The Taxpayer Pays Principle? the Supreme Court of Canada’s Findings in Newfoundland v. AbitibiBowater

William A. Amos and Hugh S. Wilkins

The polluter pays principle requires polluters to take responsibility for remedying contamination for which they are responsible, imposing on them the direct and immediate costs of pollution.

In a recent Supreme Court of Canada decision, Newfoundland and Labrador v. AbitibiBowater Inc. 2012 SCC 67, the Court missed an excellent opportunity to affirm the application of the polluter pays principle and clarify the linkages between environmental law and insolvency law.

We were involved in the appeal as counsel for Friends of the Earth Canada, an intervener, arguing that insolvent corporations retain their public environmental obligations through a restructuring and must not burden taxpayers with the costs of cleaning up contaminated sites.

Facts

AbitibiBowater (Abitibi) was a timber and mining company that operated in Newfoundland and Labrador for more than 100 years. In 2008, it announced that it would be closing down all its operations in the province. The provincial government, led by former Premier Danny Williams, enacted legislation to expropriate most of Abitibi’s assets and resource rights without compensation (Abitibi was later compensated through proceedings under NAFTA). But left behind was a legacy of contaminated sites, polluted with toxins like PCBs, mercury, lead and zinc. In 2009, Newfoundland and Labrador issued orders under the province’s Environmental Protection Act (EPA), requiring Abitibi to undertake environmental remediation in various locations.

By that time, Abitibi had filed for insolvency protection under the federal Companies’ Creditors Arrangement Act (CCAA). Abitibi asserted that, in relation to the remediation orders, the Province was effectively asserting a monetary claim, since the orders to clean up would inevitably be converted into orders to pay for decontamination work done by the province. As such, Abitibi argued that the Province had to line up with other creditors and file a claim under the CCAA. The Province argued that the EPA orders were legal obligations and not “claims in fact,” and should not be subject to the claims process under the Act. The Province took the issue to court, seeking a declaration that they could stand outside the CCAA restructuring process. Neither the Quebec Superior Court nor the Court of Appeal agreed with the Province’s arguments.

The Appeal

When the case reached the Supreme Court last year, much of the oral argument focused on the polluter pays principle and how it applied to insolvency law. We argued that environmental protection is part of the public benefit achieved through an insolvency restructuring. It is not something to be sacrificed along the way.

We asserted that environmental regulators must be presumed to be exercising their regulatory authority in the public interest and not as a financial stakeholder. In other words, provincial remediation orders should not be subject to the claims process under federal insolvency law. It is the polluter – not the taxpayer – who should bear responsibility for fulfilling the terms of an order to clean up in the public interest.

SCC Ruling

In its decision released in early December, the Supreme Court of Canada held that if there is “sufficient certainty” that they will be monetized, provincial remediation orders may be found equivalent to private debts, liabilities or obligations under insolvency law. In the circumstances of this case, this means that taxpayers will bear much of the financial and environmental costs associated with cleaning up the heavy metals and toxic chemicals left on Abitibi’s former industrial sites.

The decision effectively limits a polluter’s liability to what it can pay as part of a restructuring plan it designs with creditors’ approval, not out of the billions (in Abitibi’s case) in profit going forward after its successor has emerged from insolvency protection.

The case affirms the need for the federal and provincial governments to proactively issue remediation orders so that taxpayers will not be left with the cleanup costs after companies file for insolvency protection. It also demonstrates the urgent need for reform of our insolvency laws. The Companies’ Creditors Arrangement Act must be amended so that the full cost of site remediation is guaranteed to be covered as part of any insolvency restructuring plan.

At present, environmental regulators only have a super-priority claim for remediation costs secured by a charge on the contaminated real property (and contiguous property) that is related to the activity causing the contamination. In other words, the regulator’s super priority does not extend to the totality of the debtor’s assets, exposing the public to potentially massive liabilities. To avoid subsidizing insolvent private enterprises and to ensure that the polluter pay principle is fully implemented, the clear implication of this Supreme Court decision is that Parliament must amend the CCAA so that the full costs of remediation are paid by putting the Crown at the front of the queue of creditors.

Conclusion

Like most insolvency matters, the decision turned significantly on the facts, and should not necessarily be seen as a troubling precedent. Newfoundland and Labrador expropriated Abitibi’s assets. Danny Williams said the Province would remediate the lands and the practicalities of Abitibi possibly complying with the EPA orders were questionable. Most cases involving environmental obligations will likely not have facts like these, where remediation orders are deemed little more than disguised financial claims.

It is important to note that the Supreme Court indicated that the outcome may have been different if Abitibi still owned and planned to operate on the lands. There remains an argument that ongoing environmental obligations in respect of continued operations cannot be compromised. It is unlikely that any court would allow a debtor company to continue to operate on contaminated lands while, at the same time, sanctioning the compromise of its environmental obligations under insolvency law.

Although the decision does not strengthen environmental principles, it does not diminish them either. It is, however, a significant missed opportunity. The Court could have cemented the important role of the polluter pays principle in Canadian law and better integrated environmental considerations in our insolvency claims process. Now the ball is in the federal government’s court.

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