Canada: Seismic Shift For Lenders To The Resource Sector: Supreme Court Of Canada Rules That A Company's Environmental Liability Can Rank In Priority To Secured Debt


A recent Supreme Court of Canada decision commonly referred to as Redwater marks a seismic shift in Canadian insolvency law. The case is causing uncertainty throughout Canada's secured lending community, which now faces new and unexpected risks.

In Orphan Well Association v Grant Thornton Limited, 2019 SCC 5 (Redwater), a majority of the Supreme Court of Canada ruled that provincial legislation governing the abandonment and remediation of oil and gas assets and associated sites was effective in spite of federal bankruptcy and insolvency legislation governing trustees' rights and duties in relation to environmentally-impacted property. The decision also dealt with the priority of repayment to creditors out of a bankrupt estate.

Based upon the Supreme Court's decision, an insolvent company's environmental liabilities, which may engulf the realizable value of the insolvent estate, can have priority over any distributions to secured creditors. The decision has raised the spectre of zero-recovery insolvencies, even for senior secured lenders.

While the Redwater decision was made in the context of oil and gas remediation, the decision will have significant implications in a variety of industries where environmental regulation is a significant issue, including mining and manufacturing.


The legislation

The Oil and Gas Conservation Act and Pipeline Act form part of the regulatory scheme that governs Alberta's oil and gas sector. Under that legislation, industry participants must be licenced to begin operation. Those licences are issued by the Alberta Energy Regulator (the Regulator). One of the objectives of the licensing scheme is the management of environmental risks. Attaching to each licence are various "end-of-life" obligations that require licence holders to remediate properties once they have reached the end of their useful lives or been abandoned.

To ensure that these obligations are met, the Regulator imposes strict limitations on the transfer of licences. In particular, the Regulator will not permit a transfer where the effect of that transfer would be to reduce one of the parties' asset value to environmental liabilities ratio to less than two (2.0).

The Bankruptcy and Insolvency Act (BIA) is one of Canada's primary insolvency statutes. The BIA prescribes a "waterfall" of repayment obligations, the effect of which is to rank various kinds of debt and pay out according to the priority scheme set out in section 136 of the BIA.


The oil and gas assets in this case were formerly owned and operated by Redwater, a publicly traded corporation with operations in central Alberta. Prior to its bankruptcy, Redwater possessed 84 wells, 7 facilities and 36 pipelines, each of which was subject to a licence. Redwater was also party to a secured loan agreement, under which it owed approximately $5.1 million. In mid- 2014, Redwater encountered financial difficulties and eventually became bankrupt, at which time Grant Thornton Limited (GTL) was appointed trustee in bankruptcy and initiated a liquidation sales process.

On learning of Redwater's insolvency, the Regulator sent a letter reminding GTL of Redwater's outstanding environmental obligations. The Regulator advised that, under Alberta legislation, the trustee in bankruptcy was a deemed licensee, and therefore subject to the same end-of-life obligations as had been the bankrupt licensee—in this case, Redwater. The Energy Regulator further advised that, per its licence transfer policy, it would deny any application to transfer the valuable licences pending satisfaction of the end-of-life obligations or the posting of security in the full amount of such obligations, as Redwater's asset to liability ratio was currently less than one. Denial of license transfers would render Redwater's assets effectively unsaleable, as the assets can only be exploited lawfully with the regulatory licenses in place.

GTL responded that it was under no such obligation. Specifically, it asserted that it was entitled under the BIA to disclaim assets with negative realizable value, and advised that it had done so in respect of 107 of Redwater's licensed properties. GTL argued that it had no responsibility with respect to Redwater's former environmental obligations, and that any attempt by the Regulator to block the transfer of the licences for assets that had positive net realizable value would be a violation of the BIA.

At trial, the Alberta Court of Queen's Bench agreed with GTL's argument and concluded that the Alberta legislation was inoperative to the extent that it conflicted with GTL's rights under federal bankruptcy law. A majority agreed at the Court of Appeal of Alberta. The Regulator and the Orphan Well Association appealed.


At the Supreme Court of Canada, a 5-2 majority overruled the Court of Appeal's decision. Specifically, the Court held that Redwater's and GTL's obligations arising under the Alberta legislation remained effective and were not affected by the provisions of federal bankruptcy legislation.

Under Canadian law, where provincial legislation conflicts with federal legislation, the provincial legislation will be deemed inoperative to the extent of the conflict. In applying this doctrine to the facts of the case, the Court considered two primary questions:

  1. Do the provisions of federal bankruptcy legislation permit trustees in bankruptcy to disclaim environmental obligations of the kind imposed under the Alberta Legislation?
  2. In obliging trustees in bankruptcy to satisfy outstanding environmental obligations prior to transferring oil and gas licences, does the Alberta legislation (and the Regulator's actions thereunder) interfere with secured creditors' priority rights under federal bankruptcy law?

Subsection 14.06 and the power to disclaim

On the first question, GTL argued that federal bankruptcy legislation allows the trustee in bankruptcy to reject or "disclaim" any asset of the bankrupt estate, along with any environmental liabilities that might attach to that asset. 

The Court rejected this argument. In reaching this conclusion, the Court relied on specific language in the BIA—which makes no reference to absolving the bankrupt's estate from liability—and parliamentary evidence from the time of the subsection's enactment. The section of the BIA in issue was interpreted as apply only to the personal liability of trustees.

Interference with the BIA priority scheme

On the second question, the Court  again found for the Regulator. Here the central question was whether the Regulator's actions had the effect of creating an unsecured "claim provable  in bankruptcy."

