The usual answer to this question can all too easily fall into the “life’s too short” category. After all, how many cases have there been where directors have personally been held to account for clean-up costs? Well, now there is one, albeit subject to appeal.
The case arose out of the insolvency of Northstar Aerospace of Canada and certain other companies within the group who were granted protection in June 2012 under the Canadian Company’s Creditors Arrangement Act (“the act”). Six weeks later the company was adjudged bankrupt. In the bankruptcy proceedings, Ontario’s Ministry of the Environment issued an order against the former directors and officers of Northstar requiring them personally to fund environmental remediation at a cost estimated to be C$15m.
Some eight years earlier, in 2004 Northstar had first informed the Ontario Ministry of Environment of potential environmental contamination on its site. The contamination involved the use of industrial solvents which had migrated to the soil and groundwater and presented a potentially serious threat to health.
What makes this case so striking is that in the period from 2004 through to 2012, the evidence was that Northstar and its directors did everything right. They seem to have taken all reasonable steps to investigate, mitigate and remediate the pollution. They even originally reported it to the authorities themselves. The problem was that, in the end, the company had neither the time nor the money to finish the job. Moreover, and perhaps unsurprisingly, even after Northstar had applied for protection under the act, the evidence was that no potential buyer showed any interest in purchasing the contaminated site. In other words, whether or not the directors had sought to raise funds under the protection of the bankruptcy court (as indeed they did), no assets would have been available to fund compliance with the Ministry’s orders. In short, there was no evidence either pre-or post-filing for protection, that the directors and officers of Northstar had acted negligently, either in causing or allowing the pollution to occur in the first place, or in failing to attempt to mediate its effects.
According to the law firm, Heenan Blaikie, the only way out for these directors and officers, on the assumption that their appeal is unsuccessful, would have been to have secured a personal release of their obligations under the Environmental Protection Act as part of formal restructuring under the act.
We do not know the extent to which these directors have the benefit of D&O insurance and, if so, on what terms. Many such policies exclude cover for clean-up/pollution costs. Indeed, some of these exclusions may also extend to the provision of defence costs in relation to allegations of pollution or alternatively (and at best) sublimit such cover. The moral of this particular tale seems to be that pollution/clean-up costs cannot safely be ignored as a “battle too far” when it comes to amendments to standard D&O forms.
This post was originally published August 1, 2013.