Canada: AER Seeks To Hold Directors, Officers Personally Liable For Obligations Of Insolvent Corporate Licensees

The Alberta Energy Regulator (AER) recently released Bulletin 2016-10 (Bulletin), as a reminder to directors and officers of corporate holders of AER oil and gas well licences (Licensees) that they may be personally responsible for the statutory obligations of the Licensee when it enters insolvency proceedings or otherwise ceases operations.

The AER's traditional position has been that the failure of a Licensee to comply with its obligations under the directives issued by the AER, or an order seeking to enforce those obligations, would result in the AER pursuing enforcement actions against the Licensee. Only in rare cases would the directors and officers be targeted by the AER for non-compliance by a Licensee. This recent Bulletin may indicate a change in that attitude.

There are a number of ways that a director or officer of an insolvent Licensee could be personally affected by this change in AER policy. Options open to the AER include declaring directors and officers as named persons or naming them in environmental protection orders (EPO). Liability continues until such orders are satisfied.

Section 106 of the Oil and Gas Conservation Act (OGCA) and section 51 of the Pipeline Act (Naming Provisions) allow the AER, where it considers it in the public interest to do so, to declare a director or an officer a named person (Named Person). In order to issue such a declaration, there must be:

  1. A contravention or failure by a Licensee to comply with an AER order
  2. At the time of the contravention or failure, the Named Person must have been a director, officer, or other person in direct or indirect control of the Licensee at the relevant time
  3. The requested declaration and order must be in the public interest. Prior to taking this step, the AER must give written notice of its intention to make a declaration and give the person(s) affected 10 days to show cause as to why the declaration should not be made (OGCA, section 106(2)).

The specific reference to directors, officers, and agents in the Naming Provisions demonstrates a presumption that they are in direct or indirect control of the Licensee. The Naming Provisions are also reverse onus provisions. Once a person's position as a director or officer is confirmed, it is up to that person to disprove control. The AER considers "control" to be the authority to cause a Licensee to meet its financial obligations to the AER and to comply with AER orders, regardless of title or position.

Being declared a Named Person does not impose personal liability on directors or officers for abandonment or reclamation costs. Instead, it effectively blacklists such Named Person from being involved in the operations of Licensee in the future. Where a Named Person is involved with a Licensee, the AER may suspend such Licensee's operations, deny its applications or require it to post security because of its association with the Named Person. These actions are also available against any subsequent Licensee that the Named Person becomes involved with, effectively preventing the Named Person from holding a position of control in the industry unless the original AER orders are satisfied.

Unlike a declaration against a Named Person, the directors or officers of an insolvent Licensee could be found personally liable where they are deemed a "person responsible" and named in an EPO under the Environmental Protection and Enhancement Act (EPEA). Generally, an EPO is issued where a substance is or has been released, where contaminated lands exist, or where reclamation obligations have not been satisfied.

An EPO can be issued against every person responsible who has or has had charge, management or control of a substance or thing. This description has been found to be broad enough to include both past and present officers of a Licensee. The onus is on directors and officers to present evidence as to their lack of involvement if they wish to avoid being subject to an EPO. The greater the degree of a control over a Licensee, the more likely a director or officer will be found to be a "person responsible" for the purposes of the EPEA.

We are not currently aware of any EPOs that have been issued against directors and officers as a result of a Licensee failing to comply with its reclamation obligations associated with oil and gas assets. However, the Bulletin may signal a change in the AER's view in respect of recovering these costs from directors of a corporation and is consistent with the approach taken in other jurisdictions such as Ontario.

In Baker v. Director, Ministry of Environment, the Ontario Ministry of Environment (MOE) issued an order naming former directors and officers of Northstar Aerospace (Canada) Inc. (Northstar Canada) personally, even though Northstar Canada had filed for insolvency protection. The order named former directors and officers on the basis that they had management and control of the site when the contamination occurred. The named parties were all held personally liable for remediation costs of approximately C$15-million.

In Currie v. Director, Ministry of Environment, the MOE issued an order in similar circumstances that was upheld on appeal in spite of the fact that subsequent owners and corporate directors had taken responsibility for the contaminated site and even though regulatory action was not taken until after the former directors had left the company.

The most common course of action for the AER is to either threaten or take steps to declare such directors and officers Named Persons. This specifically occurred in Decision to Issue a Declaration Naming Bryce Lee Karl Pursuant to Section 106 of the Oil and Gas Conservation Act, where Bryce Karl was declared a Named Person after three of the Licensees he controlled failed to comply with 18 AER orders, including several abandonment and abandonment cost orders.

Ultimately, the AER has a diverse statutory tool chest that provides a broad array of enforcement mechanisms to ensure compliance with its orders. The Bulletin may be an indication that the AER is prepared to exercise some of the less common options available to it in an effort to respond to the increasing tide of insolvent Licensees and the surge in orphan properties. It also may indicate that the AER is prepared to sanction directors and officers as a means to address occurrences of non-compliance where a Licensee enters insolvency proceedings.

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.

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