Where an unsecured claim provable in bankruptcy exists, it will be subject to the distribution scheme set out in section 136 of the BIA, and unless otherwise indicated, will be subordinated to the interests of secured creditors. In seeking to enforce the end-of-life obligations ahead of the senior secured debt, GTL argued that the Energy Regulator was effectively seeking to enforce a claim against the estate, thereby interfering with the priority scheme set out in the BIA.

The Court took the opportunity to provide clarification and elaboration with respect to the three-part test from Newfoundland and Labrador v AbitibiBowater Inc., 2012 SCC 67, [2012] 3 S.C.R. 443 (Abitibi), which is used to determine whether a regulator is asserting a claim provable in bankruptcy.

The test from Abitibi can be summarized as follows. For an environmental obligation owing to a regulator to meet the definition of a "claim provable in bankruptcy":

  1. There must be a debt, a liability or an obligation to a creditor;
  2. The debt, liability or obligation must be incurred before the debtor becomes bankrupt; and
  3. It must be possible to attach a monetary value to the debt, liability or obligation.

In reaching its conclusion, the Supreme Court's majority clarified parts one and three of the Abitibi test. With respect to step one, the Court explained that a regulatory body does not become a creditor simply by demanding satisfaction of an environmental obligation. Rather, it must be determined whether the body is acting in a bona fide regulatory capacity, or whether it is simply seeking to collect an amount owing. In this case, the Court held that it was clear that the Regulator was acting in a bona fide regulatory capacity to enforce a pre-existing regulatory scheme. This was not a debt collection, the Court held, but an effort to ensure the satisfaction of a "public duty". As such, the Regulator's enforcement of the end-of-life obligations could not render it a creditor under part one of the test.

The Court went on to hold that the third prong of the Abitibi test was likewise unmet. The Court found that it could not attach a monetary value to the obligation imposed by the Regulator. The Court emphasized that the relevant question was whether it was "sufficiently certain" that the Energy Regulator would complete the work, and that a corresponding debt to the Regulator for doing so would "come to pass." The Court found that it was not the Regulator who might perform the work, but an independent not-for-profit organization: the Orphan Well Association. Further, the Court found that it was not sufficiently certain when, if at all, the work would be completed, given the rapidly rising rate of orphan wells, and the limited capacity of the Orphan Well Association.

Having determined that the Regulator's orders did not constitute claims  provable in bankruptcy, those orders were unaffected by federal bankruptcy legislation or any claims of  secured creditors.

In the result, the Supreme Court directed that funds held in trust by GTL from sale proceeds of Redwater assets be used to address the outstanding environmental obligations, as opposed to being distributed to the company's first secured creditor.

The path forward

The practical implications posed by Redwater are far-reaching for lenders, energy industry participants, and regulators. Secured lenders are left with significant uncertainty about what environmental obligations, if any, will have to be paid before any proceeds of realizations can be used to repay the ranking creditors.

Energy industry financing will, no doubt, face growing pains as the industry adapts to the new legal framework that would enforce a "polluter's creditors" pay model, as opposed to the "polluter-pay" approach to environmental harm that was more typically associated with Canadian resource extraction.

In particular, lenders will no doubt adjust their lending practices to account for end-of-life obligations that, until now, were thought to be subordinate to secured debt. Under the common law, end-of-life obligations attaching to oil and gas licences are effectively super-prioritized in the bankruptcy context. Accordingly, lenders are likely to be more hesitant in extending financing to small-to-medium-size energy industry participants or will require bonding or other forms of up-front commitments to satisfy the prospective end of life obligations. Certainly any new financing is likely to have just become more costly as a result of Redwater. Secured lenders may also wish to modify the loan terms to which they earlier bound themselves to protect against this new risk. Lenders are also likely to reserve greater rights for themselves to prevent borrowers from acquiring marginally-producing assets.

Another implication of the decision concerns the utilization of the bankruptcy process. In particular, with respect to loans extended in the pre-Redwater world, lenders may elect not to commence formal bankruptcy proceedings where the end-of-life obligations attaching to oil and gas properties outweigh the potential value of the associated assets. Similarly, trustees in bankruptcy or receivers may be unwilling to accept mandates where their efforts will not be able to provide value to the estates over which they are appointed (let alone when their own fees may not be first-secured given the Supreme Court's ruling). Insofar as these possibilities exist, so too does the possibility that the Redwater decision will ultimately lead to, perversely, an increase in the number of orphan wells, as insolvent companies leave behind both their spent properties that have high remediation costs relative to their value and their valuable properties due to the inability to sell the valuable properties separate from the spent properties.

Another potential outcome is that that the Regulator will adjust its licence transfer policy to demand a higher asset to liability ratio before permitting transfers. While this change will not be directly attributable to the Redwater decision, the Regulator may now have a greater impetus to limit instances such as the one considered in Redwater. Moreover, in the long-term, while financing for regulated industries in the extractive sector may be stymied, the decision may afford regulators with greater flexibility and a greater ability to address environmental concerns in the context of insolvent companies whose insolvency leaves behind untended environmental hazards. Indeed, on the day the Redwater decision was released, the Regulator press released its intention to build a new regulatory "framework."

The case also poses implications for regulated industries in Canada beyond oil and gas; the Supreme Court's ruling bears upon any industry in which environmental remediation is a regulated and obligatory activity. Redwater suggests that the obligation to remediate not only survives a formal insolvency but must be addressed ahead of the claims of secured creditors, including lenders, municipalities, and lien claimants.

We would like to thank Daniel Mills, an articling student in our Calgary office, for his assistance in writing this article.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see

Law around the world

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
Borden Ladner Gervais LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
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