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Restructuring and Insolvency Bulletin 

Canada’s Supreme Court Decides That Environmental Orders Can Be Compromised in Insolvency Proceedings


December 18, 2012

David Bish, Scott A. Bomhof, Lily Coodin

A ruling on December 7, 2012, by the Supreme Court of Canada has determined that orders made under provincial environmental protection legislation can be compromised as part of insolvency proceedings. While not all regulatory claims will be compromised in this way, those that meet certain criteria of "monetary claims" can be. The decision in Newfoundland and Labrador v. AbitibiBowater Inc. has important ramifications for debtor companies and their stakeholders in respect of contaminated property and other regulatory matters. The decision also provides guidance on the way insolvency proceedings should be approached when issues such as the remediation of environmental contamination arise in the context of a proceeding under the Companies’ Creditors Arrangement Act (CCAA).


Background

AbitibiBowater Inc. (Abitibi) was a pulp and paper manufacturer operating in Newfoundland and Labrador (the province). After a period of financial distress, Abitibi ended its operation in the province. Before the closure of the last paper mill in the province, legislation was passed that had the effect of expropriating the majority of Abitibi’s property. The company then filed for insolvency protection in the United States and, in April 2009, also obtained a stay of proceedings in Canada under the CCAA.

In November 2009, the Minister of Environment and Conservation issued five orders under the province’s Environmental Protection Act (EPA), requiring Abitibi to remediate contaminated property on five different industrial sites. Three of these sites had already been expropriated by the province, and the cost of remediation was estimated to be at least in the tens of millions of dollars.

The position of the province was that the EPA orders were not "claims" of the type that would be compromised or stayed under the CCAA because they were non-monetary obligations and were therefore not captured by the CCAA. The Quebec Superior Court disagreed with the province, determining that the EPA orders were, in substance, monetary claims within the scope of the CCAA and, therefore, that the stay and any compromise would apply. The province sought leave to appeal to the Quebec Court of Appeal, which was denied. The province then appealed the denial to the Supreme Court of Canada.


The Decision

In upholding the decision of the lower Court, the Supreme Court of Canada sided with Abitibi. Its 7-2 decision focused on two principal issues, discussed below.


1. The Nature of the Claim: Monetary or Non-Monetary

Justice Deschamps, for the majority, decided that not all regulatory orders are monetary in nature and thus provable claims within an insolvency proceeding. Some, however, are monetary in nature. She articulated a three-part conjunctive test, in addition to the factual matrix and a test of the means of the debtor and potential effect on the CCAA proceeding, to determine whether a regulatory order is a monetary claim that is subject to CCAA compromise:

  1. there must be a debt, liability or obligation to a creditor;
  2. this debt, liability or obligation must be incurred before the commencement of CCAA proceedings; and
  3. it must be possible to attach a monetary value to the debt, liability or obligation.

Justice Deschamps found that the first two criteria were satisfied because the province had, on the facts, become a creditor, and because the environmental damage had occurred before the time of the CCAA proceeding. The principal question was whether the third part of the test – that requiring attachment of a monetary value – was met.

Justice Deschamps determined that a claim can be asserted in insolvency proceedings even if its value has not been determined at the time of the commencement of the CCAA proceeding because it was contingent on a future event. A "contingent" claim will be subject to compromise as long as the event to which it attaches is not too remote or speculative. In the present case, the Court found that it was sufficiently clear, from the facts, that the province did not expect Abitibi to perform the remediation work; rather, the province would ultimately perform the remediation of the real property and assert a monetary claim against Abitibi. Therefore, the province was found to have a monetary claim that was subject to compromise under the CCAA.


2. Policy Arguments

The Court considered a number of policy arguments relating to the environment and corporations’ potential treatment of their obligations toward the environment in the future. Justice Deschamps noted that there would be no "license to pollute," because insolvency proceedings do not affect the future conduct of a debtor. The decision does not invite corporations to restructure for the purpose of eliminating environmental liability, the Court determined, since reorganization as a result of insolvency is rarely undertaken by choice. Moreover, the Court found that dealing with the claim in accordance with the insolvency legislation does not subvert the "polluter-pay" model but, rather, ensures that the costs of remediation are not simply passed on to third-party creditors.


Dissenting Opinions

Both Chief Justice McLachlin and Justice LeBel dissented in this case and would have allowed the appeal. Chief Justice McLachlin was of the view that environmental remediation orders can only be compromised in narrow circumstances in which the likelihood of the province undertaking the work itself (and therefore having a monetary claim) was "approaching certainty." She found that there was no evidence to support the view that the province was certain to perform the environmental remediation work, except at one site. Justice LeBel, while adopting the "sufficient certainty" standard of the majority rather than the "approaching certainty" standard proposed by the chief justice, determined on the facts that there was no evidence to support the view that the province would perform the work itself.


Conclusion

The decision in Newfoundland and Labrador v. AbitibiBowater Inc. provides a template for considering how regulatory claims should be treated in insolvency proceedings. Although the decision turned on the facts of the case, the Court’s categorization of claims as either monetary or non-monetary in nature will assist debtors and regulators in making decisions, particularly where environmental contamination is a problem. The case also highlights the importance of the CCAA claims process and the reluctance of the Court to transfer to third-party creditors monetary obligations owed by the debtor to a regulator.

 

To discuss these issues, please contact the authors.

This bulletin is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this bulletin with you, in the context of your particular circumstances.

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