Law Times

Law Times • November 5, 2018 Page 11 www.lawtimesnews.com Ruling on obligations of bankrupt companies coming BY DALE SMITH For Law Times I n the spring, the Supreme Court of Canada heard ar- guments in Orphan Well Association, et al. v. Grant Thornton Limited, et al., re- garding the obligations that trustees or receivers of bankrupt companies have when it comes to cleaning up contaminated sites they have acquired. Ontario lawyers say they are paying attention to the decision, which could have an impact on regulatory oversight for busi- nesses across Canada. The com- ing ruling could also have major implications on the oil and gas industry, they say. In the case, Redwater Energy Corporation became insolvent, and its trustee in bankruptcy wanted to renounce or disclaim Redwater's interest in its "or- phan" wells but keep and sell the valuable wells to maximize the recovery of the secured creditor. The Alberta Energy Regula- tor said this was not permissible and a sufficient portion of the sale proceeds from the valuable wells must be set aside to meet the costs of remediating those orphan wells. Nader Hasan, a partner with Stockwoods LLP in Toronto, who represented intervener Greenpeace at the SCC, says that if Thornton's position that bankruptcy law is paramount is correct, then environmental ob- ligations will take a back seat to bankruptcy law and the rights of creditors. "From an environmental per- spective, when it comes to the oil and gas industry, the environ- ment is an involuntary creditor," says Hasan. "It bears all of the risk but en- joys none of the benefits. Unlike debtors, who eventually emerge from bankruptcy, the environ- ment never gets a fresh start." Greenpeace's argument was that co-operative federalism is necessary for meaningful envi- ronmental regulation. Keely Cameron, counsel for the Orphan Well Association and the Alberta Energy Regu- lator in Calgary, says the case is expected to have wide-reaching implications for regulators, lenders, energy companies and potentially other industrial ac- tivities throughout Canada. There were 14 intervenors in the case. The association and the regu- lator have taken the stance that they should not have to wait until the end of an insolvency before regulating end-of-life ob- ligations for a well. "The case raises questions regarding who should bear the cleanup costs associated with energy development when a company becomes insolvent — lenders, regulators, provinces, other industry members or the public — and what is a regula- tory obligation as opposed to a provable claim?" says Cameron. Cameron says that three con- stitutional law principles were raised at the Supreme Court of Canada hearing — federal para- mountcy, co-operative federal- ism and inter-jurisdictional im- munity, the latter argued by the intervenor provinces. "The Supreme Court of Can- ada's decision may provide clar- ity as to what was intended by s. 92(A) of the Constitution Act, 1867, which provides provinces with exclusive jurisdiction to make laws in relation to the ex- ploration, development, conser- vation and management of non- renewable natural resources," says Cameron. Tom Cumming, partner with Gowling WLG in Calgary, who represents trustee Thornton, says the current system allows assets of an insolvent producer to be sold so that creditors and stakeholders can recover funds, but if the AER and Orphan Wells Association are found to be right, they would be in con- trol and creditors could poten- tially recover nothing. "The ability to deal with in- solvent producers is very impor- tant," says Cumming, adding that it will impact on an oil and gas company to obtain financ- ing. "The difficulty with the approach the AER has taken is there was no certainty, and that is the very thinking that un- derlay the amendments to the Bankruptcy and Insolvency Act that led to s. 14.06." Cumming says the now 88,000 unabandoned inactive wells and 188,000 unreclaimed inactive wells won't go away, no matter which way the SCC rules, because Alberta doesn't have a regulatory structure where producers have to carry out abandonment and reclamation activities — only that they are li- able for them. There was also no requirement that, if a permit was transferred, the balance sheet and liabilities of the new com- pany were considered, meaning they weren't tested if they could meet their obligations. Cumming says the tendency for large producers to transfer properties to smaller compa- nies with a single producing well with several non-producing ones had shed their liabilities to those