In insolvency matters, everything depends on the facts.This is the message delivered by the Supreme Court of Canada in its recent decision in Newfoundland and Labrador v. AbitibiBowater Inc. In this much-anticipated decision, which many hoped would clarify the “untidy intersection” of insolvency and environmental law, the Supreme Court found facts are critical when determining whether an environmental clean-up order issued by a regulatory body constitutes a “claim” subject to compromise under the Companies’ Creditors Arrangement Act.
Background
Abitibi’s industrial operations in Newfoundland and Labrador spanned over 100 years, but in 2008, it announced the closure of its last mill. The province, led by an outraged premier Danny Williams, expropriated substantially all of Abitibi’s assets, property, and natural resource rights, without compensation.
In 2009, the province’s minister of Environment issued orders under the province’s Environmental Protection Act requiring Abitibi to undertake environmental remediation of contaminated sites formerly owned and operated by the company. Under the EPA, if a polluter fails to comply with a clean-up order, the minister has the discretion to undertake the remediation and claim against the polluter for the recovery of the province’s costs.
After Abitibi filed for CCAA protection, the province asserted the EPA orders were not “claims” that could be compromised in the CCAA proceedings, and sought a Quebec Superior Court order to this end. These were framed as ongoing public duties for which the restructured company would continue to be liable when it emerged from restructuring. The province was unsuccessful and the Quebec Court of Appeal refused leave, but the Supreme Court heard the appeal.
The entire Supreme Court agreed the fundamental question was whether or not a financial obligation was owing to the province (versus the public). The court was divided on the test.
The majority, led by Justice Marie Deschamps, found where it is possible to attach a monetary amount, payable to the province, to an environmental obligation, then that obligation is subject to the claims process. To determine whether the occurrence of a contingent event is too remote or speculative, she stated a court must ask whether there is “sufficient certainty” the regulatory body will perform the remediation work itself and assert a monetary claim. The court must assess the facts before it and make its determination accordingly.
In his dissent, Justice Louis LeBel agreed with Deschamps on the “sufficient certainty” test, but he found based on the facts of the case, there was no evidence to support a finding the province would have remediated the contaminated lands. Accordingly, LeBel held the environmental obligations did not have a monetary value attached and were not claims.
Chief Justice Beverley McLachlin also dissented. She stressed that regulatory duties owed to the public generally are not “claims”: “Regulatory obligations are, as a general proposition, not compromisable claims. Only financial and monetary claims provable by a ‘creditor’ fall within the definition of ‘claim’ under the CCAA.”
She disagreed with the majority over not only whether the facts met the test, but also on the test itself. She found “sufficient certainty” should be interpreted using a higher standard of “likelihood approaching certainty” that the obligation will be converted into a financial or monetary claim. Her view was this higher standard had not been met, and like LeBel, would have allowed the appeal.
Polluter pays sometimes?
The intervener, Friends of the Earth Canada, represented by the authors, argued environmental protection is part of the public benefit achieved through a CCAA restructuring. It is not something to be sacrificed along the way. FOE asserted that environmental regulators must be presumed to be exercising their regulatory authority in the public interest and not as financial stakeholders. Furthermore, it was asserted this presumption was the proper way for a CCAA court to integrate the polluter-pays principle, so as not to undermine environmental accountability and behaviour-modification objectives of environmental laws across Canada. This argument got little traction with the majority.
In essence, the majority pierced the regulatory veil, going behind the regulatory order and interpreting the province’s purpose for issuing it. In other words, the majority looked beyond the public interest and the government’s duty to protect the environment. It sought, and ostensibly found, other provincial motives that allowed it to characterize the EPA orders as being financial and monetary in nature. In finding the orders were claims subject to compromise, the majority erred by emphasizing the private benefits accruing to the province as a landowner and by downplaying the public interests at stake.
The majority found, in this specific fact situation, the polluter-pays principle would not be served if the EPA orders were exempt from the CCAA claims process. Deschamps wrote: “full compliance with orders that are found to be monetary in nature would shift the costs of remediation to third-party creditors, including involuntary creditors, such as those whose claims lie in tort or in the law of extra-contractual liability. . . . [T]he Province’s position would result not only in a super-priority, but in the acceptance of a “third party-pay” principle in place of the polluter-pay principle.”
With respect, Deschamps’ reasoning is difficult to follow. If EPA orders are deemed claims in a CCAA process, then the regulating province would be entitled to a pro rata payment on account of the same, through the CCAA plan, thereby reducing the amount available to other creditors. It is in these circumstances third-party creditors would involuntarily fund the remediation costs.
