A recent decision of the Ontario Superior Court of Justice has considered the issue of cleanup requirements in the context of insolvency proceedings. In the decision of Nortel Networks Corporation (Re), the court confirmed that the Ministry of the Environment cannot compel an insolvent company, which has sought protection under the Companies’ Creditors Arrangement Act (CCAA), to remediate property in priority to other claims from creditors.
Canadian telecommunications company Nortel and its predecessors conducted manufacturing operations at several locations until the late 1990s. Nortel identified environmental impacts arising from past operations at five locations and, by the time Nortel filed for protection under the CCAA in January 2009, it had disposed of its interest at all of these locations, with the exception of a partial interest in one property.
Nortel was conducting remedial work at certain locations on a voluntary basis even after it ceased having an interest in those locations. In fact, Nortel had spent some $30.2 million on these remedial efforts since the late 1990s. After Nortel filed for protection under the CCAA, the ministry issued an order against Nortel with respect to one of the properties, requiring that Nortel undertake remedial work. The ministry also prepared similar orders with respect to three other properties.
Nortel’s motion and arguments
Nortel brought a motion seeking confirmation from the court that it was no longer required to perform remediation at, or in relation to, the various locations. Nortel also sought a declaration that any claims in relation to current or future remediation requirements by the environment ministry (or any other person against Nortel or against current or former directors or officers) would be subject to resolution in accordance with a Procedure Order and a Claims Resolution Order, both of which were issued by the court to address claims.
Nortel was also seeking a declaration that the ministry orders were financial and monetary in nature and were stayed by virtue of the Stay of Proceedings previously issued by the court. The Stay of Proceedings prevented any action from commencing or continuing against Nortel, and also stayed any existing proceedings until February 13, 2009. Nortel also challenged the constitutionality of the provincial Environmental Protection Act (EPA) provisions in an insolvency context.
Nortel argued that the ministry orders required extensive further remediation; it estimated that fully responding to the orders would require expenditures in the amount of $18 million. As such, Nortel argued that the orders are, in substance and in effect, requirements for it to pay money, and that the orders were no different than the ministry presenting Nortel with a bill for remediation carried out by the ministry.
Nortel also argued that the ministry already has certain statutory remedies in insolvency matters and that the orders fell outside of those remedies, thereby creating an unlegislated priority claim. Nortel argued that the ministry orders conflicted with the objectives of the CCAA by prioritizing environmental liabilities over all other unsecured claims against Nortel. Finally, Nortel argued that Section 11.8(8) of the CCAA already provides a remedy in these situations by establishing a “super priority” for the government in respect of contaminated real property.
Ministry arguments & court decision
The environment ministry argued that Nortel, as the former and current owner of contaminated property, is subject to certain obligations under the EPA, which are performance obligations; it argued that the costs of compliance with orders only become monetary obligations once the ministry undertakes the remedial work and has a claim for those costs. The ministry argued that these obligations had not yet advanced to the point of being “claims” that could be stayed pursuant to Section 11 of the CCAA or compromised under a plan of arrangement.
The ministry took the position that, if the orders were not upheld, it would unfairly shift any expense associated with environmental remediation to the taxpayers of Ontario and away from the company’s creditors (who chose to do business with the company in the first place). The ministry pointed out that Nortel had already expended monies to address contamination after the Stay of Proceedings and should not therefore be arguing that the orders were stayed. Finally, the ministry argued that the “super priority” created by the CCAA was intended to give the ministry a priority only when acting as a creditor.
The court indicated that the motion was as a result of the “untidy intersection” of the CCAA and the powers of the ministry to issue orders requiring remediation of property and that insolvency statutes do not “mesh very well with environmental legislation.” However, the court agreed with the position put forth by Nortel. It stated that, when the entity that’s the subject of the ministry’s attention is insolvent and not carrying on operations at a property, it’s necessary to consider the substance of the actions by the ministry. If Nortel is required to incur a financial obligation to respond to the ministry’s actions, the ministry is enforcing a payment obligation — which is a step prohibited by the Stay issued by the court.
The court held that money expended by Nortel in respect of ministry obligations is money directed away from creditors participating in insolvency proceedings. It held that the same insolvency considerations ought to apply regardless of who receives the money.
Rosalind Cooper, LL.B., is a partner with Fasken Martineau DuMoulin LLP in Toronto, Ontario. Contact Rosalind at firstname.lastname@example.org