By Nathaniel Brenneis
Today, the Supreme Court of Canada (SCC) overturned the Alberta Court of Appeal’s contentious decision
to prioritize the interests of secured creditors in bankruptcy over the
fulfillment of oil well abandonment and reclamation obligations.
At issue was whether the province’s rules for cleaning up oil wells
frustrated the purpose of Canada’s federal bankruptcy regime. The SCC
held there was no conflict. As a result, the trustees of bankrupt oil
and gas companies can no longer disclaim remediation liabilities and
simply walk away from uneconomic oil and gas sites. Environmental
clean-up now takes priority over payments to creditors.
As previously reported,
this case revolved around the assets of Redwater Energy Corporation
(“Redwater”), a public oil and gas company which was placed in
receivership in 2015 by Alberta Treasury Branch ("ATB"). Following an
application by ATB, Grant Thornton Limited (“GTL”) was appointed as the
receiver and trustee. Redwater had a number of non-producing oil wells
licensed by the Alberta Energy Regulator (the “Regulator”), which needed
to be reclaimed. The costs of abandoning and remediating these wells,
however, far outstripped their remaining economic value. As a result,
GTL sought to renounce or disclaim these unattractive assets.
In response, the Regulator ordered GTL to remediate the disclaimed
oil wells before distributing funds to creditors. It argued that
Redwater’s bankruptcy did not affect Redwater’s environmental
obligations and that GTL was legally required to discharge those
obligations before paying Redwater’s creditors. GTL brought a
cross-application challenging the Regulator’s position and seeking
approval of its sale.
Broadly speaking, the case pitted the public’s interest in ensuring
that oil and gas facilities are reclaimed against the interests of
secured creditors in the federal bankruptcy regime.
Lower Court Decisions
The key issue before the courts was determining the proper priority and treatment of environmental claims under the Bankruptcy and Insolvency Act (BIA).
The lower courts determined there was operational conflict between
the BIA and the province’s regulatory regime set out under the Oil and Gas Conservation Act (OGCA) and Pipeline Act
(PA). Based on the doctrine of paramountcy, the OGCA and PA were thus
rendered inoperable to the extent that their provisions would frustrate
the BIA’s system of distribution and priorities. Further, the courts
held that the Regulator’s orders were essentially unprotected monetary
claims and therefore unenforceable against a trustee and receiver.
As a result, the lower courts concluded that GTL did not have to
comply with the Regulator’s orders and could settle the claims of
secured creditors without fulfilling any of its environmental
Supreme Court Decision
In a 5-2 decision, the majority of the SCC ruled that Alberta’s
environmental regulatory regime can coexist alongside the scheme of
distribution set out under the BIA.
Rather than find the provincial and federal regimes to be
incompatible, the SCC determined that the Regulator’s orders were based
on valid provincial laws of general application – exactly the kind of
valid provincial laws that underpin the BIA. The BIA is clear that the
ownership of certain assets and the existence of particular liabilities
depend upon provincial law. In this case, the provincial laws provide
certain end-of-life obligations for Redwater’s production facilities
which define how much of the bankrupt’s estate is available for
In other words, in crafting the priority scheme of the BIA,
Parliament intended to permit regulators to place a first charge on real
property of a bankrupt affected by an environmental condition or damage
in order to fund remediation and reclamation. Thus, the BIA explicitly
contemplates that environmental regulators will extract value from the
bankrupt’s real property if that property is affected by an
environmental condition or damage. Therefore, there is no conflict to
trigger the doctrine of paramountcy in this case. The Regulator’s orders
supersede the distribution.
The SCC also stated that bankruptcy is not a licence to ignore rules.
Redwater has remedial obligations that are not claims provable in
bankruptcy. Section 14.06(4) of the BIA is purely concerned with a
trustee’s personal liability, and does not empower the trustee to walk
away from the environmental liabilities of the estate it is
administering. Pursuant to orders of the lower courts, GTL had already
sold or renounced all of Redwater’s assets, and the sale proceeds were
being held in trust. Accordingly, the SCC ordered that these funds be
used to address Redwater’s end-of-life obligations and reclaim the well
In overturning the lower courts’ ruling, the SCC has helped unravel
the tangled intersection between bankruptcy proceedings and provincial
environmental law, but this is a lengthy decision and its ramifications
will take time to fully assess and consider.
There is no question, however, that this case will have far-reaching
implications across several different industries nationwide. While
environmental regulators and advocates will consider this ruling a
significant victory, the decision also introduces uncertainty for
secured lenders in the oil and gas sector, as well as secured lenders to
other industries with potential for significant environmental
For further information on how this decision may impact you, please contact a member of our Restructuring & Insolvency Practice Group or our Energy, Environmental & Regulatory Practice Group.