Directors and officers to be liable for contamination on escheated land?

by Dianne Saxe on November 6, 2012

What happens to contaminated sites when their corporate owner goes bust? Most of them end up escheating to the province, which is increasingly concerned about costs of managing them.

Now, Ontario’s Ministry of Infrastructure is seeking comments on a proposed new management framework for forfeited corporate property. One of the changes would allow the provincial government to impose legacy cleanup costs on anyone who was a director or officer of the corporation in its last two years. Comments are due by December 21, 2012.

Ontario law provides that when a corporation, incorporated under an Ontario statute, is dissolved, any property that it owns at the time of dissolution forfeits to the government of Ontario. This could be a for-profit corporation, a non-profit, a co-operative, a credit union, or a corporation incorporated in other provinces, or outside of Canada, which has land in Ontario. (There is some dispute as to which government gets  property of a federally incorporated corporation.)

In most cases, the government of Ontario is unaware when property is forfeited. Title to the real property continues to show the dissolved corporation as the owner. Forfeited properties often come to the attention of the government only when an expensive issue arises such as contamination, health or safety concerns, or squatters. Governments have found themselves  left to deal with expensive clean-ups on thousands of sites across the country. One well known example is Giant Mine in the Northwest Territories where the federal government was left with 237,000 tonnes of highly toxic arsenic trioxide dust stored underground when the owner of the gold mine went into receivership. The Northstar chlorinated solvent plume in Cambridge is likely to be the next.

On the other hand, some family companies with historic contaminated sites look at escheat as their best option for avoiding complete ruin.

The Ministry of Infrastructure is responsible for most forfeited corporate property. According to the proposed management framework, the proposed directors and officers liability provision is in line with the polluter pays principle and “would serve as a disincentive to directors and officers of corporations to allow property with legacy issues to forfeit to the government of Ontario and would encourage prudent ownership of corporate property prior to dissolution. It would also support increased corporate accountability by making directors and officers deal with issues associated with forfeited corporate property and would avoid imposing these obligations on the taxpayer.”

One problem the proposed change does not take into account is the situation where the director or officer is not responsible for the pollution. Consider, for example, a failing business on land that is already contaminated. New directors may come in to try to turn the business around and institute effective environmental control. Unfortunately they are ultimately unsuccessful and the corporation is dissolved. Under the proposed framework, these directors would be liable for the whole cleanup cost. This could make it very difficult to find anyone willing to take office in such companies, except perhaps for seniors with no assets, and should drive a boom in business for directors and officers’ insurance.

A second obvious problem is the potential for conflict with the federal insolvency regime.

MEI says: The proposed changes are being presented for the purpose of obtaining stakeholder feedback and do not represent government policy.

By Meredith James and Dianne Saxe

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