On the other hand, if the EPA orders are not claims, and thereby survive the restructuring, they are of no consequence to the creditors, whose rights have been addressed through the CCAA plan. Such parties no longer have a financial interest in the company. Instead, the restructured company and its equity holders would bear the costs. Such parties are not “involuntary creditors”; in fact, they are not creditors at all.
Moreover, equity holders and the company are, in effect, one and the same: the polluter who should pay. Further, a “super-priority” is an entitlement to a priority payment within the CCAA process. So, contrary to Deschamps’ statement, the only time the “involuntary” creditors would be asked to bear the burden of environmental clean-up costs is where such costs amount to claims within the CCAA.
Although the decision does not strengthen environmental principles, it does not diminish them either. The decision turned significantly on the facts of the case.
The province had expropriated Abitibi’s assets, the premier had publicly stated the province would remediate the lands, and the practicalities of Abitibi possibly complying with the EPA orders was questionable from the start. Most cases involving environmental obligations will likely not have facts like these, where remediation orders are deemed little more than disguised financial claims.
It is important to note the majority also indicated the outcome may have been different if Abitibi still owned and planned to operate on the lands. There remains an argument that ongoing environmental obligations in respect of continued operations, even if incurred before the date of CCAA proceeding, cannot be compromised. It is unlikely any court would allow a debtor company to continue to operate on contaminated lands while, at the same time, sanctioning the compromise of its pre-CCAA environmental obligations.
Conclusion
This decision demonstrates the CCAA requires significant reform to ensure it fully supports the polluter-pays principle, better protects taxpayers, and avoids neutering regulators.
Although the restructuring of insolvent companies delivers important public policy benefits, taxpayers cannot be left holding the bag for the costs of toxic debts when companies go under. Ultimately, Newfoundland taxpayers will bear much of the clean-up (or ongoing environmental contamination) costs associated with Abitibi’s former industrial sites. Abitibi’s restructuring plan is complete and the province will get no money from Abitibi’s successor for site remediation costs.
The decision affirms it is risky for regulators to stand strategically outside of insolvency processes and assert they need not line up with other creditors, most of whom only get a fraction of the debts they are owed. If provincial governments are not proactively issuing remediation orders and requiring timely compliance, then taxpayers risk being left with the clean-up costs after companies file for insolvency protection. Remediation orders must be issued and acted upon before a company loses its financial footing and cannot meet its debt payments.
Hugh S. Wilkins is a staff lawyer at Ecojustice Canada; William Amos is Director of the Ecojustice Environmental Law Clinic at the University of Ottawa; and, R. Graham Phoenix is an associate at Fasken Martineau DuMoulin LLP. All were co-counsel for the intervener, Friends of the Earth Canada.
Background
Abitibi’s industrial operations in Newfoundland and Labrador spanned over 100 years, but in 2008, it announced the closure of its last mill. The province, led by an outraged premier Danny Williams, expropriated substantially all of Abitibi’s assets, property, and natural resource rights, without compensation.
In 2009, the province’s minister of Environment issued orders under the province’s Environmental Protection Act requiring Abitibi to undertake environmental remediation of contaminated sites formerly owned and operated by the company. Under the EPA, if a polluter fails to comply with a clean-up order, the minister has the discretion to undertake the remediation and claim against the polluter for the recovery of the province’s costs.
After Abitibi filed for CCAA protection, the province asserted the EPA orders were not “claims” that could be compromised in the CCAA proceedings, and sought a Quebec Superior Court order to this end. These were framed as ongoing public duties for which the restructured company would continue to be liable when it emerged from restructuring. The province was unsuccessful and the Quebec Court of Appeal refused leave, but the Supreme Court heard the appeal.
The entire Supreme Court agreed the fundamental question was whether or not a financial obligation was owing to the province (versus the public). The court was divided on the test.
The majority, led by Justice Marie Deschamps, found where it is possible to attach a monetary amount, payable to the province, to an environmental obligation, then that obligation is subject to the claims process. To determine whether the occurrence of a contingent event is too remote or speculative, she stated a court must ask whether there is “sufficient certainty” the regulatory body will perform the remediation work itself and assert a monetary claim. The court must assess the facts before it and make its determination accordingly.
In his dissent, Justice Louis LeBel agreed with Deschamps on the “sufficient certainty” test, but he found based on the facts of the case, there was no evidence to support a finding the province would have remediated the contaminated lands. Accordingly, LeBel held the environmental obligations did not have a monetary value attached and were not claims.
Chief Justice Beverley McLachlin also dissented. She stressed that regulatory duties owed to the public generally are not “claims”: “Regulatory obligations are, as a general proposition, not compromisable claims. Only financial and monetary claims provable by a ‘creditor’ fall within the definition of ‘claim’ under the CCAA.”
