A new Ontario statutory provision affecting the liability of directors and officers of dissolved corporations for environmental remediation costs recently caught my attention. As discussed in a December 5, 2016 memo from the Dentons law firm (here), apparently Ontario corporations have been in the past voluntarily dissolving in order to try to avoid environmental clean-up. Under provisions of the Forfeited Corporate Property Act 2015, which comes into force on December 10, 2016, along with related amendments to the Ontario Business Corporations Act, corporate dissolution will no longer protect former directors and officers from environmental liabilities. This statutory change, which is consistent initiatives in a number of jurisdictions to try to impose liability on corporate and officers without regard to culpability, raises a number of concerns and also highlights a number of larger issues.
According the law firm memo, under Ontario law, when a corporation is dissolved, unclaimed assets escheat to the province. Under this process, when the corporation dissolves, the remaining assets are forfeit to the province. Under the legal regime previously in place prior to the recent statutory revisions, there was no way for the province to hold corporations or their directors and officers liable for the environmental clean-up costs on forfeited property. Apparently, concerns were growing that corporations were voluntarily dissolving in order to avoid environmental remediation costs.
Sections 30 and 31 of the Forfeited Corporate Property Act allow the province’s Minister of Economic Development, Employment and Infrastructure to apply to the Superior Court of Justice for an order requiring the officers of a prior corporate owner of forfeited corporate property to pay costs of environmental remediation costs associated with the property. Through the court order, the province can recover costs associated with the disposition of the property from any person who was an officer or director in the two years prior to the dissolution.
The law firm’s memo’s authors note that the provisions, in effect, “create a regime of absolute liability.” There are no defenses listed in the statute, so it appears that the directors and officers cannot attempt to argue that they did not cause the contamination or are otherwise without fault. The authors note that it remains to be seen whether the courts will read in an exception for “innocent” past directors and officers.
The new statutory provisions also allow the certain provincial officials to seek to revoke a corporate dissolution order on the ground that revocation would be in the “public interest.” The authors suggest that this section appears to be another mechanism through with the province can ensure that it is not stuck with remediation costs of forfeited corporate property.
The memo’s authors suggest that in light of these new statutory provisions, it will particularly important both for corporate officials to assess the degree of environmental risk associated with the corporation’s property holdings and also to develop a strategy to reduce the risk of environmental liability through, for example, remediation or risk management. The authors also suggest setting aside funds to complete remediation in the event of insolvency. The authors conclude their memo by noting that directors and officers “should be aware of the risk of personal liability and the need to responsibly manage environmental risk.”
I am not an environmental attorney and there may well be important differences between Ontario’s laws and those applicable in other jurisdictions that limit the significance of these statutory provisions. I am aware from prior developments that Ontario has, in fact, been active in seeking to recover environmental remediation costs; as discussed here, in 2013, in a high-profile development, certain directors and officers of a bankrupt Ontario corporate reached a settlement with the provincial environmental regulator to pay out of their own assets for the bankrupt company’s unfunded remediation liabilities. The law firm memo’s authors note that provincial governments across Canada increasingly are seeking to hold prior owners, officer, and directors accountable for cleanup costs, regardless of fault.
The theoretical underpinnings of these various efforts to hold corporate directors and officers personally responsible for corporate environmental clean-up costs echo legal principles that are sometimes invoked in the United States. As discussed here, regulators sometimes rely on what is known in the U.S. as the “Responsible Corporate Officer” doctrine to try to hold individual directors and officers personally liable for corporate environmental remediation liabilities, without regard to the individuals’ responsibility for the pollution.
Obviously, the high costs of environmental remediation is a serious problem, and I don’t want for a minute to suggest that I do not appreciate the problems that arise if governmental authorities (and by extension taxpayers) are stuck having to fund environmental clean-up costs.
That said, I also have serious concerns with these and many other similar efforts to try to impose responsibility on individuals for corporate liabilities, without regard to fault. The idea that liability can be imposed on an individual for corporate obligations, in apparent disregard of the corporate form and without even a requirement for a culpable state of mind, seems inconsistent with basic legal principles. At a minimum, these efforts depend on a willingness to overlook the formality of the corporate form, through which the corporate is a separate legal being, distinct both from its shareholder and from the individuals who run it.
Of course, corporate officials can and should be held responsible for their own misconduct – but that is the point, it is their misconduct. All too often, what we seem to be talking about these days is not holding somebody responsible for their own misconduct, but rather simply for their status as corporate directors and officers.
In numerous prior posts (for example, here), I have noted with alarm the increasing willingness of legislatures and regulators and others to try to impose liability without culpability. As I have previously observed, one of the most basic notions in our legal system is that liability attaches only to those who act with intent or knowledge. It is a “bedrock principle” of our legal system is that criminal liability cannot be imposed without “mens rea,” or a guilty mind. Despite these constraints, legislators, regulators, and other authorities increasingly seek to impose liability without regard to involvement in or awareness of the alleged wrongdoing.
I recognize that environmental remediation represents a particularly challenging and costly social problem. I appreciate that many believe corporate executives need to be held accountable. Nevertheless, I am concerned that as a result of the increased tendency to impose liability on corporate executives without culpability, there is a contrary danger that corporate executives could be held liable in instances when they have done nothing themselves to deserve it. Scapegoating any individual – even a corporate executive – for circumstances in which they were not involved and of which they were not even aware is inconsistent with some of the most basic assumptions of a well-ordered society governed by law.
The legal memo’s authors suggest that individuals can try to protect themselves from potential liability for environmental remediation costs by procuring additional environmental or D&O liability insurance coverage. I have no experience with environmental liability insurance, and so I have no way of knowing about whether or not this is actually a viable alternative. I will say that the likelihood of obtaining D&O insurance protection for these kinds of risks, at least in so-called traditional D&O insurance policies, is limited. The typical D&O insurance policy will contain an environmental liability exclusion precluding coverage for claims arising out of pollution, environmental spills and contamination and so on. Even policies that lack environmental liability exclusions preclude environmental remediation costs from Loss coverage under the policy.
One possibility that does occur to me is that so-called Side A DIC policies often do not contain environmental liability exclusions; these kinds of policies are triggered only when the corporate entity is unable to provide indemnification owing to insolvency or legal prohibition. To the extent that the circumstances involved might trigger the Side A DIC policy, it theoretically might be possible for insured individuals to try seek insurance protection under this type of policy, perhaps (under the policy’s drop-down feature) on a first dollar basis. The extent of coverage available would also depend on the relevant definition of covered Loss and whether or not the remediation expense meet the definition or are otherwise precluded as not meeting the definition of Loss.