New Risks for Directors of Companies for Environmental Remediation Costs

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

The Saskatchewan Environmental Management and Protection Act, 2010, SS 2010, c E-10.22 (“EMPA, 2010”), which came into effect on June 1, 2015, contains provisions which increase the risk to corporate directors of liability for environmental remediation costs. While the risk is increased for all directors, particular issues arise for incorporated small businesses and their owners.

As was the case before EMPA, 2010 came into effect, directors (and officers) face potential liability as Environmental Protection Orders (“EPO”s) can be issued personally against them as persons having charge, management or control of substances causing contamination (EMPA, 2010, ss.55-56). This is a particular risk for small corporations whose owners are actively involved in the company’s day to day operations. It was also possible for a director or officer to be convicted of an offence relating to the discharge if they “directed, authorized, assented to, acquiesced in or participated in” the offence. Upon conviction, the court had authority to impose remediation obligations on the individual director or officer. These risks remain under EMPA, 2010.

The new issue in EMPA, 2010 is that any director can also now be named as a “responsible person”, subject to a clean-up order if: “…they authorize a dividend or distribution when they knew or should have known that it could reasonably impair or could reasonably be expected to impair the ability of the corporation to prevent, mitigate, remedy or reclaim adverse effects on land owned or occupied by the corporation” (EMPA, 2010, s.2(g)).

This wording is very broad. In general, under the old provisions, the more direct control an individual had, the more likely it has been that they may be subject to an EPO in respect of a discharge or adverse environmental effect. In most cases, directors would not be liable to an EPO for contamination from releases occurring prior to their tenure, but may be liable, depending on the facts in each circumstance.

However, with the new provisions in EMPA, 2010 it is arguable that any authorization of dividends or distributions while failing to ensure adequate funding of a reclamation obligation with respect to a contaminated site, could lead to an EPO being issued directly against the directors of a corporation. It remains to be seen whether the MOE will take the aggressive approach allowed under the new provisions.

Implications for Directors

There are some uncertainties as to the manner in which the provision will operate. For example, would it apply where the fact that the site is contaminated is not known but there is reason to believe that it could be, but no Phase II has been done? Does it mean that directors must always retain a sufficient reserve fund even during ongoing operations, or can the directors rely on reasonable expectations that the obligation can be funded out of future operations? After all, the test is whether they knew or should have known that the distribution could reasonably impair or be reasonably expected to impair the ability of the corporation to meet its obligations. Finally, can the cost of the clean-up obligation under an EPO exceed the amount distributed? For example, what if the “improper” distributions amount to $50,000 but the clean-up cost is a million dollars? It appears that this may be so as no express limitation is provided.

The implications of the provision may be most strongly felt as a business is wound down or even after a company sells its assets. Sale of a contaminated property does not bring the company’s liability to an EPO to an end. Say a small company sells a former gas station site and then pays out the owners/shareholders for the sale of the business, leaving no capital in the company to meet its potential EPO obligations. This simple transaction may lead to the directors becoming “persons responsible” such that they can be put at risk of being personally subject to an EPO for contamination at the site of the former gas station. On the other hand, it may be that the provision applies only where the land is owned or occupied by the corporation at the time of the distribution. That is, the provision might not be interpreted in a way that would never allow a corporation that sells a contaminated property to distribute its cash or assets and wind down.

Similarly, professionals who have agreed to act as corporate directors are also open to increased risk under the new provisions.

While each situation will need to be assessed on a case-by-case basis, certain strategic steps can be taken in order to protect the personal assets of directors through estate planning and credit proofing. For example, in a small family business it may be wise to have only the spouse with the fewest assets as a director at the time the owners/shareholders are paid out. Depending on the circumstances it may also be wise to leave some of the funds in the company after an asset sale, rather than paying out all of the funds and winding down the company. Alternatively, if there are known environmental issues it may be best to obtain estimates for the cost of clean-up and leave a corresponding amount in the company.