A landmark decision from the Supreme Court of Canada will have an impact on how the provincial regulators that issue licences and permits deal with future environmental remediation in Ontario, say lawyers.
A landmark decision from the Supreme Court of Canada will have an impact on how the provincial regulators that issue licences and permits deal with future environmental remediation in Ontario, say lawyers.
In late January, the Supreme Court ruled that bankruptcy does not absolve companies of their environmental cleanup obligations or the obligations of trustees who are involved in the bankruptcy process in Orphan Wells Association v. Grant Thornton Ltd., 2019 SCC 5.
In Orphan Wells, Redwater Energy Corporation became insolvent, and its trustee in bankruptcy wanted to renounce or disclaim Redwater’s interest in its “orphan” wells across Alberta but keep and sell the valuable wells to maximize the recovery of the secured creditor. While the lower courts agreed with the trustee, the Supreme Court of Canada ruled that the federal Bankruptcy and Insolvency Act does not empower a trustee to walk away from the environmental liabilities of the estate it is administering.
Gabrielle Kramer, a partner at Borden Ladner Gervais LLP in Toronto, notes that the Ontario attorney general intervened in the case at the Supreme Court because of the broader implications on regulatory orders.
“It’s now really clear that unless the provincial ministry of the environment is going to be carrying out the [remediation] work that it’s not a creditor, and the action isn’t going to be stayed in the bankruptcy,” says Kramer. “It definitely fosters the overall polluter pays principle; it also ensures that you have responsible officers and directors in positions of control over corporations.”
Kramer says the decision will enhance overall good governance because officers and directors won’t be shy to take on those roles if the company is going to have first liability. In 2013, the decision in Northstar Aerospace Inc., Re, 2013 ONCA 600 meant that when a ministry’s orders to reclaim remediation costs were stayed, the ministry sought to collect those costs from the officers and directors of the insolvent company.
“That’s clearly not a just outcome,” says Kramer.
“I see this [Orphan Wells] decision as helping to protect officers and directors against the kinds of orders that were issued in the Northstar decision.”
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Kramer adds that, in Ontario, there are industries such as mining and waste disposal with long-term environmental liabilities that need to post financial assurance for future remediation activities.
Assuming that the calculation for those costs is correct, there is protection for certain kinds of liabilities, says Kramer.
“We want people to take on those officer and director roles and do a good job with them,” says Kramer.
Kramer says that because Orphan Wells clarifies that the regulator is not a creditor, it will have broad applicability to Ontario, given that there are facilities such as mines in the province that may be of an age where there may not have been a financial assurance for future remediation posted.
“If a party is looking to buy the assets of an entity out of receivership, unless they are in a position where they can directly negotiate the liabilities with the ministry, they will need to understand that the assets are subject to that outstanding [environmental] order,” says Kramer. “As a purchaser, you can step into that liability.”
Not all lawyers agree with Kramer’s assessment. Michael Hebert, a partner with Beament Hebert Nicholson LLP in Ottawa, however, feels that the facts in Orphan Wells are too Alberta-specific to have much application in Ontario.
“The Alberta case was a question of the absolute priorities, but additionally, there’s often a case in these bankruptcies where if they can’t enjoy priorities, at least they can have a claim and get their pro rata share of the assets,” says Hebert. “I suggest that the [Orphan Wells] case is not as strong as it could be.”
Hebert notes the dissent in Orphan Wells as being fairly compelling, as well as the unique situation of the two statutes in Alberta, the Oil and Gas Conservation Act and the Environmental Protection and Enhancement Act, to cover the “orphan” wells.
“That legislation is not going to exist anywhere else in the country,” says Hebert.
Hebert also says that it’s impossible to balance the environmental claims and care of the environment and whether or not a provincial government should pay for environmental spills.
Tamara Farber, a partner at Miller Thomson LLP in Toronto, says there is a fear that any regulators that issue permits or licences will require more financial assurance requirements for future remediation as part of granting those permits or licences.
Additionally, these regulators might incorporate language from the Orphan Wells decision to in their agreements to say that they are not creditors in the event of an insolvency and to guard against the threshold test of becoming super-priority creditors in the event that the provincial government has to spend money on a remediation.
“They want to avoid the situation where secured creditors lead to almost no money for environmental management or remediation issues,” says Farber. “The case certainly has had a bit of a chilling effect for traditional lenders already.”
Farber says any chilling effect among traditional lenders as a result of Orphan Wells may help foster a secondary market for environmental financing, which does not currently exist.
“The problem is there’s a lot of risk when you’re lending to businesses that have environmental issues, so there will be a greater diligence on the company [and] the operators and drilling down beyond credit into operational confidence,” says Farber.