Northstar directors and officers settlement: does $4.75m buy certainty?

Read the Full Article on Lexology.com

Last week, the Ministry of Environment entered into a settlement agreement with the former officers and directors of Northstar Aerospace (Canada) Inc. for $4.75 million[1]. The payment by the directors and officers was on a no-fault basis to remediate the Cambridge, Ontario site formerly operated by Nothstar. The Northstar companies (including Northstar Aerospace, Inc. and Northstar Aerospace (Canada) Inc.) had sought and obtained protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”) in June 2012. Although the Ministry attempted to compel Northstar to remediate the contamination even after they obtained CCAA protection, the Court viewed the Ministry’s order as an unsercured claim under the insolvency procedure, the enforcement of which was subject to the overall stay of proceedings[2].

The Ministry had no financial recourse against the corporate entities for significant environmental liabilities relating to the migration of a plume of volatile organic compounds from their former operations in Cambridge, Ontario.  For a period of time, the Ministry could not issue orders against the directors and officers because the stay of proceedings in the insolvency also applied to them.  However, once the stay against the officers and directors expired (after Northstar’s bankruptcy), the MOE decided to issue a clean up order against them alleging that their management of the property/operations during the migration of contamination and their failure to set aside sufficient funds to address known environmental liabilities put them squarely within the ambit of the Ministry’s order powers.

The directors and officers disputed this. They sought to appeal the order and the hearing was scheduled to start October 28, 2013.  The case settled just before the start of the hearing.  The lead up to the hearing was full of its own drama.  In the time period between issuance of the order and the hearing of the appeal, the directors and officers had already lost several court challenges trying to:

> preclude the issuance of the order against them to start,

> obtain funding from reserved funds in the insolvency/ bankruptcy proceedings of the Northstar companies, and

> stay the operation of the order pending the hearing of the appeal.

The loss of the motion to stay operation of the order pending appeal caused a serious issue. It required the directors and officers to fund remedial work before the hearing even began with almost no chance of recovery of those funds (or their litigation costs) even if they were ultimately successful on appeal.  The interim payments were approximately $800,000.

With the prospect of many hearing days ahead of them, and the potential for appeals from whatever the ultimate decision of the Environmental Review Tribunal would be, the parties headed off to attempt to mediate a solution.  The resulting settlement requires the former directors and officers to set aside $4.75 million in personal funds exchange for a release of any administrative or civil action that could be brought against them by the Ministry.

While it may be a good settlement for the directors and officers involved from a “certainty” perspective, it does anything but that for those in current or prospective director and officer roles in companies with existing or potential environmental liabilities. This is even more so where companies have insufficient cash-flow to reserve for environmental liabilities.  For some of these directors and officers, insurance bridges some of the risk gap.  However, pollution exclusion clauses pepper many of these insurance policies.  While management may be “managing” their environmental risks, the companies can only manage in the context of their overall financial viability.  If that starts to tip, what are directors and officers to do to protect themselves from personal liability?   We are left with a series of questions: Can they be personally liable even when they did not cause the contamination and where the corporation has insufficient resources to set aside funds for estimated remediation costs? Will we start to see more insurance products on the scene that try to bridge this risk gap? Will we see specific environmental carve outs for directors and officers roles? Will we see more examples of the Ministry looking to increase financial assurance requirements for operations with approvals whether or there is any concern about the financial viability of the company? Will we see less willingness on the part of the Ministry to accept voluntary compliance on a longer term basis?  Will we see a greater reluctance on the part of the Ministry to step in when corporations are already in insolvency proceedings, despite potential environmental risks?  This last question is more a result of the last month’s conflicting Court of Appeal decisions in Northstar[3] and Nortel[4].  The overall question will be whether corporations with identified or potential environmental concerns will have greater difficulties in the future in attracting qualified directors and officers to accept corporation positions. All of these are quite possible.

The result of the settlement, although perhaps providing certainty for the former officers and directors of the Northstar companies, leaves a lot of open questions and uncertainty for directors and officers generally.