4. Directors' Duties on the Eve of Insolvency: An Analysis of the Competing Liability of Directors Under Insolvency and Environmental Legislation Following the Northstar Aerospace Insolvency

Under Canadian corporate law, directors and officers owe a fiduciary duty to act in the best interests of the corporation and prioritize the interests of the corporation ahead of their own.  When a corporation nears insolvency, this fiduciary duty does not change; however, directors and officers must not take steps that may unreasonably reduce the pool of assets available for creditors upon liquidation.  Similarly, since their duty is to the corporation as a whole, directors and officers are not permitted to favour one group of creditors over another.  Traditionally, the Canadian bankruptcy and insolvency regime has been designed to serve as a comprehensive framework for corporations entering bankruptcy and clearly delineates the priorities of various groups of creditors.  However, the Ontario, Canada Ministry of the Environment’s 2013 decision in Baker has the effect of circumventing this priority structure by creating incentives for directors to potentially favour a subordinate group of creditors over other, possibly superior ranking parties.

Baker has fundamentally reconfigured the potential personal liability of directors and officers of corporations approaching insolvency in Ontario.  Although the former directors of Northstar Aerospace settled with the Ministry of the Environment before the order was appealed to the Environmental Review Tribunal or reviewed by the courts, the Ministry’s decision to hold the directors personally liable for the environmental remediation costs of one of Northstar Aerospace’s properties, notwithstanding the fact that the board acted in good faith and some of the directors were not associated with the corporation when the contamination occurred, creates significant regulatory jeopardy for directors of financially distressed companies. 

 

This paper will analyze theoretical arguments relating to the interface of bankruptcy law, corporate governance in the pre-insolvency context and regulatory liability with a view to reconceptualising the relationship among of these areas of law.  This research will be supplemented by comparative analysis of how environmental legislation in the United Kingdom and United States responds to financially distressed companies and interviews with directors and officers involved in bankruptcies so as to further understand the incentives and factors considered by directors and officers in these circumstances with a particular view towards understanding how the imposition of personal liability could influence their decision making structure.  Based on this research the paper will then attempt to reconcile the divergent incentives created by Baker in a manner that maintains the integrity and comprehensive nature of the bankruptcy regime while also accounting for the social costs of unremediated environmental contamination that frequently arises when a corporation is liquidated in bankruptcy.