Bellatrix Exploration Ltd.

Does the court have discretion to allow an eligible financial contract be disclaimed on the basis of unfairness?

Bellatrix obtained protection from its creditors under the Companies’ Creditors Arrangement Act (the “CCAA“). Bellatrix and BP were parties to certain contracts for the purchase and sale of natural gas (the “Contract”). On November 25, 2019, while under CCAA protection, Bellatrix purported to disclaim the Contract. The next day, Bellatrix ceased delivery of natural gas under the Contract.

BP argued that the disclaimer notice provided by Bellatrix was a nullity. Bellatrix estimated that it could realize an additional $14.2 million if, instead of continuing to deliver natural gas to BP under the Contract, it disclaimed the Contract and sells that volume of gas locally in Alberta. At issue was whether the Contract constituted an Eligible Financial Contract (“EFC“) for CCAA purposes. If the Contract is an EFC, then Bellatrix was not permitted to disclaim it.

Section 32(1) of the CCAA allows a debtor company to disclaim any agreement to which it is a party on the day on which proceedings commence under the CCAA. The company’s ability to disclaim, however, is subject to notice provisions and other limitations. Section 32(9) provides that section 32(1) does not apply to, inter alia, an EFC. Therefore, if the contract is an EFC, Bellatrix cannot disclaim it.

One of Bellatrix’s arguments was that the Court is to apply a “fair results” test under which it may determine that even if the form of contract constitutes an EFC and cannot therefore be disclaimed, the Court may decline to characterize the contract as an EFC if it would be unfair to do so.

The jurisprudence notes that fairness may enter the analysis at the time that a court is considering if an agreement meets the definition of an EFC. This was clearly different from Bellatrix’ proposition that even though an agreement clearly meets the definition of an EFC, it can nevertheless be declared by the court not to be one.

The CCAA imposes two impediments to unrestrained disclaimer. First, section 32(9) has the effect of removing an EFC from a debtor company’s power to disclaim. Second, section 32(4) directs the court to consider various factors in deciding whether a non-EFC should be disclaimed.

If there is to be an exception to disclaimer for EFCs, parties to agreements must be able to count on that exception meaning something. Agreements negotiated at considerable expense, reflective of industry practice and understanding, cannot be subject to effective wholesale revision by a CCAA court, such that parties’ legitimate expectations are always going to be at risk of a CCAA court finding unfairness. To allow a court to find an agreement that otherwise clearly fits within the definition of an EFC to not be an EFC, is to allow a court to effectively rewrite that agreement.

An agreement for physical delivery of natural gas is not, a priori, disqualified as an EFC. A financial agreement is one which serves an important financial purpose. All of the arrangements which fall within the definition of EFC share a common theme—the management of financial risk inherent in business transactions.

In this case, the Contract seeks to achieve price diversification; that is a financial purpose. The Contract was part of Bellatrix’ hedging program. It was an important part of a collection of agreements that play a role in Bellatrix’ financial management undertakings. The Court concluded that the Contract was an EFC.

CounselRobert Chadwick of Goodmans LLP for Bellatrix Exploration Ltd., Gunnar Benediktsson of Norton Rose Fulbright for BP Canada Energy Group ULC, James Reid and Kelly Bourassa of Blakes for the First Lien Lenders and Josef Kruger of BLG for PricewaterhouseCoopers

Judge: The Honourable Mr. Justice Jones of the Court of Queen’s Bench of Alberta

 

Fullcase: https://mcusercontent.com/a3e2039936cbf8a31bda45ab3/files/8724d120-603e-4f43-9c18-f16d498d4eba/Bellatrix_Jones_reasons_for_judgment.pdf

 

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