Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5

Who is responsible for cleaning up the inactive wells of insolvent companies?

To address the unavoidable environmental costs and consequences of its lucrative oil and gas industry, Alberta has established a comprehensive cradle-to-grave licensing regime. A company will not be granted the licences that it needs to extract, process or transport oil and gas in Alberta unless it assumes end-of-life responsibilities for plugging and capping oil wells, dismantling surface structures and restoring the surface to its previous condition. The Alberta Energy Regulator (“Regulator”) administers Alberta’s licensing regime and enforces the abandonment and reclamation obligations of licensees. 

The question in this appeal was what happens to these obligations when a company is bankrupt and a trustee in bankruptcy is charged with distributing its assets among various creditors according to the rules in the Bankruptcy and Insolvency Act (“BIA”). Redwater Energy Corporation (“Redwater”) was a publicly traded oil and gas company. Upon entering into bankruptcy, its principal assets consisted of 127 oil and gas assets, and their corresponding licences.

The Regulator argued that the assets of the bankruptcy estate must be applied to meet the abandonment and reclamation responsibilities associated with its licensed assets. The trustee in bankruptcy argued that, under the priority scheme in the BIA, the claims of Redwater’s secured creditors must be satisfied ahead of Redwater’s environmental liabilities.

The Oil and Gas Conservation Act, the Pipeline Act and the Environmental Protection and Enhancement Act all contemplate that a licensee’s Regulatory Obligations will continue to be fulfilled when it is subject to insolvency proceedings. Every power which these Acts give the Regulator against a licensee can theoretically also be exercised against a trustee. A licensee that contravenes or fails to comply with an order of the Regulator, or that has an outstanding debt to the Regulator in respect of abandonment or reclamation costs, is subject to a number of potential enforcement measures. The Court held that a trustee in bankruptcy retains the responsibilities and duties of a “licensee” to the extent that assets remain in the bankruptcy estate.

The test for determining whether a particular regulatory obligation amounts to a claim provable in bankruptcy was set out in Newfoundland and Labrador v AbitibiBowater Inc
  • “First, there must be a debt, a liability or an obligation to a creditor. Second, the debt, liability or obligation must be incurred before the debtor becomes bankrupt. Third, it must be possible to attach a monetary value to the debt, liability or obligation.”
The Court clarified that Abitibi should not be taken as standing for the proposition that a regulator is always a creditor when it exercises its statutory enforcement powers against a debtor. A regulator exercising a power to enforce a public duty is not a creditor of the individual or corporation subject to that duty. Additionally, public obligations are not provable claims that can be counted or compromised in the bankruptcy. However, a regulator’s environmental claims will be provable claims under certain circumstances.

The Regulator was not a creditor within the meaning of the Abitibi test. The end-of-life obligations the Regulator sought to enforce against Redwater were public duties. Neither the Regulator nor the Government of Alberta stood to benefit financially from the enforcement of these obligations. These public duties were owed to fellow citizens—not to a creditor—and were therefore outside the scope of “provable claims”.
 

In determining whether a non-monetary regulatory obligation of a bankrupt is too remote or too speculative to be included in the bankruptcy proceeding, courts must apply the general rules that apply to future or contingent claims. It must be sufficiently certain that a regulator will enforce the obligation by performing the environmental work and seeking reimbursement. The Regulator is not in the business of performing abandonments. It has no statutory duty to do so, and the Regulator’s affiant stated that the Regulator had no intention of abandoning Redwater’s licensed assets. As such, even if the Regulator had acted as a creditor in issuing Abandonment Orders, it could not be said with sufficient certainty that the Regulator would perform the abandonments and advance a claim for reimbursement.

The Court concluded that the end-of-life obligations binding on the Trustee were not claims provable in the Redwater bankruptcy, so they did not conflict with the general priority scheme in the BIA. Requiring Redwater to pay for abandonment before distributing value to creditors did not disrupt the priority scheme of the BIA. The BIA explicitly contemplates that environmental regulators will extract value from the bankrupt’s real property if that property is affected by an environmental condition or damage.

Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. End-of-life obligations are imposed by valid provincial laws, which define the contours of the bankrupt estate available for distribution. Further, the BIA’s general purpose of facilitating financial rehabilitation is not relevant for Redwater. Corporations with insufficient assets to satisfy their creditors will never be discharged from bankruptcy because they cannot satisfy all their creditors’ claims in full. Thus, no conflict with this purpose is caused by the conclusion that the end- of-life obligations binding Redwater are not provable claims.

The Court allowed the appeal and granted the Regulator’s request for an order that the proceeds from the sale of Redwater’s assets be used to address Redwater’s end-of-life obligations.

Counsel: 

  • Solicitors for the appellants: Bennett Jones, CalgaryAlberta Energy Regulator, Calgary.

  • Solicitors for the respondents: Blake, Cassels & Graydon, Calgary; Cassels Brock & Blackwell, Calgary; Gowling WLG (Canada), Calgary.

  • Solicitor for the intervener the Attorney General of Ontario: Attorney General of Ontario, Toronto.

  • Solicitor for the intervener the Attorney General of British Columbia: Attorney General of British Columbia, Victoria.

  • Solicitor for the intervener the Attorney General of Saskatchewan: Attorney General of Saskatchewan, Regina.

  • Solicitor for the intervener the Attorney General of Alberta: Attorney General of Alberta, Edmonton.

  • Solicitor for the intervener Ecojustice Canada Society: Ecojustice Clinic at the University of Ottawa, Ottawa.

  • Solicitors for the intervener the Canadian Association of Petroleum Producers: Lawson Lundell, Calgary.

  • Solicitors for the intervener Greenpeace Canada: Stockwoods, Toronto.

  • Solicitor for the intervener Action Surface Rights Association: University of Calgary Public Interest Law Clinic, Calgary.

  • Solicitors for the intervener the Canadian Association of Insolvency and Restructuring Professionals: McMillan, Calgary.

  • Solicitors for the intervener the Canadian Bankers’ Association: Norton Rose Fulbright Canada, Calgary.

 

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