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Northstar liability fight casts pall over country’s boardrooms

Directors and officers of defunct Northstar Aerospace Inc. are being held personally responsible for a $15-million cleanup of a polluted parcel of company land.

Fred Lum/The Globe and Mail

An Ontario government order holding directors and officers of defunct Northstar Aerospace Inc. personally responsible for a $15-million cleanup of a polluted parcel of company land is sending a chill through the country's community of corporate directors.

Northstar's directors have launched an appeal of an Ontario Environment Ministry ruling holding them liable for cleaning up abandoned land, saying the order flies in the face of legal principles that limit the personal liability of individuals working for an incorporated company.

The group of 13 executives and directors was ordered by the province last year to personally pay for the remediation of polluted land in Cambridge, Ont. Northstar, a maker of helicopter parts, had filed for bankruptcy protection in 2011 and its assets were sold, leaving no one to pay for the ongoing cleanup of the site.

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The case has raised concerns that people may be reluctant to join companies with industrial land for fear of being held personally responsible for cleanup costs.

Stan Magidson, chief executive officer of the Institute of Corporate Directors, which represents 7,500 corporate directors in Canada, said the ICD has submitted a third-party witness statement in the Northstar appeal, the first time the organization has intervened in a legal matter.

The ICD argues that Ontario's Environmental Protection Act allows directors to be held liable for pollution when they are negligent in preventing the contamination.

But Mr. Magidson said directors should not be held liable for pollution they "did not cause and could not prevent" and when they were diligent in their duties.

"We hope this case will make it clear directors will not be held liable if they acted responsibly," Mr. Magidson said in an interview. "If it were otherwise, this would have a chilling effect on directors joining boards of companies that have operations in Ontario that impact the environment, and this will be detrimental to Ontario's economy."

Northstar reported the contamination when it was detected in 2004 and spent more than $20-million cleaning the site before filing for bankruptcy. Many directors joined the board in recent years, long after the pollution occurred and while it was being cleaned up. One director, Neil Baker, joined the board of Northstar's parent company in 2009 and was never on the board of the Canadian operating company.

The appeal is scheduled to begin Oct. 28 before the province's Environmental Review Tribunal, which hears appeals of cases involving Environment Ministry orders.

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Economist Sherry Cooper, who was hired by the directors' legal team to prepare a report on the implications of the Northstar ruling, warns the cost order will make it more difficult for companies to attract good directors, and could cost the Ontario economy millions because of "reduced business development, the potential closing of some existing operations and the commensurate loss of jobs, exports and income."

Northstar found high levels of chromium and trichloroethylene (TCE) – a carcinogen used in metal degreasers – in the soil, air and water around houses near the Cambridge plant. Since detection in 2004, 461 houses have received ongoing indoor air monitoring, and many still have machines in place to extract vapours. The Environment Ministry said continued operation and monitoring of the equipment is essential, and has also ordered directors to pay for continuing treatment of groundwater around the site.

The ministry said it has an established right to collect money from a company's directors to clean up polluted land. Jane Glassco, district manager of the ministry's Guelph office, said in a filing in the appeal case that the directors and officers are "the only remaining responsible parties" the ministry could order to take over the cleanup.

"I am not alleging that the directors and officers in any way caused the discharge of the TCE and chromium," she said. "However, once the magnitude of the contamination and the need for a long-term remediation effort became known, the directors and officers ought to have set aside and secured the funds necessary to complete the remediation. They did not set aside any amount of funds."

The Northstar directors argue that the Canadian process for bankruptcy protection did not allow them to finance the environmental cleanup ahead of the rights of secured lenders. Lawyer Dianne Saxe, who is representing Mr. Baker, said many valid claims unfortunately go unpaid in bankruptcies, "but they don't have a right to make the officers and directors pay for it."

The point of incorporating a company is to shelter individuals from a company's liabilities, she added.

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Northstar's former directors have so far had to pay more than $500,000 to cover cleanup costs, Ms. Saxe said. She said their money is not refundable even if the order is overturned on appeal.

It is not clear Northstar caused the TCE contamination on the site. A report from an environmental consulting firm that has worked on the site cleanup since 2004 says the pollution appears to have occurred before Northstar bought the site in 1985. In the 1960s and 1970s, it was common to dispose of TCE by pouring it on the ground, according to the report by AMEC Environment & Infrastructure.

Northstar used TCE on the site, but the report said there is no evidence of any spill after it bought the property, although there was a spill of chromium on the site which appears to be a cause of chromium pollution. AMEC says TCE accounts for 95 per cent of the contamination around the site.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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