Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Edward Sellers, Mary Paterson and Caitlin Fell.  Edward Sellers is a Partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt, LLP, Mary Paterson is an Associate in the litigation group and Caitlin Fell is an Associate in the insolvency and restructuring group.
On December 7, 2012, the Supreme Court of Canada (“SCC”) released its decision in Newfoundland and Labrador v. Abitibi Bowater Inc. (2012 SCC 67), a case which dealt with the potential impact of environmental obligations of a debtor company in a restructuring process under the CCAA.  In a 7-2 ruling, the SCC confirmed that the issuance by the Province of Newfoundland (the “Province”), through the Minister of Environmental and Conservation (the “MOE”), of Orders compelling Abitibi to perform remediation at its own expense constituted monetary claims against the company and therefore were capable of being compromised.
In 2008, Abitibi, one of the world’s largest publicly traded pulp and paper manufacturers, announced it was closing its last operating mill in the Province. Shortly after the announcement, the Province passed an Act which allowed for the expropriation by the Province of all of Abitibi’s property in Newfoundland and Labrador. In April 2009, Abitibi filed for insolvency protection in the United States and in Canada, ultimately commencing proceedings under the Companies’ Creditors Arrangement Act (“CCAA”).  In November 2009, the MOE issued five orders for the remediation of properties owned by Abitibi or formerly owned by Abitibi prior to being confiscated by the Province. The Orders mandated the remediation of environmental contamination on the sites as a result of the release of substances in amounts and concentrations which were deemed by the MOE to have an adverse impact on the environment.
Concurrently with the issuance of the MOE Orders, the Province brought a motion in the CCAA proceedings for a declaration that the Orders were not “claims” and were not subject to the stay of proceedings under the CCAA.  Essentially the Province’s position was that Abitibi had the legal obligation to clean up the sites following its restructuring. The SCC, however, found that the MOE Orders were in fact contingent monetary claims and thus stayed in the CCAA proceeding.
The Court clarified when Orders will be considered contingent monetary claims in CCAA proceedings. First, there must be a debt, a liability, or an obligation to a creditor. Second, the debt, liability, or obligation must be incurred as of a specific time (generally before the debtor exits insolvency proceedings). Third, it must be possible to attach a monetary value to the debt, liability, or obligation.
The Court focused on the third point – whether it was possible to attach a monetary value to the obligation – and considered whether there are “sufficient indications” that the regulatory body will ultimately perform the remediation work itself and then assert a monetary claim to have its remediation costs reimbursed.  This means that for an Order to be a monetary claim there must be sufficient indications that the regulatory body will pay for and perform the remediation itself.
After finding that the MOE Orders constituted provable claims, the Court addressed the various policy arguments raised by the Province.  The Court rejected the notion that treating an environmental regulatory order as a monetary claim in an insolvency proceeding would entirely extinguish the debtor’s environmental obligations and, in turn, undermine the polluter-pays principle.  Subjecting the MOE Orders to the CCAA claims process did not extinguish Abitibi’s environmental obligations to pay a debt. Rather, the Court held that it ensures that the Province’s claim will be paid in accordance with insolvency legislation. Further, the Court also noted that requiring Abitibi to pay full remediation costs would elevate the Province’s claim to a super priority status thereby undermining the intent of insolvency legislation and would also shift the cost and blame of environmental contamination from the debtor onto third party creditors.
The Court’s reasoning in Abitibi clarifies the treatment of regulatory orders in the context of an insolvency proceeding. It remains to be seen, however, how the Courts will apply the Abitibi approach in other circumstances, potentially far removed from the unique factual circumstances present in Abitibi.

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