An important bankruptcy case came down today from the Supreme Court of Canada, Orphan Well Association v. Grant Thornton Ltd. It is about who pays to clean up contaminated properties when the owner goes bankrupt. It made a lot of headlines, like “Supreme Court of Canada says bankrupt energy companies must clean up old oil, gas wells before paying off creditors,” and will impact how people do business in Canada.

It’s great news for the environment, this has been a massive loophole for years where, in the worst instances, companies could hive off contaminated properties to smaller companies, or sell them to smaller high-risk companies, and then let them go bankrupt, leaving no-one to clean up the mess, but the taxpayer. This has been going on in both the states and Canada, in the oil & gas sector and others.

The broader issue was described well by Tori Crawford in her 2014 prize-winning student paper,

The idea that Canada’s insolvency regime and environmental regulations are often in tension is hardly a novel one. At the root of this conflict are a number of competing policy objectives: protecting the public’s interest in a safe and clean environment, preventing companies from treating insolvency as a “regulatory car wash”, and allowing debtors to obtain a fresh start by either restructuring or discharging their debts.

In other words, bankruptcy courts play a balancing act between discharging the bankrupt, paying creditors, and protecting the public. Until today the balance was often found in prioritising paying creditors over protecting the public, as far as the environment is concerned.

But, the court was clear today that “bankruptcy is not a license to ignore rules..” .

So, how does that affect liability for climate change damage? Of which there is potentially plenty in just the last month, including 11 deaths so far from the polar vortex, world-heritage old-growth rainforests burning in Tasmania, mass death of wild horses in Australia due to a heat wave, and a confirmation from the Pentagon that climate change leads to more wars and refugees. And it’s also important to note that so far the costs of dealing with climate-impacts have been borne by the impacted and the taxpayer, if they have been dealt with at all.

But right now businesses are not really liable for climate damage, at least in practice. One could easily argue that there is currently no liability for businesses regarding climate change. However, the rules are changing there too.

A recent article in Insurance Business Magazine noted that the risks regarding climate change are changing for businesses. The article notes three kinds of risk for business in relation to climate change;

• Physical risks are those that might impact businesses of all kinds as climate change-related events lead to physical damage to business property, assets or supply chains.
• Transition risks are those that arise as the worldwide shift to a low or zero carbon economy impacts the finances and valuations of organizations and asset portfolios.
• Liability risks are faced by those alleged to be responsible for (for example) contributing to climate change, or failing to avert, minimize, or report on physical or transition risks.

The third is the key here, and there is lots of discussion out there on the topic. The rules are changing. So, when the SCC said today, “bankruptcy is not a license to ignore rules,” what will that mean as the rules adapt to climate-impact liability?

Well, if the rule becomes that companies are potentially liable for climate-impacts, then their liability will extend to within the bankruptcy process, and could take priority over  creditors. Climate litigation is growing exponentially, and this case opens up the possibility of going after the assets of bankrupt companies, and, again, critically –  getting priority over creditors.

If climate litigants actually take that course, or even if they do not, it should be a red-flag and lead potential investors to more fully explore any climate-impact liabilities of companies and assets before purchase or investment.

Buyer beware!