Redwater overturned by Supreme Court of Canada: a provincial regulator may insist on the satisfaction of environmental liabilities in an insolvency

In a 5:2 decision issued earlier today, the Supreme Court of Canada overturned the Alberta Court of Appeal’s decision in Orphan Well Association v Grant Thornton Ltd. (also known as Redwater).

The practical effect of today’s decision is that, in an insolvency, the Alberta Energy Regulator (AER) may require the satisfaction of abandonment and reclamation liabilities from the debtor’s estate, thereby reducing what is available for distribution even to prior-ranking secured creditors.

SCC decision

A majority of five of the seven judges who heard the SCC appeal overturned the Alberta Court of Appeal’s decision, thus recognizing that a provincial regulator (the AER specifically) can use its regulatory authority over licensing and license transfers to ensure the satisfaction of abandonment and reclamation liabilities before the marketable assets of an insolvent company are sold to satisfy the claims of creditors, including secured creditors.

The following determinations were key to the majority’s decision:

• Section 14.06(4) of the Bankruptcy and Insolvency Act (BIA) should not be given the broad interpretation that was accepted by the two lower courts. That provision does not protect the bankrupt estate from certain environmental liabilities associated with disclaimed assets, but instead only relates to the personal liability of trustees.
• The AER did not assert a claim provable in bankruptcy and was not a creditor. It instead exercised a power to enforce a public duty. There was therefore no basis for finding an inconsistency between the AER’s regulatory orders and the federally legislated priority scheme in the BIA.
• Insolvency professionals must comply with valid provincial laws and satisfy the non-monetary obligations that are binding on a bankrupt estate.

Ultimately, the majority accepted that Alberta’s regulatory regime could coexist and not conflict with the BIA.

Two judges dissented, identifying an operational conflict between the provincial regulatory regime and the BIA and a frustration of the BIA’s purpose, thus rendering the provincial regulatory regime ineffective in the circumstances.

Background

Alberta Treasury Branches had a receiver appointed over Redwater Energy Corporation. The receiver only took control of a fraction of Redwater’s licensed oil and gas properties because the majority were near the end of their productive lives and non-producing. The AER then issued closure and abandonment orders for all of Redwater’s licensed properties, including the subset that the receiver had taken control of and intended to sell. The receiver was subsequently appointed as trustee in bankruptcy. The trustee then purported to disclaim the unsaleable assets.

The AER and Orphan Well Association (OWA) applied to challenge the disclaimer and the trustee applied for court approval of a sale process that excluded the disclaimed assets. The fundamental issue was whether a provincial regulator like the AER could interfere with license transfers for Redwater’s marketable assets as a means of compelling the satisfaction of abandonment and reclamation liabilities associated with Redwater’s unmarketable assets.

At first instance, Wittmann C.J. held in part that the AER’s closure and abandonment orders had frustrated the federal disclaimer power under s. 14.06 of the BIA. The doctrine of federal paramountcy was therefore engaged, rendering the AER’s orders inoperative to the extent they conflicted with the federal legislation.

Wittmann C.J.’s decision was upheld by the Alberta Court of Appeal in a 2:1 split decision. The majority agreed that federal paramountcy rendered the AER’s closure and abandonment orders ineffective: “It follows that under the proper interpretation of the BIA, the Regulator cannot insist that the Trustee devote substantial parts of the bankrupt estate in satisfaction of the environmental claims in priority to the claims of the secured creditor.”

Martin JA (as she then was) dissented.

The AER and OWA pursued a further appeal that was heard by the SCC on February 15, 2018. The SCC allowed the appeal earlier today.

Howard A. Gorman, QC and D. Aaron Stephenson from Norton Rose Fulbright Canada LLP acted as counsel to the intervener, the Canadian Bankers’ Association.