She disagreed with the majority over not only whether the facts met the test, but also on the test itself. She found “sufficient certainty” should be interpreted using a higher standard of “likelihood approaching certainty” that the obligation will be converted into a financial or monetary claim. Her view was this higher standard had not been met, and like LeBel, would have allowed the appeal.
Polluter pays sometimes?
The intervener, Friends of the Earth Canada, represented by the authors, argued environmental protection is part of the public benefit achieved through a CCAA restructuring. It is not something to be sacrificed along the way. FOE asserted that environmental regulators must be presumed to be exercising their regulatory authority in the public interest and not as financial stakeholders. Furthermore, it was asserted this presumption was the proper way for a CCAA court to integrate the polluter-pays principle, so as not to undermine environmental accountability and behaviour-modification objectives of environmental laws across Canada. This argument got little traction with the majority.
In essence, the majority pierced the regulatory veil, going behind the regulatory order and interpreting the province’s purpose for issuing it. In other words, the majority looked beyond the public interest and the government’s duty to protect the environment. It sought, and ostensibly found, other provincial motives that allowed it to characterize the EPA orders as being financial and monetary in nature. In finding the orders were claims subject to compromise, the majority erred by emphasizing the private benefits accruing to the province as a landowner and by downplaying the public interests at stake.
The majority found, in this specific fact situation, the polluter-pays principle would not be served if the EPA orders were exempt from the CCAA claims process. Deschamps wrote: “full compliance with orders that are found to be monetary in nature would shift the costs of remediation to third-party creditors, including involuntary creditors, such as those whose claims lie in tort or in the law of extra-contractual liability. . . . [T]he Province’s position would result not only in a super-priority, but in the acceptance of a “third party-pay” principle in place of the polluter-pay principle.”
With respect, Deschamps’ reasoning is difficult to follow. If EPA orders are deemed claims in a CCAA process, then the regulating province would be entitled to a pro rata payment on account of the same, through the CCAA plan, thereby reducing the amount available to other creditors. It is in these circumstances third-party creditors would involuntarily fund the remediation costs.
On the other hand, if the EPA orders are not claims, and thereby survive the restructuring, they are of no consequence to the creditors, whose rights have been addressed through the CCAA plan. Such parties no longer have a financial interest in the company. Instead, the restructured company and its equity holders would bear the costs. Such parties are not “involuntary creditors”; in fact, they are not creditors at all.
Moreover, equity holders and the company are, in effect, one and the same: the polluter who should pay. Further, a “super-priority” is an entitlement to a priority payment within the CCAA process. So, contrary to Deschamps’ statement, the only time the “involuntary” creditors would be asked to bear the burden of environmental clean-up costs is where such costs amount to claims within the CCAA.
Although the decision does not strengthen environmental principles, it does not diminish them either. The decision turned significantly on the facts of the case.
The province had expropriated Abitibi’s assets, the premier had publicly stated the province would remediate the lands, and the practicalities of Abitibi possibly complying with the EPA orders was questionable from the start. Most cases involving environmental obligations will likely not have facts like these, where remediation orders are deemed little more than disguised financial claims.
It is important to note the majority also indicated the outcome may have been different if Abitibi still owned and planned to operate on the lands. There remains an argument that ongoing environmental obligations in respect of continued operations, even if incurred before the date of CCAA proceeding, cannot be compromised. It is unlikely any court would allow a debtor company to continue to operate on contaminated lands while, at the same time, sanctioning the compromise of its pre-CCAA environmental obligations.
Conclusion
This decision demonstrates the CCAA requires significant reform to ensure it fully supports the polluter-pays principle, better protects taxpayers, and avoids neutering regulators.
Although the restructuring of insolvent companies delivers important public policy benefits, taxpayers cannot be left holding the bag for the costs of toxic debts when companies go under. Ultimately, Newfoundland taxpayers will bear much of the clean-up (or ongoing environmental contamination) costs associated with Abitibi’s former industrial sites. Abitibi’s restructuring plan is complete and the province will get no money from Abitibi’s successor for site remediation costs.
The decision affirms it is risky for regulators to stand strategically outside of insolvency processes and assert they need not line up with other creditors, most of whom only get a fraction of the debts they are owed. If provincial governments are not proactively issuing remediation orders and requiring timely compliance, then taxpayers risk being left with the clean-up costs after companies file for insolvency protection. Remediation orders must be issued and acted upon before a company loses its financial footing and cannot meet its debt payments.
Hugh S. Wilkins is a staff lawyer at Ecojustice Canada; William Amos is Director of the Ecojustice Environmental Law Clinic at the University of Ottawa; and, R. Graham Phoenix is an associate at Fasken Martineau DuMoulin LLP. All were co-counsel for the intervener, Friends of the Earth Canada.
