Newfoundland and Labrador called on the Harper government Friday to change corporate bankruptcy laws after it lost a major environmental appeal before the Supreme Court of Canada.

The province failed in its bid to force the newsprint giant, formerly known as AbitibiBowater Inc., to pay for an environmental cleanup, as the Supreme Court sided with the company in a 7-2 ruling.

The province's attorney general called for legislative changes after Friday's ruling, which acknowledged the so-called "polluter pay" principle. But that wasn't enough to give the province the legal victory that eluded it Friday for the third time.

Tom Marshall, the attorney general for Newfoundland and Labrador, said the public would be upset that the Supreme Court equated regulatory orders designed to protect the public with the "ordinary claims of creditors."

Marshall said the federal government must rethink insolvency laws that essentially leave taxpayers holding the bag for pollution caused by insolvent companies.

Environmental groups agreed the ruling would leave taxpayers to foot the bill for future clean-ups.

The province wanted the Supreme Court to decide whether a debtor's statutory duty to remove environmental contamination is extinguished under Companies' Creditors Arrangement Act.

The company, now operating as Resolute Forest Products (TSX:RFP), had filed for protection under the act in 2009.

The province wanted to force the company to clean up five contaminated sites, estimated to cost more than $100 million.

They include a defunct Grand Falls-Windsor paper mill in central Newfoundland that the province expropriated in December 2008.

The Supreme Court ruled against the province, essentially telling it that it had to get in line with other creditors.

Writing for the majority, Justice Marie Deschamps, now retired, said allowing the province to operate outside the bankruptcy law regime would be akin to asking all other creditors to pay the province.

The ruling acknowledged the "polluter pay" principle but said in this case it did not give the province any special status that would move it ahead of other creditors.

"In the insolvency context, the province's position would result not only in a super-priority, but in the acceptance of a 'third party-pay' principle in place of the polluter-pay principle," Deschamps wrote.

"Nor does subjecting the orders to the insolvency process amount to issuing a licence to pollute, since insolvency proceedings do not concern the debtor's future conduct. A debtor that is reorganized must comply with all environmental regulations going forward in the same way as any other person."

The case has been politically charged and attracted attention from the governments of Alberta, Ontario and British Columbia as well the environmental groups, which were all granted intervener status.

Outside the legislature in St. John's, the provincial attorney general said he was disappointed with the ruling.

"Thank God we expropriated. If we hadn't expropriated, the company still would have gone into ... bankruptcy protection and we would have been left with nothing but the contaminated assets," said Marshall.

"By expropriating, we got the valuable assets — we got the power plant, we got the water rights, we got the valuable timber and we got the land that wasn't contaminated."

The province rushed through legislation to seize Abitibi timber and water rights, along with a hydroelectric power station, after the failing company announced it was closing the Grand Falls-Windsor mill.

Later, the federal government agreed to pay AbitibiBowater $130 million to settle a claim under the North American Free Trade Agreement.

A spokesman for the company said Friday it was pleased with the decision. "The decision of the Supreme Court speaks for itself," said Seth Kursman.

Environmental groups said the ruling was bad news for taxpayers.

"The Supreme Court missed an important opportunity to affirm the correct application of the 'polluter pays' principle in insolvency proceedings," said Beatrice Olivastri, the head of Friends of the Earth Canada.

"This case is a loss for the environment."

The ruling will ultimately have a negative effect on the ability of provinces to deal with polluters, she said.

Olivastri predicted the provinces will have to ensure companies "have enough money in the pot" to pay future cleanups at the time they grant licences for new projects.

Ecojustice lawyer William Amos, who represented Friends of the Earth, said the high court missed a chance to infuse insolvency law with the polluter-pay principle.

"And ultimately, unless the federal government goes about amending federal insolvency law, taxpayers may end up on the hook for significant environmental liabilities because provinces will be in a much more difficult situation," he said.

"They will find it much more difficult to issue an order to remediate if companies will simply anticipate being able to argue that they should get in line with the rest of the creditors."

Remediation orders will have to be issued and acted upon well before a company goes under, Amos said.

"This decision demonstrates clearly that federal insolvency laws require significant reform so that they don't serve to protect companies and investors at the expense of taxpayers and regulators. The Companies' Creditors Arrangement Act must be amended by Parliament so that taxpayers aren't left holding the bag when companies go insolvent."

Amos said corporations often use bankruptcy as a strategic move to restructure debt, and not necessarily purely because of financial crisis.

The Supreme Court addressed that point in its ruling, and disagreed.

"No matter what risks are at issue, reorganization made necessary by insolvency is hardly ever a deliberate choice. When the risks materialize, the dire costs are borne by almost all stake holders," Deschamps wrote.

"To subject orders to the claims process is not to invite corporations to restructure in order to rid themselves of their environmental liabilities."

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  • Pollution By Province

    Here's a list of each province's contribution to Canada's overall emissions in 2009.<br><br>Source: <a href="http://nrtee-trnee.ca/wp-content/uploads/2012/06/reality-check-report-eng.pdf" target="_hplink">National Round Table on the Environment and the Economy.</a> Data. from Environment Canada. (Alamy)

  • P.E.I. - 0 Per Cent

    P.E.I's 2009 contribution was 2 megatonnes carbon-dioxide equivalent (Mt) or less than 1 per cent of Canada's total. (MICHEL VIATTEAU/AFP/Getty Images)

  • Newfoundland And Labrador - 1 Per Cent

    Newfoundland and Labrador's 2009 contribution was 10 Mt. (<a href="http://www.flickr.com/photos/60548141@N00/" target="_hplink">Flickr: magnolia1000</a>)

  • New Brunswick - 3 Per Cent

    New Brunswick's 2009 contribution was 18 Mt. (Luke Pinneo/Getty Images)

  • Manitoba - 3 Per Cent

    Manitoba's 2009 contribution was 20 Mt. (<a href="http://www.flickr.com/photos/jezz/">Flickr: Jezz's Photostream</a>

  • Nova Scotia - 3 Per Cent

    Nova Scotia's 2009 contribution was 21 Mt. (Tim BREAKMEIE/AFP/Getty Images)

  • B.C. - 9 Per Cent

    B.C.'s 2009 contribution was 64 Mt. (PUNIT PARANJPE/AFP/Getty Images)

  • Saskatchewan - 11 Per Cent

    Saskatchewan's 2009 contribution was 73 Mt. (<a href="http://www.flickr.com/photos/justaprairieboy/">Flickr: Just a Prairie Boy's photostream</a>)

  • Quebec - 12 Per Cent

    Quebec's 2009 contribution was 82 Mt. (Alamy)

  • Ontario - 24 Per Cent

    Ontario's 2009 contribution was 165 Mt. (GEOFF ROBINS/AFP/Getty Images)

  • Alberta - 34 Per Cent

    Alberta's 2009 contribution was 234 Mt. (MARK RALSTON/AFP/Getty Images)