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Bulletin

Former Directors and Officers Personally Liable for Clean-Up of Contamination

Fasken
Reading Time 3 minute read
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Environmental Bulletin

Former directors and officers of companies can be personally liable for clean-up of contamination caused by the operations of the companies which they serve.

In the Baker v. MOE case, 12 former directors and officers of Northstar Aerospace (Canada) Inc and its US parent company, Northstar Aerospace Inc, opted to settle a clean-up order issued against them by the Ontario Ministry of the Environment. The settlement involved an agreement by the former directors and officers to pay $4.75 million to the Ministry. The funds are to be used for remediation of Northstar's former manufacturing site and neighbouring contaminated properties in Cambridge.

In 2005, Northstar had commenced voluntary remediation of the site and hundreds of neighbouring properties. In 2012, when it became apparent that the company was in financial difficulty, the Ministry issued orders against Northstar requiring further remediation work and the provision of more than $10 million in financial assurance. Northstar became insolvent thereafter and, in June 2012, was provided creditor protection under the Companies' Creditors Arrangement Act (CCAA). The directors and officers were granted an indemnity in the initial CCAA order for liabilities that they might incur post-filing, and a priority charge over the assets as security for that indemnity. Northstar continued with remedial work until its assets were sold in July 2012. In August 2012, the Ministry decided to undertake the remedial work itself due to health concerns relating to the contamination.  

When the Northstar directors and officers were faced with the clean-up orders, they raised several arguments including that they had not been on Northstar's board during the time of the discharge and had no specific responsibility for environmental matters. However, liability was imposed by the Ontario Environmental Review Tribunal on an interim basis pending appeal, because the directors and officers failed to obtain a stay of the order based on the applicable test which is almost impossible to satisfy. This is because the Tribunal does not have the discretion to stay certain types of monitoring orders, as well as orders that create a danger to the health or safety of any person or impair the quality of the natural environment. As a result, the directors and officers had to personally pay approximately $800,000 for interim remedial work pending the appeal. While the Ministry and certain directors asserted a claim under the indemnity and charge in the CCAA proceedings, the claim was denied as the court found that the activity that gave rise to the claim occurred long before the CCAA proceedings were commenced.

The directors and officers in the Baker case, no doubt, opted for settlement because of the huge exposure to liability that they faced for the entire clean-up. This settlement, combined with a previous decision of the Ontario Environmental Review Tribunal, where liability was imposed on directors and officers of a company that previously owned a contaminated property, will undoubtedly have a chilling effect on the willingness of qualified and experienced individuals to serve on boards and assume officer positions with corporations, particularly since most director/officer insurance policies do not include coverage for environmental claims or, if they do, limits could easily be exhausted.

Fasken Martineau was involved in the first case, some two years ago, where liability was imposed on one current and two former directors and officers. As a result, we are uniquely positioned to discuss the Ministry’s approach to imposing liability, as well as the statutory framework for exposure to environmental liability that current and former directors and officers face. We are also able to provide advice on strategies that can be employed to protect individuals from that liability, both from a corporate perspective and a personal perspective. If you are interested in arranging for us to present to your board at an upcoming meeting, or to otherwise meet informally with your directors and officers, we would be pleased to do so.

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