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    Court allows Nortel to walk away from clean-up costs that are estimated at $18 million
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    It is no surprise that Nortel is insolvent and seeking to restructure under the Companies' Creditors Arrangement Act ("CCAA"). What is a surprise is the ruling this month of the Ontario Superior Court of Justice that the Ministry of Environment ("MOE") orders which require Nortel to perform environmental clean-up work do not take priority ahead of other obligations. Since complying with the orders would require Nortel to expend funds the environmental liabilities are found to amount to a financial obligation and are stayed by the CCAA proceedings and therefore would be more properly addressed as a claim in the process.

    Nortel owned and conducted manufacturing business at multiple sites using processes that involved hazardous substances, particularly, chlorinated solvents. Nortel has identified environmental impacts at five of these sites. Prior to the CCAA process being initiated Nortel no longer owned the impacted sites except for a partial interest in one site although it was conducting some remedial activities at the sites. The MOE had not issued orders requiring clean-up actions at the time the CCAA action was commenced but rather draft orders after. The work required under these orders is estimated to cost $18 million.

    Nortel asked the court to make a determination that the MOE orders were subject to the stay as Nortel argued the orders were fundamentally attempts to enforce financial obligations. The MOE argued the activities required by the MOE were performance-based regulatory obligations which were exempt from the stay.

    The Justice began his decision by pointing out that it is "necessary to emphasize: insolvency statutes such as the CCAA and the BIA do not mesh very well with environmental legislation." The court found that the reality of Nortel's insolvency means the MOE orders can amount to nothing but an attempt to enforce a financial obligation which is prohibited by the stay. Justice Morawetz concluded "that any money expended by Nortel in respect of MOE obligations is money that is directed away from creditors participating in the insolvency proceedings. The same insolvency considerations ought to apply regardless of who received the money."

    The CCAA and BIA are drafted such that for companies with on-going operations they must comply with environmental legislation, the environmental liabilities of those like Nortel, which are no longer operating, are dealt with by way of a charge over the property in favour of the MOE. In this situation since Nortel no longer holds an interest in the sites in question there is no property to charge and the MOE is left to file a claim primarily as an unsecured creditor.

    This is a major blow to the MOE. I would expect, to start with, this decision will be appealed by the MOE. Additionally we might see some legislative amendments proposed. To view the decision click on this link

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