Canada: ABQB Clarifies Test For Lifting The Stay To Replace An Insolvent Operator

Last Updated: February 28 2019
Article by Alexis E. Teasdale, Kelsey Meyer, Vivek Warrier and Chris D. Simard

The Alberta Court of Queen's Bench has issued several conflicting decisions on whether a stay of proceedings in an insolvency matter should be temporarily lifted to allow enforcement of a contractual right to immediately replace an operator of oil and gas assets in the event of the operator's insolvency. In the recent decision of Alberta Energy Regulator v Lexin Resources Ltd, 2019 ABQB 23 [Lexin], the Alberta Court of Queen's Bench (ABQB) provided much-needed clarification regarding the test to be used in determining whether a stay of proceedings imposed in a court-sanctioned insolvency proceeding should be lifted to permit a co-owner to assume operatorship of oil and gas assets. After analyzing three previous conflicting decisions of the ABQB, Justice Romaine emphasized the importance of the test for lifting a stay of proceedings in a receivership, which she explained in detail in Alignvest Private Debt Ltd v Surefire Industries Ltd, 2015 ABQB 148 [Alignvest]. This test focuses on the totality of the circumstances and weighs the prejudice to the parties involved in the receivership. In Lexin, Justice Romaine denied the co-owner's application to lift the stay and to replace Lexin as operator of certain oil and gas assets, because the prejudice to the Receiver outweighed any prejudice to the co-owner.

Previous Case Law

Justice Romaine's review of the previous case law on this issue included Norcen Energy Resources Ltd v Oakwood Petroleums Ltd, (1988), 92 AR 81 [Norcen]. Oakwood Petroleums Ltd. (Oakwood) was granted a stay of proceedings pursuant to the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA). Norcen Energy Resources Limited (Norcen) applied to lift the stay to give effect to the provisions of the 1974 and 1981 CAPL joint operating agreements, which provided for the immediate replacement of Oakwood as operator, upon its insolvency. Justice Forsyth held that pursuant to section 11 of the CCAA, the court had jurisdiction to stay Norcen's exercise of its rights, and that such a reading of section 11 was constitutionally valid, given the need to promote the continuance of insolvent companies through the CCAA. The Court held that Norcen should be stayed, temporarily, from taking proceedings to replace Oakwood as operator, but noted that it still retained the discretion to lift a stay in circumstances where it would be unfair to stop a party from pursuing its contractual rights.

In Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363, Bumper Development Corporation Ltd. [Bumper] and Eagle Energy Inc. [Eagle] were parties to a Joint Operating Agreement that incorporated the 2007 Canadian Association of Petroleum Operating Procedure (CAPL 2007), giving Eagle the right to replace Bumper as operator of certain oil and gas assets upon Bumper's insolvency. Upon the receivership of Bumper, Eagle advised the Receiver that it intended to exercise these contractual rights and assume operatorship of certain of Bumper's oil and gas assets. The Receiver agreed not to convey operatorship as part of the sale if Eagle was not the successful bidder. Upon sale of the assets to Forent Energy Ltd. (Forent), operatorship was granted to Eagle. The court stated that contrary to the situation in Norcen, the purpose of this insolvency proceeding was to permit the "orderly realization and distribution" of the assets, rather than ensure the survival of Bumper. Therefore, retaining ownership to preserve the business as a going concern was not required and Eagle's contractual rights could be enforced. In making its ruling, the ABQB reasoned that Eagle's right to become operator arose because of the negotiations with the Receiver prior to the sale. Ultimately, the business was sold without the operatorship rights and therefore, "Forent did not have any reasonable expectation that it was purchasing operatorship" (at para 22).

In Firenze Energy Ltd v Scollard Energy Ltd, 2018 ABQB 126 [Firenze], Scollard Energy Ltd. (Scollard) and Firenze Energy Ltd (Firenze) were joint owners of various oil and gas assets under a Joint Operating Agreement, also incorporating CAPL 2007, which permitted Firenze to assume operatorship of the assets in the event that Scollard became insolvent. Scollard went into receivership. The ABQB emphasized that a contractual right of transfer (like that provided in CAPL 2007) is not in itself a sufficient reason to lift the stay, and that ipso facto clauses are void against a bankruptcy trustee on policy grounds. For this reason, a court must look beyond the rights the parties intended to convey to determine whether to lift the stay. To do so, the ABQB applied the test from Alignvest to determine whether the party applying to lift the stay is likely to be materially prejudiced by the stay or whether it would equitable to lift the stay on other grounds.

