The recent decision of Justice B.E. Romaine of the Alberta Court of Queen's Bench in Manitok Energy Inc (Re), 2021 ABQB 227 ("Manitok") is another important development in the area of insolvency law following the Supreme Court of Canada's landmark decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 ("Redwater"). In Manitok, the Court held that secured creditors (in this instance holders of builders' liens) were entitled to receive sale proceeds from the sale of select assets of the debtor notwithstanding that the debtor was unable to fully satisfy abandonment and reclamation obligations associated with other assets. The case has critical implications for lenders to distressed exploration and production companies.
Before delving further into the decision of Manitok, the basic nature of oil and gas bankruptcy cases and the impact of the Redwater decision must be discussed. In these cases the debtors are frequently able to sell only a portion of assets subject to abandonment and reclamation obligations. As was the case in Manitok, those sales will involve the environmental liabilities associated with the transacted assets being satisfied by way of purchaser assumption and resulting in the estate retaining assets with significant abandonment and reclamation that are unsaleable. In Redwater, the Supreme Court of Canada (the "SCC") held that abandonment and reclamation obligations were not "provable claims" for the purposes of the Bankruptcy and Insolvency Act. As a result, the SCC held that trustees of bankrupt estates could not make distributions to creditors (whether secured, preferred or unsecured) until all end-of-life obligations remaining in the debtor estate were satisfied.
The Court distinguished the facts of Manitok from those in Redwater on the basis that the Alberta Energy Regulator had not taken any action in respect of the specific assets subject to the sale. As a result, the trustee was not required to use sale proceeds to fulfill end-of-life environmental obligations associated with stranded assets because the assets subject to sale changed ownership prior to the AER issuing any orders and environmental liabilities associated with the sold assets were assumed by the purchaser - the new licensee assumed end-of-life obligations for the transferred assets.
Notably, the Court stated that the Redwater decision "does not appear to expand [the scope of section 14.06(7)] to cover trust funds relating to the proceeds of sale of property to which the debtors no longer have the status of "owner, party in control, or licensee" at the time the orders were issued. Thus, the findings in Redwater do not extend to a situation, such as in this case, where property unrelated to property that is affected by an environmental condition is sold to a new licensee before any abandonment or reclamation orders are made, and where the new licensee assumes the inherent end-of-life obligations for that property. In this case, the AER is not at risk for any current costs of reclamation of the transferred property".
Manitok highlights the continuing evolution of the law on the scope of Redwater in cases involving energy companies.
This decision is a positive development for banks and other secured creditors who now have the ability to assert that they are entitled to receive distributions from the debtor's estate in a manner that is arguably not inconsistent with the Redwater decision.
The trustee has appealed the decision. An application to determine whether leave to appeal is necessary and, if so, to determine whether to grant leave will be heard by the Alberta Court of Appeal on May 20, 2021. Stay tuned.
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