How much responsibility do Directors and Officers bear for environmental contamination? The answer is not clear from the text of the Environmental Protection Act and currently the Ontario Courts are considering the issue in Baker v Ministry of the Environment. In this blog post, Paula Lombardi looks at the history of this developing issue.It is becoming increasingly common for the Ministry of the Environment (“MOE”) to hold directors and officers personally responsible for remediation costs in the case of environmental contamination. This includes former directors and officers and even those who have little day-to-day involvement in the corporate activities.
In the past, the MOE has typically pursued corporate directors only in closely-held corporations, where the directors had active roles and are involved in the day-to-day management of the corporation. It is not clear from the Environmental Protection Act whether directors of large and complex corporations, where directors typically oversee corporate management and are not involved in day-to-day operational decisions, have the requisite degree of control required to be responsible for MOE Orders. This is the question the courts are being asked to determine and will impact on directors and officers liability for environmental matters.
In the Northstar Inc. case, the MOE issued orders personally against former officers and directors of a bankrupt company and of its parent company, to personally fund an ongoing remediation. The MOE is taking the position that former corporate directors can hold the requisite degree of management and/or control of the property under the Environmental Protection Act.
The MOE issued an order to continue with remediation work against thirteen (13) former directors and
officers of the bankrupt Northstar Aerospace (Canada) Inc. and its parent company Northstar Aerospace Inc. on grounds that they had “management or control” of the contaminated property between the years 2003 and 2012. The MOE held the directors and officers responsible despite the fact that most or all of the groundwater contamination occurred prior to the tenure of any of the directors and officers named in the order. The remediation and site monitoring costs are anticipated to be in the range of $15 million dollars over the course of the next ten years.
Twelve of the directors and officers appealed the order to the Environmental Review Tribunal (“ERT”) and filed a motion with the Divisional Court seeking a determination of the validity of the Order under the bankruptcy proceedings. The Divisional Court rejected the appeals and judicial review applications filed by the directors of officers, upheld the MOE order, and confirmed that the directors and officers are liable for interim remediation costs.
The appeals filed with the Divisional Court were focused on the inability of the directors and officers to defray or recover the costs associated with the remediation work (either through Northstar’s insolvency proceedings or in conjunctions with the ERT hearing.). Indemnification of directors and officers for environmental claims is not easy since most insurance companies fail to cover historical contamination. Protection for directors and officers becomes even more complicated in an insolvency situation where environmental liabilities are discovered after the assets have been distributed and the company has been liquidated.
The MOE is alleging that the former directors and officers violated the EPA by failing to anticipate insolvency and neglecting to set aside funds for a ten year remediation program. The MOE Order stated:
At the ERT, the MOE is taking the position that the former directors and officers “failed to plan for the resources and funds necessary for the Company's long term obligations to prevent or repair the injury or damage” to the surrounding residential community and the environment.
While Northstar's former directors and officers may not ultimately be found liable for the remedial work ordered by the MOE, there is no clear remedy for them to recover interim remediation costs. The hearing in respect of the directors' and officers' liability has been scheduled for later this fall.