“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy.”Wagner C.J. and Abella, Karakatsanis, Gascon and Brown JJ. in Orphan Well Association v. Grant Thornton Ltd.
Last week the Supreme Court of Canada (“SCC”) released its decision in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5. A majority of the Court found that environmental liabilities, such as a requirement to seal a spent gas well and reclaim the land around it, must be discharged before a bankrupt company’s creditors are paid. This overturns the finding by the lower courts.
In this case, Redwater Energy, a publicly traded oil and gas company, entered receivership in 2015. Grant Thornton Limited was appointed as its receiver, so was responsible to manage the bankruptcy process including by taking control of Redwater’s assets. Redwater’s main assets were 127 oil and gas assets (wells, facilities and pipelines), some of which were producing and profitable, but the majority of which were burdened with reclamation and end-of-life requirements. As Redwater operated in Alberta, it was subject to the oversight of the Alberta Energy Regulation (AER) and had received authorizations under a number of pieces of provincial legislation, including Alberta’s Environmental Protection and Enhancement Act, Oil and Gas Conservation Act, and Pipeline Act. These authorizations included requirements to abandon and reclaim property that had been used for oil and gas activities once the oil and gas assets had reached the end of their life.
As bankruptcy is governed by the federal government through the Bankruptcy and Insolvency Act (BIA), the main legal issue in this case was whether the federal BIA and the provincial legislation’s end-of-life reclamation requirements were in conflict (this legal question of conflict is referred to as the doctrine of federal paramountcy).
The receiver, Grant Thornton, argued that it should be able to take control only of Redwater’s profitable assets, and that any environmental liabilities should not have to be satisfied until after secured creditors have been paid—essentially rendering the AER an unsecured creditor. Grant Thornton relied on a specific interpretation of the federal BIA to make this argument. The Orphan Gas Well Association (OWA) is an industry-funded non-profit organization that has delegated authority from the AER to clean-up gas wells that are left in an unreclaimed state by bankrupt companies. The OWA argued that a regulator exercising a “public duty” is not a creditor of the company in question, and that environmental liabilities should be discharged before creditors are paid, in compliance with AER orders . It relied on a different interpretation of the BIA in making this argument.
A majority of the Court found that the federal BIA and the relevant provincial legislation were not in conflict, and that companies may follow both the federal bankruptcy regime and the provincial oil and gas licensing regime in tandem. This means that when a company enters the bankruptcy process, its receiver must take responsibility for all of the company’s property (not just the most valuable or that without environmental liabilities), and it must discharge the company’s environmental liabilities outside of the bankruptcy process, before creditors are paid.
This decision makes clear that regulators may access the assets of bankrupt companies first, before creditors, in order to discharge environmental liabilities and reclaim oil and gas sites. Though this is a step in the right direction in terms of forcing the polluter to pay for its environmental damage, the problem still remains that many of these companies may not have enough value in their assets to cover all of their environmental liabilities—leaving taxpayers to cover the rest.
Summary by Erin Gray