Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Edward Sellers, Dave Rosenblat and Rebecca Wainstein. Edward Sellers is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, Dave Rosenblat is an associate in the insolvency and restructuring group and Rebecca Wainstein is an articling student in the insolvency and restructuring group
The Ontario Court of Appeal recently released its decision in Nortel Networks Corporation (Re) (“Nortel”) regarding an appeal by the Ontario Ministry of Environment (“MOE”) of a lower court decision that environmental remediation orders were caught by the stay of proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) as equivalent to an order enforcing the payment of an obligation. The Court of Appeal allowed the appeal after reviewing AbitibiBowater Inc., Re (“Abitibi”), a Supreme Court of Canada decision that established the circumstances in which ongoing environmental remediation obligations may be reduced to a monetary claim that can be compromised in CCAA proceedings. Both the Abitibi and Nortel decisions were made in proceedings commenced prior to amendments to the CCAA dealing expressly with regulatory orders that took effect in September, 2009 (the “2009 Amendments”).
The Nortel decision was released at the same time as a decision made in proceedings commenced after the 2009 Amendments dealing with substantially similar issues: Northstar Aerospace Inc.(Re) (“Northstar”). In Northstar, the Court of Appeal upheld a lower court decision that an MOE remediation order was subject to a stay of proceedings after reviewing Abitibi. We previously blogged about Northstar here and Abitibi here. Collectively, Nortel and Northstar deal with the potential implications of regulatory orders in the context of insolvency proceedings and how the principles established in Abitibi may be applied in the future.
Initial Decision
An initial order under the CCAA that stayed proceedings was granted to Nortel Networks Corporation and a number of subsidiaries, (collectively, “Nortel”). Nortel was selling all of its businesses and had no prospect of maintain its own operations in implementing a restructuring plan. Prior to commencing CCAA proceedings, Nortel and its predecessors had largely disposed of the sites where it had conducted manufacturing operations in the 1990s. At that time Nortel had identified environmental issues that arose from its past operations at certain impacted sites.
Nortel maintained only a partial interest in one of the impacted sites (the “London Site”) at the time of filing for CCAA protection. At that time the MOE had not issued remediation orders against Nortel. After the CCAA filing, the MOE issued remediation orders pursuant to the Environmental Protection Act (Ontario) (the “EPA”). Nortel anticipated that the remediation would cost approximately $18 million and argued that the MOE orders were stayed. The motions judge determined that environmental liabilities amount to financial obligations caught by the stay of proceedings where operations have ceased on a particular property and a company can only comply with the EPA or MOE orders by expending funds. Thus, the MOE’s remediation orders were subject to the initial order stay and were to be addressed as claims in the proceedings.
The Appeal
The Court of Appeal considered the MOE’s orders in light of Abitibi. Per Abitibi, ongoing environmental remediation obligations may be reduced to monetary claims that can be compromised in CCAA proceedings in two circumstances: first, such claims could be compromised where the MOE performed remediation work and made a claim for reimbursement; second, such claims could be compromised where the obligations could be considered as  contingent or future claims because it was “sufficiently certain” that the MOE would do the work and then seek reimbursement.
Nortel submitted that it would be an oversimplification of the Abitibi decision to read it as requiring future courts to examine environmental remediation orders “through the exclusive binary test” of determining whether it was sufficiently certain that the province would perform a remediation and claim reimbursement. Rather, Nortel argued that it was sufficiently certain that compliance with the MOE’s orders would require the expenditure of a minimum of $18 million and that whether the cost was to be paid to the MOE or a third party retained for remediation did not matter.
The Court of Appeal rejected Nortel’s approach for being too broad and inconsistent with Abitibi, stating that the approach would result in virtually all regulatory environmental orders being found to be provable claims. The Court of Appeal concluded that it was not sufficiently certain that the MOE would perform the remediation it had ordered. Nortel no longer owned most of the properties and the MOE orders were directed towards both Nortel and the subsequent owners. Per the Court of Appeal, it could not be said that the MOE had no realistic alternative but to perform the remediation work itself. Thus, the appeal was allowed and the MOE orders were not stayed generally, leaving as completely uncertain how Nortel could comply with the MOE orders in respect of properties it no longer owned and who, as between Nortel and the subsequent owners of the properties, was to comply with the orders
Worth noting is that the stay of proceedings was maintained with regards to the London Property as there was no-one to carry out Nortel’s responsibilities under the MOE order in connection with that site. The Court of Appeal considered it “sufficiently certain” that the MOE would ultimately undertake Nortel’s obligations regarding the London Property. One wonders how the Court of Appeal could be certain that Nortel could do anything in respect of the other properties it no longer owned such that it would rule to preserve an obligation of compliance with orders Nortel appears incapable of complying with.
Nortel serves to amplify the potential negative scope of Abitibi’s implications (certainly for proceedings commenced prior to the 2009 Amendments) and gives rise to numerous questions regarding the manner in which CCAA debtors may be required to respond to regulatory orders (including in respect of property they no longer own and when they have no means to do so). It appears that ongoing environmental remediation obligations will not be reduced to monetary claims that can be compromised in CCAA proceedings simply because there is ‘certainty’ that compliance with an MOE order will require an expenditure. Apparently environmental obligations will only be treated in this manner when there is sufficient certainty that the MOE would do the work and then seek reimbursement.

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