Former Directors and Officers of Bankrupt Company Reach $4.75 Million Settlement with the Ministry of Environment over Cleanup Orders

On October 28, 2013, the Ontario Ministry of the Environment (MOE) announced that it had reached a settlement with the former directors and officers of Northstar Aerospace 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 Environmental Review Tribunal approved the Minutes of Settlement at the hearing held on October 28.

As reported in a previous Osler Update, in June 2013, the Ontario Divisional Court and the Environmental Review Tribunal (ERT) held that the former directors and officers were responsible for all interim costs in respect of monitoring, reporting and remediating (at an estimated cost of $1.4 million per year), at least until the ERT had heard and decided the appeal of the MOE Director’s Order.

According to a report in the Globe & Mail, the MOE hailed the settlement as a victory, noting that “this is the first time the ministry has held corporate directors of a publicly traded company personally responsible for an environmental cleanup after a company has gone bankrupt.”

Discussion

As a result of this settlement, observers have been deprived of any further insight into the extent to which the ERT or any appellate court would be willing to uphold an order by the MOE against former officers and directors of a bankrupt company. Given the MOE’s statement above, it would appear that this settlement has emboldened the MOE in its campaign to exercise its discretion under the Environmental Protection Act to identify and name potential “pockets” for environmental remediation costs.

The settlement amount is significantly less than the approximately $15 million originally sought by the MOE. A number of factors may have influenced the decision to settle at a lesser amount, including the following:

  • financial capacity of the directors;
  • prospects of any ruling on the merits of the appeal from the ERT or from an appellate court that would diminish the directors’ and officers’ ultimate liability (quite apart from their interim liability to pay while the appeal was ongoing);
  • availability of insurance to fund the amount claimed; and
  • scope of resources available to the MOE to devote to a novel proceeding.

What is abundantly clear from the settlement is that directors and officers are currently at risk of being named in environmental protection orders and to being exposed to personal liability for costs. Prudence would dictate that appropriate environmental-compliance and contamination-mitigation measures be put in place to minimize the likelihood of an environmental incident (these measures are commonly implemented through an environmental management system). Further, it would be prudent to proactively consider obtaining directors’ and officers’ insurance (specifically including coverage for environmental liability) and other available protections to ensure that directors and officers are protected from the spectre of personal liability for environmental orders.

Should the MOE continue the practice of issuing cleanup orders against former directors and officers, it will be interesting to see if the ERT and the courts revisit the erosion of the application of the so-called fairness factors that occurred in the Kawartha Lakes appeals (see Osler Update on the Kawartha Lakes appeals). The facts involved in this dispute – namely, that certain directors began their terms well after the contamination was alleged to have occurred and had nothing to do with the pollution – may have been ripe for reconsidering whether fairness should be a factor in appealing environmental cleanup orders. Without the clarity of a decision on the MOE Orders, the lingering uncertainty and the possibility of personal liability caused by the MOE’s actions in this matter may discourage qualified people from participating on corporate boards, particularly on boards of struggling companies most in need of help.