would do the work and then seek reimbursement. We previously blogged on Abitibi here.
In examining the trial decision and the evidence before the court, the Court of Appeal found that the trial judge was of the view that the MOE had no realistic alternative but to remediate the property. The Court of Appeal concluded that the trial judge had implicitly found that it was “sufficiently certain” that the MOE would remediate the lands.
This finding was born out by subsequent facts. After the asset sale, Northstar went bankrupt and the trustee in bankruptcy abandoned the contaminated facility. The MOE thereafter commenced remediation activities at the site. The MOE had filed an affidavit with the Court of Appeal in support of a motion for fresh evidence detailing its remediation activities. The Court of Appeal found that the fact that the MOE had undertaken remediation activities made it “sufficiently certain” that it would do so. Thus, the ongoing environmental remediation obligations could be reduced to monetary claims that could be compromised in CCAA proceedings, as per the test set out by the Supreme Court of Canada in Abitibi. Though the MOE would be acting in a regulatory capacity while completing remediation work, the Order was in substance a monetary claim provable in insolvency proceedings. Thus, the MOE’s appeal was denied.
While waiting for its appeal to be heard, the MOE had issued fresh orders against a group of former directors and officers of Northstar to personally pay for the continued remediation of the properties. We blogged about these orders here. On October 28, 2013, the MOE announced that it had reached a settlement with the former directors and officers of Northstar, whereby those former directors and officers agreed to pay $4.75 million for costs associated with the remediation of contaminated lands owned by the now-bankrupt company.
The decision in Northstar and its case history is significant for many reasons, including the interpretation given to Abitibi. The decision in Northstar shows that the decision in Abitibi is not confined to its facts. The decision also indicates that not all environmental remediation orders will be stayed or compromised in CCAA proceedings. Moreover, the MOE’s success against the former directors of Northstar may embolden it to search for other “pockets” to pay for the clean-up of abandoned contaminated properties. The potential personal liability that arises as a result of the MOE’s actions on this matter may discourage qualified people from participating on corporate boards, particularly on boards of companies at risk of insolvency.