Canada: Insolvency And Energy Insights: The Redwater Decision

Introduction

The Alberta Court of Queen's Bench decision in Redwater Energy Corporation Re, 2016 ABQB 278, written by Chief Justice Neil Wittmann, clarifies that the provisions of the Bankruptcy and Insolvency Act (BIA) addressing the environmental liability of trustees render certain provisions of provincial regulatory legislation addressing wells and pipelines inoperative to the extent they conflict with the BIA.

This is a significant decision that will directly impact the conduct of oil and gas receiverships and bankruptcies in Alberta, and affect the position of secured creditors in those proceedings.

Facts

Redwater Energy ("Redwater") was a publicly traded oil and gas company. Redwater encountered financial difficulties and Grant Thornton Limited was appointed as receiver ("Receiver") over the assets of Redwater pursuant to section 243 of the BIA. The receivership order issued was in the form of the Alberta template receivership order, with the notable difference that no appointment was sought under the Judicature Act or other provincial legislation providing for the appointment of a receiver.

In the course of administering the receivership, the Receiver informed the Alberta Energy Regulator (AER) that it was taking possession of only some of Redwater's assets and would disclaim the rest ("Renounced Licensed Assets"). The AER proceeded to issue abandonment orders in respect of the Renounced Licensed Assets. Subsequently, Redwater was petitioned in to bankruptcy. The Receiver was appointed as Redwater's trustee in bankruptcy ("Trustee") and, in that capacity, exercised its rights under section 14.06 of the BIA and disclaimed its interest in the Renounced Licensed Assets.

The AER brought an application for an order that the Trustee's disclaimer of certain wells was unenforceable and that required the Trustee to comply with abandonment orders made and statutory duties of a licensee in respect of abandonment, reclamation and remediation of Redwater's properties. The Trustee brought a cross-application to approve a sales process for the assets of Redwater, excluding the Renounced Licensed Assets.

Several parties made submissions before the Court. The Orphan Well Association, the Canadian Association of Petroleum Producers, and Her Majesty the Queen in Right of Alberta supported the AER's position. The Alberta Treasury Branches (the primary secured creditor of Redwater) and the Canadian Association of Insolvency and Restructuring Professionals supported the Trustee's position.

Legal decision

The main issue before the Court was whether certain provisions of the Oil and Gas Conservation Act (OGCA) and the Pipeline Act were inoperative due to a conflict with the provisions of the BIA. While the case has important impacts on industry, it is at its heart an analysis of the constitutional interplay between federal and provincial legislation.

The doctrine of paramountcy provides that in cases of genuine conflict between otherwise valid federal and provincial legislation, the provincial legislation is deemed inoperative to the extent of the conflict. To assess whether the doctrine is engaged, the court considers, first, whether there is an operational conflict between the two pieces of legislation (which occurs when it is not possible to comply with both the federal and provincial law) and second whether, notwithstanding the ability to comply with both pieces of legislation, the provincial law frustrates the purpose of the federal legislation. If either branch of the test is satisfied, the doctrine of paramountcy is engaged and the provincial legislation is inoperative to the extent of the conflict.

The Court found that there was an operational conflict between the BIA, and the OGCA and Pipeline Act in that the BIA permitted a trustee to renounce assets whereas the OGCA and Pipeline Act defined the trustee as a licensee (with all attendant responsibilities) and did not permit such a disclaimer.

As a result of the BIA provisions allowing a trustee to disclaim assets, the court found that "the Trustee is not a licensee of the renounced assets, ought not to be required to assume any liabilities, and is not bound by the Abandonment Orders relating to the renounced assets in seeking approval of the sales process to market and sell the assets remaining under its possession and control of. [sic] In other words, so long as the Trustee renounces the affected property in accordance with section 14.06(4), the AER cannot attempt to impose on the Trustee the obligation to remediate the renounced property by performance or posting security."¹

Additionally, the Court held that the purpose of section 14.06 of the BIA "is to permit receivers and trustees to make rational economic assessments of the costs of remedying environmental conditions, and gives receivers and trustees the discretion to determine whether to comply with orders to remediate property affected by these conditions".² The Court also held that, applying the criteria in Newfoundland and Labrador v AbitibiBowater Inc., 2012 SCC 67, the abandonment orders were monetary in nature and not merely regulatory. Further, the Court found the orders frustrated both the purpose of section 14.06 of the BIA, which seeks to limit the liability of receivers and trustees in respect of environmental liabilities and the broader purpose of the BIA in attaining an equitable distribution of assets among creditors of the insolvent entity.

Lastly, the Court held that the AER could not use its regulatory powers to approve a transfer of a license to stop a sale of the assets of Redwater in Redwater's insolvency proceedings.

In light of the importance of this decision, the potential for an appeal is high.

This article was co-authored by John Regush, Associate in Dentons' Calgary office.

Footnotes

1 Para 156.

2 Para 129.

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