Director and Officer Liability in Ontario – Very Serious Business

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Last week I blogged about board responsibility and the need for management systems and tools to achieve compliance throughout the organization. This morning I had the chance to attend a conference, “Managing Emerging Environmental Risks : Are you Prepared?” at the Blakes Law Offices in Montréal, Canada. While all of the talks were interesting and engaging, the presentation by Jonathan Kahn on developments in board and director responsibility especially stood out.

Khan highlighted two cases in Ontario, one settled and one pending. The settled case is known as Baker and involves a  company called Northstar Aerospace that had a known contaminant on its site and a liability on its balance sheet. To manage the contaminant, Northstar had installed a water treatment system that cost nearly $150,000 a month to operate. However, the company did not put any money aside for the removal or management of the contaminant. Northstar then went into bankruptcy protection and the Ontario Ministry of the Environment (MOE) launched suits against the directors of the company to recover the costs necessary to continue to manage the water treatment facility.

Without going into the details of the case (which you can do at the link above), the directors settled with the MOE rather than attempt to fight their efforts. The settlement money was likely paid-out-of-pocket as the directors did not have insurance to cover their environmental risks, making this an essential reminder that directors should check their liabilities policies for such coverage.

A second case highlighted by Jonathan Kahn was that of Cavern Petrochemical in Guelph, Ontario. This company made fuel additives and had a series of financial issues. One of the three owners passed away, and the two remaining business owners had few assets.

During a previous financial restructuring, Cavern had sold the land it operated on to a family friend who then leased it back to the company. This created some liquidity for the company and allowed it to continue to operate. The land was placed in a numbered company whose primary owner was domiciled in the United Kingdom. The owner had given power of attorney to a Canadian accountant who hired a company to sell the property on which Cavern operates. In 2012, Cavern had a spill of some serious chemical products  (toluene, xylene and acetone) and has shut down. In attempt to recover the money was necessary for site reclamation (estimated at three million dollars), the Minister of the Environment is pursuing not only Cavern Petrochemical and its owners, but also the owner of the land, the accountant and the company hired to sell the property. This case is before the courts and it will be interesting to see how it plays out.

The moral of these stories, as you might have guessed, is that directors are liable for the activities of their business and for the proper management of the capital necessary to remediate any legal issues. Even if the directors are recognized as not being at fault for an accident, in the event that it happened before they became directors, they are still on the hook for the cleanup. In simple terms, if the MOE cannot get the money through traditional “polluter pays” methods, they will go after anyone involved, without pity.

Dianne Saxe, a well-known environmental lawyer and the representative for Northstar Aerospace, has publicly stated that the MOE has become particularly aggressive in their tactics to hold directors accountable for the environmental activities of the companies they administer. She offers a good outline of the legal framework here and of the Baker Northstar settlement here.  Board members and officers may find her information helpful for avoiding smaller liability.