Insolvency and Environmental Issues Before the Supreme Court of Canada

On January 31, 2019, the Supreme Court of Canada decided, in Orphan Well Association v. Grant Thornton Ltd., that a provincial regulator, in this case the Alberta Energy Regulator (the “AER”), can enforce end-of-life obligations with respect to oil wells, pipelines and other provincially regulated facilities belonging to a bankrupt company or its trustee in bankruptcy, even if the enforcement orders adversely affect the assets in the bankrupt’s estate and its secured creditors. 

Redwater Energy Corp. (“Redwater”) obtained its licence to extract, process or transport oil and gas in Alberta on the condition that it assume end-of-life obligations known as “abandonment” and “reclamation” for certain assets. When Redwater was placed under receivership, the AER notified the trustee Grant Thornton Ltd. (“GTL”) that it was legally bound to fulfil abandonment obligations for all assets covered by Redwater’s licences before distributing any funds or finalizing any proposal to creditors. GTL decided that because of the high cost of the end-of-life obligations for certain spent wells, it would not take possession or control of them. GTL then maintained that it had no obligation to fulfil any regulatory requirements associated with these disclaimed assets. The judge at first instance and the majority of the judges of the Alberta Court of Appeal agreed with GTL. 

The Bankruptcy and Insolvency Act (the “BIA”), a federal statute, governs the administration of the estate of a bankrupt and the orderly and equitable distribution of property among its creditors. In this instance, GTL maintained that the AER’s use of its powers under Alberta’s provincial legislation to enforce compliance with Redwater’s environmental obligations during the bankruptcy proceedings was incompatible with the BIA, for two reasons. First, according to GTL, the orders issued by the AER imposed on GTL the obligations of a licensee in relation to the Redwater assets disclaimed by it, contrary to s. 14.06(4) of the BIA. Second, the orders issued by AER upended the priority scheme for the distribution of a bankrupt’s assets by requiring that the provable claims of the AER, an unsecured creditor, be paid ahead of the claims of Redwater’s secured creditors. 

In a 5-2 decision, the Supreme Court held that AER’s use of its statutory powers did not create a conflict with the BIA so as to trigger the doctrine of federal paramountcy. The Court interpreted s. 14.06(4) of the BIA as concerning the personal liability of the trustee and not affecting the environmental liabilities of the estate administered by it. The Court also found, by applying the test it set out in Newfoundland and Labrador v. AbitibiBowater Inc. (2012 SCC 67), that the end-of-life obligations incumbent on GTL were not provable claims in the bankruptcy of Redwater. 

The Redwater decision thus makes it clear that by exercising a power to compel compliance with a public duty, a regulator does not automatically become a creditor of the individual or corporation bound by that duty. This decision is primarily of interest to secured creditors, who will now have to analyze their investments in terms of the environmental liabilities associated with the secured assets, and the regulatory power of any governmental authority with respect to those liabilities. Creditors will have to ask themselves whether it would be financially reasonable to institute insolvency proceedings, in light of the potential environmental obligations of the debtor. 

The Supreme Court’s decision does not distinctly expand upon or clarify the doctrine of federal paramountcy, and consequently has limited value as a precedent in proceedings before Quebec courts on the application of the provincial authorization framework to federally regulated activities. However, the decision does provide food for thought on the handling of bankruptcy files involving environmental obligations and on the enforceability of orders under Quebec’s Environment Quality Act. These are definitely developments to be monitored by bankruptcy and insolvency practitioners and by environmental lawyers.

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