Since the Honourable Chief Justice of the Alberta Court of Queen's Bench released the decision in Redwater Energy Corporation (Re), 2016 ABQB 278 ("Redwater"), much has been written about its implications for various stakeholders in Alberta. What has received less attention is the impact that Redwater may have outside of Alberta.
Although Redwater concerned a relatively small producer, it attracted significant interest since it highlighted growing tensions between secured lenders and regulators. This is a battle of increasing interest as insolvencies mount and environmental issues command greater attention. It is also a dispute that plays out across the country in a variety of industries.
We will not attempt a full recap of the Redwater decision, which has been ably and fully discussed in earlier articles.
However, by way of brief background, Redwater Energy Corporation ("REC") was an oil and gas company with a number of licensed properties throughout Alberta. Its primary secured creditor (Alberta Treasury Branches) appointed Grant Thornton Limited ("GTL") as receiver of REC in May 2015. GTL took possession of REC's assets, and in July 2015 disclaimed 107 out of 127 licensed assets. This allowed GTL to take possession of REC's most valuable assets, renouncing the non-producing wells and facilities. The value of the disclaimed assets was less than the anticipated costs to meet their end of life environmental obligations. GTL proposed to sell the remaining valuable assets, and sought court approval for a sales process for those remaining assets.
The Alberta Energy Regulator and Orphan Well Association jointly applied for a declaration that the disclaimer was void, and for an order compelling the receiver to fulfill the licensee's obligations with respect to abandonment, reclamation and remediation of REC's licensed assets.
Redwater involved two key questions:
- whether receivers and trustees in bankruptcy could disclaim licensed assets; and,
- whether the regulator could force receivers/trustees to comply with the applicable abandonment and reclamation obligations.
The Court held that receivers and trustees in bankruptcy can disclaim licensed assets. This, effectively, allows the receiver/trustee to pick and choose assets and avoid the statutory obligations and regulatory orders that accompany certain assets.
Similarly, the regulator did not have authority to force the receiver or trustee in bankruptcy to assume the monetary consequences of abandonment or reclamation. The obligation is that of the debtor company, and for those amounts, the regulator cannot claim priority over other creditors of the bankrupt licensee.
The regulator has appealed. However, until the Alberta Court of Appeal issues its decision, Redwater will remain in effect.
The Bankruptcy and Insolvency Act, R.S.C. 1985 c.B-3 ("BIA") s.14.06(4) provides clear authority for trustees to renounce assets, without any personal liability for environmental abandonment and remediation work. This authority is broad and empowers receivers and trustees to disclaim any asset(s) it considers uneconomic.
The Alberta Energy Regulator argued, among other things, that the trustee had to act, at least in part, in the public interest and that allowing a licensee to ignore its statutory obligations would conflict with the Alberta Oil and Gas Conservation Act, R.S.A. 2000 c.O-6 (the "Alberta OGC") and the Alberta Pipeline Act, R.S.A. 2000 c.P-15 (the "Alberta PA"). The Alberta OGC and the Alberta PA definitions of "licensee" included receivers and trustees.
The Court in Redwater found that there was an operational conflict between the BIA and the Alberta OGC and the Alberta PA. This created two problems for the provincial legislation: (a) compliance with both the provincial and federal legislation was impossible; and (b) the provincial legislation frustrated the legislative purpose of the BIA by purporting to impose restrictions, conditions or limitations on the powers conferred by the BIA and by purporting to impose liability that is not consistent with the BIA.
Redwater confirms that where a BIA disclaimer triggers environmental obligations, to the extent those obligations are monetary, the cost cannot be claimed against the receiver/trustee or as a priority claim against the debtor's other assets.
This is consistent with the approach taken in cases pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985 c.C-36 (the "CCAA") which establish clear authority for environmental orders to be stayed and compromised in insolvency proceedings where those orders are monetary in nature.
In reaching its decision, the Court in Redwater considered the Supreme Court of Canada decision in Newfoundland and Labrador v. AbitibiBowater Inc. ("Abitibi") (and its application by the Ontario Court of Appeal in Nortel Networks Corporation (Re), 2013 ONCA 599 ("Nortel") and Northstar Aerospace Inc. (Re), 2013 ONCA 600 ("Northstar")). Each of Abitibi, Nortel and Northstar concerned CCAA proceedings. In Abitibi, the Supreme Court of Canada established a three-part test for determining whether environmental orders are "provable claims" that can be stayed and compromised in insolvency proceedings. Satisfying the Abitibi test generally hinges on whether it is "sufficiently certain" that the regulator will perform the remediation required by the order and to seek reimbursement. If it is, then it is subject to the insolvency process (as was the outcome in Abitibi and Northstar). If it is not, then it is not subject to the insolvency process (as was the outcome in Nortel).