As part of the analysis, Justice Dario examined the provisions of CAPL 2007 setting out that if an operator resigns or is removed, the other party may become the operator on the service of notice if it holds over 40 percent of the working interest. The Court noted that Scollard and Firenze each had a 50 percent working interest for most of the assets, and as such, Firenze had an "unconditional right to assume operatorship" under CAPL 2007 (at para 21). Further, the Receiver had been marketing Scollard's working interest to include the right to assume operatorship. By including this right along with the assets, the Receiver was conveying more than Scollard would have been entitled to convey before the receivership. The ABQB found these factors sufficient to lift the stay to allow Firenze to serve the necessary notice to remove Scollard as operator under CAPL 2007 for the assets in which it had over a 40 percent working interest, finding that to do otherwise would cause significant prejudice to Firenze.

Background to Lexin

Lexin Resources Ltd. was co-owner and operator of several oil and gas facilities (the Facilities) in conjunction with Exxon Mobil Energy Canada (Exxon). Midstream Canada Ltd. (Midstream) agreed to purchase Exxon's interest in the wells and Facilities co-owned by Lexin, and which had been shut in by order of the Alberta Energy Regulator. Midstream had applied to transfer the licences for the Facilities, but did not have approval at the time when Midstream applied to lift the stay. At the time of the application, the Receiver had been marketing Lexin's assets for sale, including the ability to become operator.

Ruling by Justice Romaine

Justice Romaine reiterated the test for lifting the stay that was established in Alignvest, which requires a focus on the totality of the circumstances and the relative prejudice of the parties involved in the receivership (at paras 40 and 43). To obtain an order lifting the stay, the applicant must be able to demonstrate material prejudice by showing that it would suffer worse harm than other creditors. Justice Romaine followed Alignvest in stating that the applicant's inability to exercise a contractual right for which it bargained is not a sufficient reason to lift the stay. She reasoned that the prejudice suffered by an applicant is no different from that suffered by other creditors, as they also lose the benefit of their contractual rights because of the debtor's insolvency.

Further, Justice Romaine found that these clauses are void as against public policy because their enforcement would undermine the purpose of an insolvency stay, which is to allow the orderly and equitable distribution of the debtor's assets. Finally, Justice Romaine disagreed with the finding in Bumper that differentiated the test as between different insolvency proceedings and clarified that the test for "lifting a stay under the BIA and the CCAA are substantially the same" (at para 23).

Justice Romaine indicated that it is possible to find material prejudice to a co-owner where the oil and gas assets are actively producing, as a receiver might make different investment or operational decisions than someone with a long-term interest in the facilities. However, in the case before her, the Facilities were shut-in when the applicant purchased them, and the risk of misaligned investment or operational decisions by the Receiver was not at issue.

Justice Romaine held that if the stay were lifted, the Receiver would suffer greater prejudice than Midstream for three principal reasons. First, the Receiver would be required to make substantial capital and operating disbursements that it likely could not fund. Second, by lifting the stay, the sales process would suffer from uncertainty. The bidding process was already at a later stage and the current bidders would have a reasonable expectation that they would be entitled to assume operatorship of the Facilities upon a successful bid. Third, and most importantly, if the stay were lifted, it would prevent the Receiver from utilizing the replacement of operator provisions in the contracts. These provisions permitted Lexin to assign their interests in the Facilities through the sales process. Without giving effect to these provisions, Midstream would be in a position to assume operatorship rights that it would otherwise be unable to assume, which was not, in the court's view, the purpose of the immediate replacement provisions of the joint operating agreements.


The key takeaways from Justice Romaine's decision in Lexin are:

  1. In focusing on the relative prejudice to the parties, the court will consider the specific contractual wording at issue and the specific facts of the case, including (for example) the cost to the receiver, the manner in which the operated assets were marketed, and the expectations of the parties; and
  2. Justice Romaine emphasized that the insolvent operator provisions of the joint operating agreements are not intended to be used strategically by co-owners to obtain operatorship in oil and gas assets to which they would otherwise not be entitled. Rather, they are "intended to protect non-operators from the real risks and prejudices that can arise when an operator becomes insolvent" (at para 47).

Special thanks to articling students Darci Stanger and Zach Johnson for their assistance in preparing this article.

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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Alexis E. Teasdale
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