Environment: 1; Secured Creditors: 0 in Landmark SCC Decision
The Supreme Court of Canada (“SCC“) in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 (“Orphan“) ruled that trustees in bankruptcy and insolvency cannot walk away from the environmental liabilities of a bankrupt estate. Chief Justice Wagnar, for the majority, decided that:
- earmarking the assets of a bankrupt estate for outstanding provincial environmental liabilities in priority to secured creditors does not conflict with the purpose of the Bankruptcy and Insolvency Act (Canada) (“BIA“) of equitable distribution among an estate’s creditors nor the personal liability of trustees; and
- provincial regulators are not creditors when enforcing environmental laws in the public interest.
If you’re the curious type, keep reading below as MT+Co. gives you a quick summary of the practical impacts of the decision, as well as the facts, claims, and the majority’s reasoning in Orphan.
Though the practical consequences of the decision are not yet know, the range of potential impacts include:
- reduced lending in industries where adverse environmental impacts are commonplace (including the oil and gas, mining and natural resource sectors);
- heightened lender scrutiny of the environmental liabilities of borrowers;
- closer attention to the value of any collateral package that includes assets to which decommissioning and reclamation liabilities will apply;
- increased monitoring and strengthened environmental monitoring during the life of a loan; and
- improved environmental regulatory compliance by proponents.
Alberta oil and gas companies are liable for the remediation costs of abandoned oil wells, and the Alberta Energy Regulator (“AEB“) can enforce these obligations against a bankrupt’s estate by treating trustees as licensee of such oil wells.
Redwater Energy Corp. (“Redwater“), a publicly traded oil and gas company operating in Alberta, borrowed funds from ATB Financial (“ATB“) in 2013. ATB knew of Redwater’s end-of-life obligations for its wells and associated works (“Redwater Assets“). When Redwood began to struggle financially, Grant Thornton Limited (“Grant“) was appointed receiver and trustee for Redwater.
In order to maximize value it could realize from the Redwater Assets, Grant attempted to avoid taking possession and control of Redwater’s oil wells requiring decommissioning and reclamation (“Disclaimed Assets”).
The AEB ordered Grant to take possession and control of all the Redwater Assets, including the Disclaimed Assets, and undertake decommissioning and reclamation of the Disclaimed Assets before selling off Redwood’s productive wells and distributing the proceeds to ATB and other creditors. The AEB claimed it had authority to do this because it issued licenses to Redwater with respect to its wells, and Grant, as receiver for Redwater, was now bound by the terms of those licenses, which included decommissioning and reclamation obligations. In turn, Grant claimed the AEB had no authority to make such orders as the enabling Alberta laws conflicted with the BIA and were thus inoperable.
To be successful, Grant had to establish its status as a licensee under applicable Alberta legislation conflicted with the BIA, as the Canadian constitution permits both provincial and federal laws to apply to the same matter so long as there is no direct conflict between them. Where there is a conflict, the provincial law (in this case, the AEB’s orders and the enabling Alberta legislation) will be invalid to the extent of such conflict.
The SCC overturned the Alberta Court of Queen’s Bench and the Alberta Court of Appeal, which sided with Grant, reasoning as follows:
- Grant claimed that its status as licensee rendered it personally liable, whereas the BIA gives trustees protection from such liability with respect to environment liabilities. The majority ruled that, though the BIA does not permit trustees to be found personally liable for the liabilities of a bankrupt, they must abide provincial laws when distributing the bankrupt’s estate. Thus Grant had an obligation to address the AEB’s requirements using the bankrupt estate’s money (not its own) to address environmental claims.
- Grant also claimed that the AEB’s claim was a provable claim under the BIA. The majority applied the test set out in Newfoundland and Labrador v AbitibiBowater Inc., and found that the AEB’s orders were not provable claims under the BIA. In doing so, the majority distinguished between the role of regulators as creditors who stand to gain financially from a claim, and regulators acting in a regulatory capacity. In enforcing laws that protect the public interest, the AEB did not stand to gain financially as a creditor.
- Grant also claimed that allowing the AEB to claim in priority to secured creditors against the Redwater Assets, upending the priority scheme set out in the BIA. The majority ruled that the BIA expressly provides for regulators to extract value from a bankrupt’s estate if such property is affected by an environmental condition or damage, and as such the AEB’s orders does not interfere with, and in fact facilitates, the aims of the BIA.