In that regard, it is important to recall that the BIA s.14.06(7) provides that government claims for remediation costs are secured by a charge against the affected property. That charge ranks above any other claims, charges or security, including secured lenders. However, the charge is limited to the affected property and does not extend to any of the debtor's other assets. The practical effect is that where remediation costs exceed the value of the property, it is ceded to the applicable government. Where the debtor holds a number of properties, those with equity can be retained and sold, with the proceeds distributed in accordance with the priorities (with the secured lenders being paid first, with the exception of certain super-priority claims, including taxes and the realization costs).
It is also important to recall that the BIA sections 14.06(4) and 14.06(7) track the language of the CCAA sections 11.8(5) and 11.8(8). The language between these sections of the BIA and CCAA contain only non-material differences. Accordingly, the decision in Redwater would apply equally in proceedings under the CCAA (whether those proceedings were a restructuring or liquidation.)
Implications of Redwater in BC
As noted above, the Alberta OGC and the Alberta PA definitions of "licensee" included receivers and trustees. The Alberta Energy Regulator used that, in part, to argue that a receiver or trustee is bound by environmental orders and directors. The equivalent definition in the British Columbia Oil and Gas Activities Act, S.B.C. 2008 c.36 (the "BC OGAA") is a "permit holder". The definition of "permit holder" does not include receivers or trustees. Accordingly, BC regulators could not raise the same argument that was raised by the Alberta Energy Regulator (and rejected by the Court) in Redwater.
More broadly, British Columbia producers are also subject to the Environmental Management Act, S.B.C. 2003 c.53 (the "EMA") and the Contaminated Sites Regulation, B.C. Reg. 4/2014 (the "CS Regulation"). The EMA and the CS Regulation each contain provisions with respect to remediation and clean-up costs. To the extent that these provisions are consistent with the BIA, Redwater would not change their effect and application. In particular:
- The EMA provides that the government has a priority lien for clean-up costs if it carries out the remediation, but the lien is limited to the contaminated site (but not the debtor's other properties). This is consistent with the BIA s.14.06(7).
- The CS Regulation specifies that receivers and trustees cannot be personally liable for remediation of contaminated sites. This is consistent with the BIA s.14.06(2).
The CS Regulation also provides that receivers can be responsible for remediation "to the extent of the receivership", which is defined as: (a) the limit of available funds; and (b) the period between the receiver's appointment and discharge. If a receiver doesn't have sufficient funds to carry out the remediation, they notify the regulator and that ends the receiver's obligations.
There may be some possibility that BC regulators argue that the "limit of available funds" relates to the debtor's cash assets, regardless of other creditors or security interests. To the extent such an argument is raised, pursuant to Redwater, the CS Regulation conflicts with the BIA and is inoperative to the extent it purports to grant priority. However, it is also important to note that nothing in the CS Regulation specifically addresses priorities, and the only provision of the EMA with respect to priority provides that the remediation expenses have priority only over the contaminated site. Even aside from the conflict with the BIA, this interpretation appears to conflict with the EMA priorities. It would seem to be an unreasonable interpretation of the CS regulation and the EMA to say that remediation costs have priority over all assets if the receiver does the clean-up work, but only over the contaminated site if it is done by the government.
Finally, the OGAA provides that the BC Oil and Gas Commission (the "BC Commission") has the authority to impose conditions on permits as it considers necessary. In practice, the BC Commission applies a formula to identify producers whose liabilities exceed their assets (the liability management rating or "LMR"). Where the LMR is less than 1.0, the BC Commission requires that the producer post security. The requirement to post security can be imposed on any producer, including those in receivership (if they wish to maintain the validity of their permit). However, Redwater makes clear that the receiver can disclaim assets to improve the LMR and avoid the security requirement.
Redwater confirms that provincial legislation cannot limit the trustee's disclaimer power, disrupt BIA priorities or purport to give the regulator or government additional security for reclamation or remediation obligations. This applies to any industry with environmental implications and possible reclamation obligations, including mining, forestry and oil and gas.
This gives receivers and trustees significant power to cull uneconomic assets to maximize value for the debtor's stakeholders, but transfers the remediation costs and economic risks to the regulators and governments. If the applicable government (regulator) has not taken cash security, or has not taken sufficient cash security, its recourse will be limited to the contaminated asset.
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.