Canada: The Tides Have Turned With Redwater: Provincial Environmental Obligations Have Priority Over Secured Creditors In A Bankruptcy

Last Updated: February 12 2019
Article by Maurice V. Fleming, Harriette E. Codrington and Bonnie Fish

In the much anticipated decision, Orphan Well Association et al. v. Grant Thornton Limited et al.1, (Redwater), the Supreme Court of Canada (SCC) held that a bankrupt estate is required to comply with environmental obligations imposed by a provincial regulator before distributing assets to secured or unsecured creditors. Redwater alters the scheme of distribution and payment priorities under the Bankruptcy and Insolvency Act2 , (BIA) and the expectations of numerous stakeholders in the Canadian energy and financial services industries.


Redwater Energy Corp. (RECorp) was a publicly traded oil and gas company whose primary assets consisted of wells, pipelines and facilities and licenses issued by the Alberta Energy Regulator (AER). When RECorp experienced financial difficulties in 2014, ATB Financial, its senior secured creditor, obtained an order appointing Grant Thornton Limited (GTL) as RECorp's receiver, and eventually, its trustee in bankruptcy.

The dispute in Redwater concerned the bankrupt estate's obligation to comply with provincial environmental laws concerning abandonment and remediation of uneconomic oil and gas wells, known as end-of-life obligations. The AER imposes end-of-life obligations on licensees to render spent oil wells environmentally safe at the end of their life span. GTL determined that the cost of the end-of-life obligations for RECorp's spent wells would exceed the sale proceeds for its productive wells and therefore renounced the spent wells. GTL maintained that it was not obligated to fulfil regulatory requirements associated with the renounced assets.

In response, the AER issued abandonment and reclamation orders respecting the renounced wells. GTL asserted that it was not a "licensee" of the wells, refused to comply with the AER's orders, and disclaimed the renounced assets in bankruptcy. AER took the position that GTL's disclaimers were unlawful.

Both the Alberta Court of Queen's Bench and Court of Appeal found that Alberta's environmental regulatory scheme conflicted with the BIA. Both Courts held that the BIA was paramount legislation and therefore the trustee was not required to satisfy provincial abandonment and reclamation liabilities in priority to claims of secured creditors. GTL was justified in disclaiming the end-of-life assets to maximize recovery for the bankrupt's estate.

The Issues addressed by the SCC

On appeal the SCC focused primarily on the following issues:

  • Does Alberta's regulatory regime conflict with the BIA and if so was the BIA paramount?
  • Is AER a creditor of the bankrupt and its environmental claims provable in bankruptcy?
  • Is a trustee or receiver a 'licensee" subject to the orders of the AER?
  • Can a trustee or receiver use the BIA to disclaim abandoned assets?
  • How does the provincial priority claim affect creditors of the bankrupt estate?

The Decision

Conflict and Paramountcy

Chief Justice Wagner, writing for the majority, concluded that there was no "operational conflict" between the BIA and the provincial environmental regulatory regime which would render compliance with both legislative schemes impossible. The SCC endorsed the principle of co-operative federalism; "courts should avoid an expansive interpretation of the purpose of federal legislation which will bring it into conflict with provincial legislation".

AER's Status as a Creditor

The Court found that the AER was not a creditor of the bankrupt estate3 . The SCC reasoned that AER would not be enriched by the super priority it was trying to enforce. It was acting in the public interest, rather than in its own interest, to ensure that abandoned wells were remediated. As the AER was not asserting a claim provable in bankruptcy, the SCC held that AER's claims were outside of the BIA's statutory priority scheme.

Ability to Disclaim Abandoned Assets under the BIA

The SCC found that GTL was a "licensee" of the wells and a stay under the BIA did not prevent this result. The SCC also found that since GTL was not exposed to the risk of personal liability, GTL could not disclaim the abandoned wells under the BIA. The assets of the bankrupt estate were therefore available to satisfy the end-of-life environmental obligations enforced by the AER.

Effect on Priority of Creditors

As the SCC held that the AER was not asserting a 'provable claim in bankruptcy', the BIA did not stay AER's power to enforce end-of-life obligations. Remediation costs are not 'debts', and therefore the assets of the bankruptcy estate were available to satisfy pre-existing remediation costs of the abandoned wells, ahead of the secured creditors. The result is a 'super-priority' for environmental remediation.


Impact of Redwater

  • Redwater takes a 'polluter pays' approach and fundamentally redirects asset value away from secured creditors.
  • Redwater may directly affect the value of assets in some industries and deter lenders from committing capital to going-concern businesses, or insolvency professionals from accepting mandates in distress situations.
    • Lack of certainty for lenders regarding future outcomes will impact credit applications. Restrictions on liquidity negatively impact pricing and credit limits, particularly with smaller entities in exposed industries and may result in a credit chill, or reallocation of assets and lending covenants used in securing corporate liquidity for committed loans.
    • Increased uncertainty for insolvency professionals (trustees, receivers, etc.) about their ability to use statutory protections in accepted mandates could lead to fewer restructuring or liquidation proceedings to maximize value in an estate falling within regulatory control. Court supervised sales and other going concern value recovery proceedings under the CCAA, BIA, among others, may be discouraged in some circumstances
  • Regulatory uncertainty and regulator super-priority, may reduce the appetite for going concern asset sales in formal and out of court restructuring situations. Exposing assets to the broader market can result in surprisingly good recoveries, including potential surpluses for subordinate creditors and equity holders. These sales are now less likely.
  • By the time a liquidation proceeding is commenced, it is often too late to fully remediate. Regulators may intervene earlier while there is still a business to save.
  • With a new 'super priority', it is unclear how regulators like the AER will sort out their interpriority status with others, such as CRA.
  • Paramountcy is now much more narrowly applied and therefore bankruptcy proceedings involving provincial regulators more uncertain. Uncertainty is most acute in the environmental sphere, Redwater may affect other areas like priority of pension rights.


Banks and Lenders: As proceeds from collateral must cover environmental liabilities first, lenders should re-examine their credit matrixes for risk assessments in lending or realization situations. This may require refreshed legal and valuation opinions at the inception of loans, or commencement of insolvency and restructuring proceedings. Secured creditors will be asked to provide more fulsome indemnities to insolvency professionals to cover fees and expenses that may not be recoverable from the estate assets under applicable court orders.

Energy extraction companies: Anticipate increased uncertainty in obtaining credit or in crisis management. Timelines will likely be extended and cost estimates for positive outcomes may change. Situational and fact specific guidance to boards of directors and management of distressed entities and their stakeholders will be required.

Insolvency professionals: With BIA protections including disclaimer rights and assets available for administrative primed charges under court orders curtailed, roll up assessments and valuations are now more important than ever in exposed industries. Before accepting mandates in files with regulatory obligations, the requirement for secured indemnities from sponsoring constituencies is highly recommended.

Businesses generally: If you operate in an area of heightened regulatory compliance, there may be greater expectations imposed by regulators in the shorter term. This will vary depending on the province of operation and the nature of business, with environmental risk being a key factor.

Land owners in Alberta: Take heart in the increased resources allocated to environmental remediation requirements of third parties on your lands.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions