Law Times

Page 8 March 18, 2013 Law Times • Focus On Restructuring & Insolvency AbitibiBowater leaves 'immoral,' unsatisfactory result Top court considers status of cleanup orders during CCAA proceedings BY Julius Melnitzer For Law Times A leading environmental lawyer says the Supreme Court of Canada's recent decision in Newfoundland and Labrador v. AbitibiBowater Inc. leaves an "immoral" and unsatisfactory situation in its wake. The Supreme Court concluded that claims arising from provincial environmental cleanup orders could be compromised under the Companies' Creditors Arrangement Act. "The short-term consequence is that governments will be left holding the bag for a lot of contaminated sites," says Toronto environmental lawyer Dianne Saxe. "They'll either pick up the cost or more likely decide that the sites don't have to be cleaned up after all, which means that we're piling up enormous new problems for our children." As Saxe sees it, AbitibiBowater should be a catalyst for legislation or regulations that ensure businesses cover the cost of environmental remediation while they have the financial capacity to do so. "The decision should make governments get serious about getting appropriate financial assurances while a business is still operating, but it doesn't necessarily follow that they will," says Saxe. "Governments simply have not done a good job in ensuring that businesses that go bust leave behind enough money to deal with the havoc their insolvency creates in areas like environmental law and pensions. Costs of remediation should be absorbed during operations to make sure the polluter pays instead of making innocent third parties responsible." Alternatively, says Saxe, some sort of pooled financial assurance plan could be an option. AbitibiBowater arose in 2008 when the company ceased directly a monetary one, could evolve into a financial liability to the regulator. Whether an order fell into the second category was a question of fact. To fall within the parameters of the CCAA, however, there had to be a debt, liability or obligation to a creditor to which a monetary value could be attached and that was incurred at a specific time and generally before the insolvency proceedings had concluded. Here, the claim was a monetary one because the environmental regulator was a creditor as it was authorized by statute to enforce environmental obligations; the contamination occurred before The facts were unique the CCAA proceedings began; and there was "sufbecause of the politics ficient certainty" that the regulator would perform involved in the province's the remediation itself and seek reimbursement bedecision to expropriate, cause the sites were no longer in Abitibi's possession, the company had no operational funds apart from says Daniel Kirby. debtor-in-possession lending limited to ongoing operations, the timetable set out in the orders inoperations in Newfoundland and Labrador. Shortly theredicated that the province never expected Abitibiafter, the province expropriated most of the company's Bowater would perform the work, and it appeared the property. In April 2009, AbitibiBowater filed for insolvency government intentionally targeted the company. protection and obtained a stay of proceedings from the Su"The upshot is that Abitibi will emerge from restructurperior Court of Quebec. ing free of the obligation to remediate," says Daniel Kirby, a In November 2009, the province issued five envi- litigation partner at Osler Hoskin & Harcourt LLP. ronmental cleanup orders against AbitibiBowater, three "But the decision leaves the results of future cases of which related to expropriated properties. The prov- uncertain because each case has to be decided on its ince then moved for a declaration that the orders weren't own facts." "claims" within the meaning of the CCAA and therefore The facts in AbitibiBowater, Kirby notes, were unique weren't subject to the stay. because of the politics involved in the province's decision to The key issue was whether a remediation order consti- expropriate. tuted a monetary claim under the CCAA. A divided court "The background circumstances are weird and it will found it could in some cases, including the one at issue in be interesting to see what happens in a more neutral fact AbitibiBowater. situation," he says. As the majority saw it, an environmental order could be "Counsel will have to decide what kind of evidence a proper claim under the CCAA either when it explicitly as- they should put forward to demonstrate the governserted a monetary amount or when the order, although not ment's intention in issuing the cleanup order." LT Sino-Forest exposes auditors, underwriters to risk BY Julius Melnitzer For Law Times T he Ontario Court of Appeal's recent decision in Re Sino-Forest Corp. has undermined the value of indemnities taken by auditors, underwriters, and other professionals from companies that find themselves in insolvency proceedings. "What the decision means in practical terms is that auditors and underwriters who take indemnities from corporations must fully understand that if they are sued by the company's shareholders in a class action or otherwise, any claims for indemnity against the company will be treated as equity claims in CCAA [Companies' Creditors Arrangement Act] proceedings," says Derrick Tay of Gowling Lafleur Henderson LLP's Toronto office. "Because the CCAA provides that claims in equity are subordinated to claims in debt, the chances of recovery would be slim." Sino-Forest arose after the company's shareholders filed a class action against Sino-Forest as well as its auditors and underwriters. The auditors and underwriters sought contribution and indemnity from the company. Subsequently, Sino-Forest obtained CCAA protection. The auditors and underwriters filed claims against the company. Sino-Forest then sought an order declaring them to be equity claims. The Superior Court granted the order and the Court of Appeal upheld it. The Court of Appeal noted that in 2009, Parliament amended the CCAA to define an equity claim as one "in respect of an equity interest." They include claims for a dividend or similar payment; a return of capital; a redemption or retraction obligation; a monetary loss resulting from the ownership, purchase or sale of an equity interest or the rescission of such a purchase; and contribution or indemnity in respect of any of the foregoing. Here, the shareholders' claims in the class action arose from a monetary loss resulting from the purchase of an equity interest. Because the auditors' and underwriters' claims related directly to that matter, they were therefore claims "in respect of" an equity claim, making them equity claims themselves. "The appellants tried to argue that the agreements to indemnify were independent contracts giving rise to independent causes of action," says Tay. "But the court recognized that their claim existed only provincial securibecause they were beties legislation makes ing sued by the shareeveryone who signs holders." the certificate in a In other words, if prospectus, offering any proceeds from memorandum, and the claim ultimately takeover bid circular, ended up in the shareas well as any mateholders' hands, it was rials incorporated an equity matter. by reference in these "The court ruled documents, liable to that the fact that the civil action. money might pass As well, provincial through third parties secondary-market lidoesn't affect the status of the claim," says Tay. 'Because the CCAA provides that claims in ability regimes impose "No matter how you equity are subordinated to claims in debt, liability for disclosure couch it, money from the chances of recovery would be slim,' says in public documents, public oral statements, an insolvent estate that Derrick Tay. and failure to make is channelled to the shareholders is money in respect of an timely disclosure. In some cases, the liability extends to every director and offiequity claim." Writing in Bennett Jones LLP's Cor- cer who authorized, permitted or acquiporate Commercial Update, Denise esced in the release of the document. Caution, then, is paramount. Bright, David Phillips, Chris Simard, "We recommend that underwriters, and Ciara Toole observe that one of the implications of Sino-Forest is that "an agents, other third parties, directors, and indemnity might be meaningless just officers consult with legal counsel and carefully consider their risk exposure when it is needed most." As the authors point out, civil li- and mitigation strategies beyond the ability for shareholder claims has a long protection of a contractual indemnity," LT reach in Canadian law. For example, the Bennett Jones lawyers advise. www.lawtimesnews.com

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