On May 18, 2016, the Court of Queen's Bench of Alberta released its much anticipated decision in Re Redwater Energy Corporation, 2016 ABQB 278, which addressed the Oil and Gas Conservation Act (OGCA), the Pipeline Act and the Bankruptcy and Insolvency Act (BIA). The long running conflict involving the Alberta Energy Regulator (AER), receivers and trustees in bankruptcy,1 including the settlement agreement reached in National Bank of Canada v. Spyglass Resources Corp., was previously discussed here.
The decision in Redwater by the Court resolves the conflict, for the time being, by indicating that:
- a trustee is entitled to disclaim the debtor's interest in a portion of the debtor's AER licensed properties, including licensed properties and facilities that have negative value due to the fact of abandonment and reclamation obligations;
- a trustee is entitled to assume possession or control over a portion of a debtor's AER licensed properties and facilities, including the fact that a trustee does not have to assume possession and control over AER licensed properties and facilities with the associated abandonment and reclamation obligations;
- a trustee is entitled, as a consequence of the foregoing, to sell a portion of a debtor's AER licensed properties and facilities and the AER cannot refuse to transfer licenses to the purchaser in such circumstance only by virtue of the fact that the estate of the debtor will be left with AER licensed properties and facilities that will be disclaimed and not abandoned or reclaimed by the trustee; and
- abandonment orders issued by the AER are "claims" within the meaning of federal insolvency law and subject to compromise therein.
The position of the AER upon the appointment of a trustee in connection with an insolvent licensee has been generally consistent for several years. The AER's standard operating procedure is, upon appointment, to issue a standard directive advising that the trustee is legally and statutorily obligated to take possession of the assets and fulfill the debtor's obligations prior to distributing any funds or finalizing any proposal to creditors. The AER maintained that its regulated licenses were not capable of disclaimer under the BIA and that, notwithstanding the commencement of insolvency proceedings, it retained the authority to refuse to approve license transfers if the licensee was not compliant with the provincial legislation and associated regulations.
The position taken by the AER in reliance on provincial legislation effectively elevated its claims as against the debtor above those of other creditors, including secured creditors. The issue came to a head in Redwater, a decision involving a publicly listed oil and gas corporation which held a number of AER licensed assets under the OCGA and the Pipeline Act and that was subject to both a receivership and bankruptcy order. The trustee refused to take possession of and disclaimed certain non-producing, "shut-in" wells, which led to abandonment orders being issued by the AER. Each of the trustee and the AER sought various relief before the court in respect of the abandonment orders; the trustee was successful in the entirety of its application and the cross-application of the AER was dismissed.
The Trustee's Ability to Disclaim Assets
Perhaps the most important implication of the decision is that the trustee's ability to disclaim AER licensed properties and facilities, including non-producing wells of a licensee under the OGCA, has been confirmed. The AER's position has been that trustees "step into the shoes" of a licensee by virtue of the definition of "licensee" in section 1(1)(cc) of the OGCA and section 1(1)(n) of the Pipeline Act. The definition in both statutes explicitly includes trustees and receiver-managers which, in the view of the AER, results in trustees becoming subject to applicable statutory and regulatory obligations to which the licensee is subject.
In Redwater the court expressly rejected the AER's position that a trustee is bound to perform the licensee's obligations by virtue of the definition of "licensee" in the OGCA and the Pipeline Act, even if the trustee abandons the debtor's interest in the property. Relying on the doctrine of federal paramountcy, the court held that the abandonment obligations imposed on the trustee as licensee under the OGCA were trumped by the trustee's ability to renounce certain assets in section 14.06(4)(c) of the BIA. In other words, so long as the trustee renounces or disclaims the affected property in accordance with the provisions of the BIA, the AER cannot impose on the trustee the obligation to remediate the renounced property by either performance or posting security for the reclamation obligation.
The trustee's ability to elect to take possession of a portion of AER licensed properties and facilities will result in much needed transactional certainty in the oil and gas industry involving insolvent licensees. In the past, purchasers who had an interest in acquiring some, but not all, of the debtor's AER licensed properties and facilities faced the risk that the AER would not approve the transfer due to the debtor's Liability Management Rating ("LMR") either being less than 1.0 prior to the proposed transaction or falling below 1.0 as a consequence of the transaction. The decision in Redwater confirms that the AER cannot refuse the transfer on this basis. Partial asset sales which strand non-producing or shut-in assets can now be completed by the trustee even if such transaction involves a debtor with an LMR of less than 1.0 or if the transaction will cause the debtor's LMR to be reduced below the 1.0 threshold.
Abandonment Orders are Provable Claims in Insolvency Proceedings
The court applied the Supreme Court of Canada's decision in Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67 to determine whether an abandonment order issued by the AER is a "claim" in an insolvency proceeding. Specifically, the Supreme Court in AbitibiBowater created a three part test to determine whether orders in the nature of environmental reclamation or abandonment orders constitute "claims" under applicable bankruptcy laws. The three part test is as follows: (1) there must be a debt, liability or obligation to a creditor; (2) that obligation must be incurred before the debtor's bankruptcy; and (3) it must be possible to attach a monetary value to the debt, liability or obligations.
In Redwater the first two elements of the test were satisfied and conceded by the AER. In considering the third part of the test, the court looked at the substance and effect of the abandonment orders and recognized that in a "technical" sense there was uncertainty as to whether the AER would perform the obligations. However, and although not expressed in defined monetary terms, the abandonment orders were held to be intrinsically financial because they would require the trustee to expend funds and provide the AER with a "super priority" that was inconsistent with federal insolvency law. The court's approach to the AbitibiBowater analysis confirms that abandonment orders are claims within the meaning of the BIA and opens the door for similar type orders issued by any regulatory body to be stayed and compromised in formal insolvency proceedings.
Also of note is the court's finding that treating a regulatory obligation as a claim does not undermine the "polluter-pay" principle of environmental law. The decision confirms that the claims process does not extinguish the environmental obligation of the debtor but only subjects the claim to the insolvency process. In support of this, the court acknowledges the public's interest in a safe and clean environment but relies on the application of the doctrine of paramountcy to avoid weighing the competing policy objective of a fair and equitable distribution of assets to creditors.
So what now?
For the time being lenders, borrowers, trustees and other interested parties (including purchasers) have a certain degree of clarity on the path that can be followed in connection with a proposed sale of some, but not all, of an insolvent licensee's AER regulated properties and facilities. The court's decision in Redwater is a comprehensive and well-reasoned decision. It is not known whether the AER will seek to appeal the decision, request the Alberta government to amend the legislation or promulgate new regulations, or whether the AER will work within the court's pronouncement in Redwater. Whatever the AER ultimately determines, it is likely that Redwater is not the last word on this issue. Stay tuned.
1 As in the Redwater decision and consistent with section 14.06(1.1) of the BIA, we have referred to the court-appointed receiver and manager and trustee in bankruptcy, Grant Thornton Limited, as a trustee in this post unless the context otherwise requires.
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