High court says province can't force insolvent company to clean contamination

OTTAWA – The Supreme Court of Canada has ruled against the government of Newfoundland and Labrador in its effort to force insolvent newsprint giant AbitibiBowater Inc. to pay for an environmental cleanup.

The high court acknowledged the so-called “polluter pay” principle, but ruled it wasn’t enough to give the province the victory it has now failed to achieve in three levels of court.

The court’s 7-2 ruling was greeted with disappointment by the environmental group that intervened in the case.

The province wanted the top court to decide whether a debtor’s statutory duty to remove environmental contamination is extinguished under Companies’ Creditors Arrangement Act.

The company, now operating as Resolute Forest Products (TSX:RFP), had filed for protection under the act in 2009.

The province wanted to force the company to clean up five contaminated sites, estimated to cost between $50 million and $100 million.

They include a defunct Grand Falls-Windsor paper mill in central Newfoundland that the province expropriated in December 2008.

The Quebec Court of Appeal earlier refused to hear the province’s appeal against the Montreal-based company.

A spokesman for the company said it was pleased with the decision. “The decision of the Supreme Court speaks for itself,” said Seth Kursman.

The Supreme Court ruled against the province, essentially telling it that it had to get in line with other creditors.

Writing for the majority, Justice Marie Deschamps, now retired, said allowing the province to operate outside the bankruptcy law regime would be akin to asking all other creditors to pay the province.

The ruling acknowledged the “polluter pay” principle but said in this case it did not give the province any special status that would move it ahead of other creditors.

“In the insolvency context, the province’s position would result not only in a super-priority, but in the acceptance of a ‘third party-pay’ principle in place of the polluter-pay principle,” Deschamps wrote.

“Nor does subjecting the orders to the insolvency process amount to issuing a licence to pollute, since insolvency proceedings do not concern the debtor’s future conduct. A debtor that is reorganized must comply with all environmental regulations going forward in the same way as any other person.”

The case has been politically charged and attracted attention from the governments of Alberta, Ontario and British Columbia as well the environmental groups, which were all granted intervener status.

“This case is a loss for the environment,” said Beatrice Olivastri, the head of Friends of the Earth Canada.

The ruling will ultimately have a negative effect on the ability of provinces to deal with polluters, she said.

Olivastri predicted the provinces will have to ensure companies “have enough money in the pot” to pay future clean-ups at the time they grant licences for new projects.

Ecojustice lawyer William Amos, who represented Friends of the Earth, said the high court missed a chance to infuse insolvency law with the polluter-pay principle.

“And ultimately, unless the federal government goes about amending federal insolvency law, taxpayers may end up on the hook for significant environmental liabilities because provinces will be in a much more difficult situation,” he said.

“They will find it much more difficult to issue an order to remediate if companies will simply anticipate being able to argue that they should get in line with the rest of the creditors.”

The province rushed through legislation to seize Abitibi timber and water rights, along with a hydroelectric power station, after the failing company announced it was closing the Grand Falls-Windsor mill.

The federal government subsequently agreed to pay AbitibiBowater $130 million to settle a claim under the North American Free Trade Agreement.

Remediation orders will have to be issued and acted upon well before a company goes under, Amos said.

“This decision demonstrates clearly that federal insolvency laws require significant reform so that they don’t serve to protect companies and investors at the expense of taxpayers and regulators. The Companies’ Creditors Arrangement Act must be amended by Parliament so that taxpayers aren’t left holding the bag when companies go insolvent.”

Amos said corporations often use bankruptcy as a strategic move to restructure debt, and not necessarily purely because of financial crisis.

The Supreme Court addressed that point in its ruling, and disagreed.

“No matter what risks are at issue, reorganization made necessary by insolvency is hardly ever a deliberate choice. When the risks materialize, the dire costs are borne by almost all stake holders,” Deschamps wrote.

“To subject orders to the claims process is not to invite corporations to restructure in order to rid themselves of their environmental liabilities.”

— with files from Sue Bailey