Introduction
Facts
Decision
Dissenting decisions
Comment


Introduction

The Supreme Court of Canada recently had the opportunity to consider the difficult intersection of Canada's federal insolvency regime with provincial environmental protection laws. The issue arose in AbitibiBowater Inc ('Abitibi'), which involved Companies' Creditors Arrangement Act (Canada) proceedings. Lower courts administering Companies' Creditors Arrangement Act proceedings have commented that Canada's insolvency statutes and environmental legislation do not mesh very well.

Before the Supreme Court's decision in Abitibi, the status of environmental remediation orders in respect of an insolvent company operating within a Companies' Creditors Arrangement Act restructuring process was uncertain. Were these orders in substance monetary claims and therefore capable of being compromised; or were they not monetary claims and therefore exempt from the Companies' Creditors Arrangement Act proceedings such that any restructured entity would be responsible for the full costs of such orders on emergence from act protection (and required to comply with them during the course of the proceeding)? In Abitibi the Supreme Court ruled (by seven judges to two) that certain environmental regulatory orders issued by the minister of environment and conservation for the province of Newfoundland and Labrador, requiring Abitibi to undertake remediation work, were monetary claims under the Companies' Creditors Arrangement Act, and as such were subject to compromise under the statute.

Facts

In 2008, before the commencement of its Companies' Creditors Arrangement Act proceedings, Abitibi announced the closure of its last operating mill in Newfoundland. Soon after Abitibi's announcement, Newfoundland passed the Abitibi-Consolidated Rights and Assets Act, which provided for the immediate expropriation of most of Abitibi's property in Newfoundland and denied Abitibi any compensation or legal remedy. In April 2009 Abitibi filed for protection under the Companies' Creditors Arrangement Act and filed a notice of intent to submit a claim under North American Free Trade Agreement for losses resulting from the Abitibi-Consolidated Rights and Assets Act, which it claimed exceeded C$300 million.

On November 12 2009 the minister issued five orders under the Environmental Protection Act (Newfoundland and Labrador) requiring Abitibi to submit remediation plans to the minister for five industrial sites and to complete the approved remediation actions. The orders covered three of the properties that Newfoundland had expropriated pursuant to the Abitibi-Consolidated Rights and Assets Act, and Abitibi had long since stopped using the remaining two sites. Estimates as to the cost of implementing such plans were quite varied, but even the most conservative estimates were in the tens of millions of dollars.

The case before the Supreme Court started with Newfoundland's motion before the Quebec Superior Court, which was the court supervising Abitibi's Companies' Creditors Arrangement Act proceeding, for a declaration that the claims procedure order issued in relation to Abitibi's proposed reorganisation did not bar Newfoundland from enforcing the Environmental Protection Act orders. Newfoundland argued that non-monetary statutory obligations such as those related to the Environmental Protection Act orders were not 'claims' under the Companies' Creditors Arrangement Act and therefore could not be subject to the stay of proceedings or the claims procedure order. Newfoundland also argued that the federal Parliament lacked the constitutional authority, based on Canada's constitutional division of powers, to stay regulatory orders validly made in the exercise of provincial power (there was no issue that environmental legislation is a matter within provincial jurisdiction under Canada's constitutional regime).

Abitibi contested Newfoundland's motion and sought a declaration that the Environmental Protection Act orders were stayed and subject to the claims procedure order. The Environmental Protection Act orders, Abitibi argued, were monetary in nature and hence fell with the definition of the term 'claim', as used in the claims procedure order. The substance of what was being required should determine the issue, not the fact that the claim was disguised as an environmental order.

At the initial hearing, the Quebec Superior Court dismissed Newfoundland's motion, holding in favour of Abitibi. The Quebec Court of Appeal denied Newfoundland leave to appeal (in a Companies' Creditors Arrangement Act case there is no absolute right of appeal; the appellate court must grant permission for the appeal to proceed).

Newfoundland then appealed to the Supreme Court. The importance of the competing rights at issue resulted in an extraordinary decision from the Supreme Court even to hear Newfoundland's appeal, as the Supreme Court invariably refuses to hear cases where the appellate court has refused to grant leave.

Decision

Constitutional issue
With respect to Newfoundland's constitutional argument, the Supreme Court held that the only constitutional question that needed to be answered concerned the jurisdiction of the Companies' Creditors Arrangement Act court to determine whether an environmental order that is not framed in monetary terms is in fact a monetary claim. The Supreme Court determined that the federal legislation governing the characterisation of a regulatory order as a monetary claim is constitutionally valid. In essence, the Companies' Creditors Arrangement Act court is to look at the substance of what is in issue, not the form.

Justice Deschamps, writing for the majority, noted that the question as to whether a Companies' Creditors Arrangement Act court has constitutional jurisdiction to stay a provincial order that is not monetary in nature was not at issue, because the stay order did not affect non-monetary orders. However, this question may arise in future cases, as the Companies' Creditors Arrangement Act expressly gives courts the power to stay regulatory orders that are not monetary claims in certain circumstances.

