Director Liability: Constant as the Northstar, or a new direction?
Overview
Last week I had a chance to address the Canadian Urban Institute Brownfield conference on a panel tasked with highlighting the big issues in bringing contaminated properties back into use. I pointed to a case now before the Ontario Environmental Review Tribunal that is costing directors across Ontario good night sleeps.
Northstar was a Cambridge aerospace manufacturer. A spill of contaminants polluted the ground water under about 500 homes and the company moved to remediate, spending $20 million dollars before going under. Its assets were sold in bankruptcy. The Ministry of the Environment, with no other pockets to turn to, looked to the directors and officers of the defunct company and ordered them to pay for the clean up. So far, they have shelled out something north of $500,000 from their own pockets. They have appealed the Ministry’s Order.
On the face of it, the legislation appears to support the Ministry’s right to make such an order. It is, in many ways, the nightmare scenario lawyers have warned their clients about for years, mostly making a note to file as clients get on with business. After all, would the Ministry ever really hold directors, none of whom were around when the contamination happened, personally responsible for the clean up, no matter the cost? As it turns out, yes.
I brought a prop to the Brownfield Conference – the Globe’s Report on Business for Oct. 14 whose lead story was about the Northstar Case (link below). Headline: Northstar liability fight casts pall over country’s boardrooms. No kidding. Directors who are on board even for a moment in time, are liable forever, for whatever happened in the past. That’s a tough result and the business community is intervening to reduce this burden.
But the second page headline was equally important: the directors and officers ought to have set aside the funds necessary to complete the remediation. That is, once the contamination was known, the current directors had to take even stronger action. After all, someone will have to clean up the contamination, and if it’s not the company, and it’s not the directors, then it’s me and you, the taxpayer. We did not cause the contamination either.
So when the company is gone, what’s the balance between the directors and the public when it comes to cleaning up? I think the answer is largely found in the Ministry’s own words: if directors have set aside enough to clean up based on reasonable evidence, and the company is bankrupt, then the balance should transfer to the public.
Let me illustrate what I mean: Say you are asked to join a board or become an officer of a company with contaminated land. The company hands you two independent reports from good consultants. remedial plan cost: $3 million. The company has set aside the $3M and bought a $5 million insurance policy to cover an over run. You are satisfied (I would be) and join the board. The remediation costs $12 million and the company goes under. You spend the $3million, exhaust the insurance proceeds, creditors take everything else the company has, and you’re on the hook for the remaining $4 million. One thing is for sure: there is one awkward conversation coming with your spouse over dinner. And, by the way, if this is when you pull out your D&O policy, you are in for a rude shock.
In this example, I think you’ve done enough and your personal livelihood should not be exposed. The legislation is intended to make directors think hard about contamination. If they do, and take action, that should be enough.
GLOBE ARTICLE LINK :
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