Canada: The Effect Of On-going Insolvency And Restructuring Proceedings On Landowner Claims For Compensation Before The Alberta Surface Rights Board

Last Updated: July 8 2014
Article by David Farmer and Andrew Pozzobon

Most Read Contributor in Canada, September 2016

The doctrine of federal paramountcy provides that where there is an inconsistency between validly enacted but overlapping provincial and federal legislation, the provincial legislation is inoperative to the extent of the inconsistency and the remainder of the provincial legislation is unaffected.

Section 36 of the Surface Rights Act (the "Act") affords landowners with a remedy to recover payments due under a compensation order or surface lease.  However, s. 69(1)(a) of the Bankruptcy and Insolvency Act (the "BIA") specifies that "no creditor has any remedy against the insolvent person or the insolvent person's property, or shall commence or continue any action...". This section is designed to prevent proceedings that might give one creditor an advantage over other creditors.

Recent Alberta Surface Rights Board (the "Board") decisions have considered whether a landowner could proceed with an application pursuant to s. 36 of the Act to recover payments due under a compensation order or surface lease from a corporation that is involved in a bankruptcy or restructuring process. These decisions have held that allowing a landowner to proceed with a s. 36 application would be incompatible with the provisions of the BIA.  As such, under the doctrine of federal paramountcy the Act, as provincial legislation, "is rendered inoperative to the extent of the incompatibility".

For landowners, this means that despite the provisions of the Act, the landowner is precluded from proceeding with a s. 36 application to recover payments due while an operator is in bankruptcy or restructuring proceedings and the landowner's only recourse to payment is through those proceedings.  A claim must be proven in the bankruptcy or restructuring process, not before the Board.  A landowner who does not prove their claim in the bankruptcy or restructuring process is not entitled to share in any distribution that may be made. 

For operators, this means that the Board may not suspend or terminate an operator's rights for non-payment, when the operator has filed a proposal under the BIA.  Further, the effect of a court approval of a proposal under the BIA may limit the "money payable" by an operator to a landowner.

In Sahara Energy Ltd. v Menzies Farms Ltd., 2012 ABSRB 789, Menzies Farms Ltd.  "Menzies") leased lands to Sahara Energy Ltd. ("Sahara"). The Lessor brought a s. 36 of the Act for recovery of rentals respecting three years' worth of non-payment.  The Board, in Decision No. 2011/0222 (the "Decision"), found that $7,200.00 was payable to the Lessor, and that payment had not been made. 

The Board at the time was not aware that Sahara had entered proceedings and filed a proposal under the BIA.  Under the terms of the proposal, the unsecured creditors (including Menzies) would receive $0.15 for every $1.00 owing. Menzies had submitted a proof of claim in the bankruptcy proceeding for the amount of $2,400.00. The proposal subsequently was accepted by the creditors and approved by the Court. As such, Sahara advised the Board that it would not pay any debts owing and submitted that the Decision should be reviewed or rescinded as s. 69 of the BIA operated as a stay from the Board enforcing payment.

The Board reviewed the Decision.  Regarding whether the Board could suspend or terminate an Sahara's rights for non-payment, the Board noted:

Section 36 of the Act provides for an action to recover payments due under a compensation order or surface lease. Under s. 69 of the BIA, however, when a notice of intention is filed "no creditor has any remedy against the insolvent person" for any claims provable in bankruptcy. Payments accruing due before the date of filing the notice of intention are provable claims, by virtue of s. 121 of the BIA. There is, therefore, an operational conflict between the Act and the BIA. Under the constitutional doctrine of federal paramountcy, the Act, as provincial legislation, "is rendered inoperative to the extent of the incompatibility" with federal law – Canadian Western Bank v. Alberta, 2007 SCC 22 (CanLII), 2007 SCC  22, [2007] 2 S.C.R. 3 at para. 69.

Section 69.6 of the BIA creates an exception to the stay of proceedings for "an action, suit or proceeding" in respect of the insolvent person before a "regulatory body." The definition of regulatory body in s. 69.6(1) appears to include the Board. However, the exception excludes "the enforcement of a payment ordered by the regulatory body." Since suspension and termination under s. 36(5) follows the Board's written demand for full payment under subsection (4), it falls outside the scope of s. 69.6. The Board may not suspend or terminate an operator's rights for non-payment, when the operator has filed a proposal under Part 3, Division 1 of the Bankruptcy and Insolvency Act. [emphasis added]

The Board also noted that a proposal that is accepted by the class of creditors according to the voting formula prescribed in the BIA and approved by the court binds all creditors in the class. Therefore, there was no money payable by Sahara under the surface lease.

Regarding whether Menzies could recover rentals under s. 36 for the portion of claim not included in the proposal, the Board noted that s. 124 of the BIA provides that "every creditor shall prove his claim, and a creditor who does not prove his claim is not entitled to share in any distribution that may be made."  This provision, along with the provision in s. 62(2)(a) that court approval of a proposal is binding in respect of "all unsecured claims," supports the conclusion that the Lessor could not now claim through the Board's rental recovery process for amounts it failed to prove in the restructuring proceedings.

The Board determined that the Decision should be rescinded.                                                                                  

In Smithv Fairwest Energy Corporation, 2013 ABSRB 649, the Board received an application pursuant to s. 36 of the Act for outstanding surface lease compensation.  The Board notified the operator, Fairwest Energy Corporation ("Fairwest"), that payment had not been made and requested a reason for non-payment, or confirmation that rental payment had been made.

Fairwest responded by  advising that  it had been granted protection from its pursuant to an Order (the "Initial Order") of the Court of Queen's Bench of Alberta in accordance with the provisions of the federal Companies' Creditors Arrangement Act ("CCAA").  The Initial Order set out that no proceeding or enforcement process in any court could be commenced or continued against or in respect of Fairwest,  except with leave of the Court.

The lessor, Smith, however, requested that the Board proceed with the application before it, arguing that the spirit and intent of the Act made it appropriate for the Board to direct the Minister of Energy to pay the arrears as allowed by s. 36 (6) of the Act.  Smith also submitted that since the Government of Alberta had presumably been receiving the royalty payments, it should be obligated to compensate the landowner. The Board noted that "s. 36 is set up for that exact purpose; however, the exception to this rule is when an Operator has financial difficulties and is able to avail itself to the Bankruptcy or Restructuring process." [emphasis added].   Moreover, the Board held that the spirit and intent of the legislation does not allow the Board to override a Court Order.

Ultimately the Board directed that the file be closed and noted that Smith could reapply when the restructuring process under the CCAA was completed.

In conclusion, recent decisions of the Board make it clear that ongoing bankruptcy and restructuring proceedings, arising from federal legislation like the BIA and CCAA, will prevent landowners from seeking compensation through the mechanisms of the provincial Surface Rights Act. It is important that when faced with insolvency or restructuring proceedings that both lessors and operators understand their rights under these regimes. To the extent that the Board is not aware of bankruptcy and insolvency proceedings, operators should take steps to notify the Board to prevent the Board from issuing an order that is inconsistent with orders granted in the insolvency or restructuring proceedings. Correspondingly, landowners must ensure, to the best of their ability, that they are not advancing their claim before the Board when their claim should be properly be in an insolvency or restructuring.

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