Treatment of Environmental Protection Act orders
Turning to whether the Environmental Protection Act orders were 'claims' under the Companies' Creditors Arrangement Act, the Supreme Court reviewed the definition of 'claim' in the Companies' Creditors Arrangement Act. 'Claim' is defined broadly to mean any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of the Bankruptcy and Insolvency Act (Canada). The Supreme Court held that the relevant statutory provisions set out three requirements for a claim:

  • There must be a debt, liability or obligation to a creditor;
  • The debt, liability or obligation must be incurred before the debtor becomes bankrupt (or subject to Companies' Creditors Arrangement Act proceedings); and
  • It must be possible to attach a monetary value to the debt, liability or obligation.

The Supreme Court held that the first two requirements were easily satisfied on the facts. With respect to the third requirement, the Supreme Court held that when considering whether a regulatory order that is not framed in monetary terms is in fact monetary, courts must look at its substance and apply the rules for the assessment of claims.

The Companies' Creditors Arrangement Act expressly provides that if a regulatory body undertakes remediation work, the regulator's claim with respect to reimbursement for the costs of such remediation is a claim provable under the Companies' Creditors Arrangement Act. In such a situation the regulator's claim is secured by a charge on the contaminated real property and any property contiguous to the contaminated real property, and such claim ranks in priority to any other claim or charge against the property. Based on these provisions of the Companies' Creditors Arrangement Act, the Supreme Court noted that exempting environmental orders from the insolvency process altogether would be inconsistent with Canada's insolvency legislation. The Supreme Court reasoned that had Parliament intended that an insolvent debtor must always satisfy all remediation costs, it would have granted the regulator priority over all of the debtor's assets.

Regulatory orders which are not framed in monetary terms - in that the regulatory body has not chosen to remediate the property and exercise its power to ask for reimbursement - are to be analysed similarly to other contingent claims. In order for such regulatory orders to be 'claims' and thereby subject to the insolvency process, there must be "sufficient certainty" that the regulatory body that issued the orders will ultimately perform the remediation work itself and assert a monetary claim for reimbursement of its costs. In making this determination, the Supreme Court held that the Companies' Creditors Arrangement Act court may take a variety of factors into account, including whether:

  • the polluting activities are ongoing;
  • the real property is within the debtor's control; and
  • the debtor has the means to comply with the regulatory order.

Here, Newfoundland's claim was contingent to the extent that it had not yet formally exercised its power to ask for the payment of money. The majority held that although the Quebec Superior Court did not elaborate on whether it was sufficiently certain that the minister would perform the remediation work and make a monetary claim, this finding was implicit in the court's judgment. Based on the fact that the Environmental Protection Act orders targeted sites that were mostly no longer in Abitibi's possession, and Newfoundland's timetable for remediation was unrealistic, the Quebec Superior Court had found that the intended and realistic effect of the Environmental Protection Act orders was to establish a basis for Newfoundland to recover funds to be used for the remediation of the properties in question. The majority also held that the Quebec Superior Court's assessment of the facts - particularly its finding that the Environmental Protection Act orders were a step towards Newfoundland's performing of the remediation - led to no conclusion other than that it was sufficiently certain that Newfoundland would perform the remediation work and, as such, fall within the definition of a creditor with a monetary claim. The Environmental Protection Act orders were therefore claims and subject to the claims procedure order.

Dissenting decisions

Chief Justice McLachlin and Justice LeBel each wrote dissenting decisions. The chief justice adopted a lower standard than the majority and held that when determining whether ongoing environmental obligations owed to the public should be converted into contingent claims that can be comprised in the restructuring proceeding, the evidence must show that there is a "likelihood approaching certainty" that the province will remediate the property itself. LeBel disagreed with the chief justice and adopted the "sufficiently certain" standard described by Deschamps. Both the chief justice and LeBel concluded that there was insufficient evidence to suggest that Newfoundland intended to perform the remedial work itself.

Comment

Although the Supreme Court held that the Environmental Protection Act orders were properly characterised as claims, the court left the door open for such orders to not be considered claims in future cases if the provincial regulatory body can establish that it is not sufficiently certain that it will perform the remediation work itself. Should regulatory bodies maintain that they have no intention of remediating the property, it may be difficult for any debtor company to establish that they do. The burden of proof may be a significant issue as companies with significant environmental liabilities seek to restructure in the future.

Had Newfoundland convinced the Companies' Creditors Arrangement Act court that it had no intention of remediating the properties itself, and had the Supreme Court ultimately held that the Environmental Protection Act orders were not claims subject to compromise in the Companies' Creditors Arrangement Act process, the reorganised Abitibi entity would have been responsible for carrying out the remediation work and bearing the costs associated with such work. It is doubtful that Abitibi would have been able to emerge successfully from the Companies' Creditors Arrangement Act proceedings had Newfoundland succeded in its arguments.

Environmental regulation does not mesh well with the Companies' Creditors Arrangement Act insolvency regime, and the Supreme Court's decision strikes a balance between these regimes by focusing on the monetary nature of the Environmental Protection Act orders and the claim of Newfoundland arising from such orders. However, in circumstances where a provincial regulatory authority maintains that it has no intention of stepping in to remediate the property, a debtor company may have significant difficulty arguing that the regulatory orders are a "provable claim", and as such may be faced with limited restructuring options. Such a company may simply be forced to liquidate.

For further information on this topic please contact Sara-Ann Van Allen, Kenneth David Kraft or John Salmas at Heenan Blaikie LLP by telephone (+1 416 360 6336), fax (+1 416 360 8425) or email ([email protected], [email protected] or [email protected]).

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