smaller companies — something other sectors could not get away with under envi- ronmental laws. Cumming says that if a re- ceiver can't sell assets to a regula- tory-compliant purchaser, then there is no purpose to an insol- vency and the assets might as well be left with everyone walk- ing away, which is an important problem. Cumming says the distinc- tion between monetary and reg- ulator obligations should be an important one, but it remains an evolving area in the courts. "What hasn't been grappled with is the idea of what kind of obligation ought to be unques- tionably respected by either a debtor in an insolvency pro- ceeding or a receiver," says Cum- ming. However, Hasan says that, while Thornton tries to frame the issue from the perspective of fairness, it leaves out the real- ity that the provincial legislation is all that is there to protect the environment. Hasan adds that the Consti- tution doesn't delegate the exclu- sive jurisdiction over the envi- ronment to either the provinces or the federal government, but it has overlapping powers, which requires co-operation in order to have effective environmental regulation. "For that to happen, you need a vibrant conception of co-operative federalism," says Hasan. "If the respondents are right, we would essentially be rolling back this doctrine of co-operative federalism, and it would involve the Supreme Court taking a much more re- strained approach to co-oper- ative approach than we've seen at any time in the past 20 years." Hasan also notes that, when orphan wells aren't cleaned up, those costs will eventually be passed on to taxpayers. "This is an end run around the polluter pays principle," Hasan says. Tamara Farber, a partner at Miller Thomson LLP in Toron- to, says the provinces generally regulate in the environmental sphere in similar ways. "When federal bankruptcy laws are overlain, we start to see strategic corporate decisions be- ing made at the possible expense of the provincial taxpayer," says Farber, who wasn't involved in the case. "The issue isn't just an Al- berta issue. To me, it's about the proper interplay between federal bankruptcy laws and provincial environmental laws in every province." Farber says this case takes the Supreme Court's Abitibi test to the next level of analysis. The test arose from Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, which estab- lished three requirements that regulatory orders must meet in order to be considered claims that could be subject to the in- solvency process. "Does Abitibi apply in all cas- es or is there some recognition of different types of regulatory oversight?" asks Farber. "Do all actions of a regulator qualify it as an ultimate creditor? If the Su- preme Court of Canada meant something in Abitibi when it said that not all regulatory or- ders qualify a regulator as a creditor, is this such a case?" Carole Hunter, a partner with DLA Piper (Canada) LLP in Calgary, who was not involved in the case, says s. 14.06 of the Bankruptcy and Insolvency Act, at the centre of this case, hasn't received much attention until now. The section states that a trustee or receiver is not person- ally liable for any environmental condition that arose before their appointment and that, if there is an order that would require a trustee to remedy environmen- tal damage, they have a certain period of time to renounce their interest in the property. At the Alberta Court of Ap- peal, in Orphan Well Associa tion, et al. v. Grant Thornton Limited, et al., 2017 ABCA 124, two of the three judges agreed with the trial judge that fed- eral bankruptcy laws had para- mountcy over the provincial en- ergy regime. Justice Sheila Mar- tin dissented and she has since been elevated to the Supreme Court of Canada, although she did not sit on the panel in this case. "It was really a grappling of this as an issue of health and safety or is it really this black letter law of this company is in- solvent and this is what they're entitled to do and too bad for ev- erybody else?" says Hunter. LT FOCUS TheCannabisChannel.ca THE CANNABIS CHANNEL.ca C C What are the implications of the Cannabis Act? 7JTJUUIFXFCTJUFUIBUQSPWJEFTSFMJBCMFOFXT BOBMZTJTFYQFSUTBOESFTPVSDFTGPS QSPGFTTJPOBMTMPPLJOHGPSBOTXFSTȋXIFUIFS UIFZȎSFEFBMJOHXJUIDBOOBCJTJOUIF XPSLQMBDFJOUFSQSFUJOHMFHJTMBUJPONBOBHJOH ."USBOTBDUJPOTPSOBJMJOHEPXOJOUFMMFDUVBM QSPQFSUZSJHIUT Untitled-4 1 2018-10-26 12:10 PM Nader Hasan says when orphan wells aren't cleaned up, those costs will eventually be passed on to Canadian taxpayers.

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