Priority of creditors: Sacrificing the environment?

By Supriya Tandan May 8, 20178 May 2017

Priority of creditors: Sacrificing the environment?

A new case that pits federal insolvency laws against provincial schemes to clean-up environmental contamination may be headed to the Supreme Court of Canada. Last month the Alberta Court of Appeal affirmed the Alberta Court of Queen’s Bench’s decision in Redwater Energy Corporation (Re), which ruled last year that federal provisions that give creditors the ability to disclaim certain uneconomic assets hold priority over provincial orders to remediate abandoned wells. The Alberta courts drew heavily upon Newfoundland and Labrador v. AbitibiBowater Inc, a 2012 top court ruling that dealt with similar issues but drew criticism for its potential in creating perverse incentives.

In Redwater, the Alberta Energy Regulator tried to use provincial oil and gas laws to compel Grant Thornton Limited, a secured creditor of Redwater’s assets, to use proceeds from viable wells to pay for the remediation of uneconomic wells. They argued that Grant Thornton should be considered as a licensee, that are subject to environmental orders, rather than a trustee. In response, lawyers for Grant Thornton Limited argued that the provincial environmental claims were in conflict with federal laws that should prevail over provincial laws. In deciding, the Alberta judges relied on the three requirements — set out by the AbitibiBowater decision — that must be met for an order to be considered a claims under the insolvency process.  First, there must be a debt or a liability. Second, it must have arisen before bankruptcy proceedings were started. Finally, it must be possible to attach a monetary value to the debt or liability.

As for whether environmental claims could hold priority over other claims, the SCC created another test, which essentially boils down to asking, “will the province pay for it?”  It’s a way for  environmental claims to jump the creditor queue in cases where provinces are likely to pay for the clean-up. This test was not without its detractors. When the decision was released, Diane Saxe, who is now the Environmental Commissioner of Ontario, wrote:

The Supreme Court’s focus on whether the province will pay for the cleanup, is, in my view, unhelpful. First, it will rarely apply: the court seemed to be unaware that provincial governments almost never cleanup abandoned private contamination. Rather than spend their own money, the provinces often ignore contaminated sites (especially the thousands that have escheated to the Crown) or impose liability on increasingly innocent parties, like the City of Kawartha Lakes.

She went on to write how the AbitibiBowater decision may have the effect of creating perverse incentives. And perverse incentives is exactly what the Alberta Energy Regulator is arguing would be created should they not be allowed to treat the Grant Thornton as licensees rather than trustees. However, in deciding in favour of Grant Thornton, the Alberta Courts noted that this fear may be exaggerated. As Evan Flaschen, a bankruptcy lawyer with Bracewell, writes:

…The Court affirmed that abandoned well liabilities imposed by provincial regulations on receivers and bankruptcy trustees are in operational conflict with [Bankruptcy and Insolvency Act] exemption provisions, and that the doctrine of paramountcy requires the courts to uphold federal over state law. Appellants argued, among other things, that the lower court’s decision would incentivize corporations to commence insolvency proceedings “merely for the purpose of avoiding environmental liabilities,” but the Court of Appeals cited the Supreme Court in AbitibiBowater, calling such fears ‘exaggerated’ ‘because bankruptcy or insolvency are not easy solutions to financial problems and . . . there is enough judicial discretion in the insolvency regime to prevent abuses.’

Worthy of note is the dissent in the Redwater decision, written by Justice Sheilah Martin, who raises concerns that the ruling will give other companies a pass on meeting their end-of-life obligations:

The appellants argue that if Redwater can shed its end of life obligations, this would provide an incentive for many other similarly situated enterprises to organize their affairs to do the same, resulting in even more orphaned wells. They have a point, as the ability to avoid end of life obligations will not arise only on bankruptcy, but under the CCAA as well. This may encourage licensees to place wells with significant end of life expenses into one entity and separate that entity from other, more profitable, holdings. If that entity goes bankrupt or is re-organized, there is the fear that these public duties would be washed away from the entity and placed instead on others. There is unfairness if the entity is permitted to reserve and preserve any “assets” for itself and to avoid the costs of the public obligations assumed to gain access to the resource in the first place. The respondent and bankruptcy professionals before this Court argued that this fear is exaggerated. With respect, it is difficult to share their optimism. It is more realistic to assume that individuals will operate as rational economic actors who organize their affairs to maximize their own self- interest, within the limits allowed by law. If they are allowed to avoid or evade the end of life responsibilities attached to their licences, abandonment and reclamation, so necessary for the environment, would likely be among the first sacrifices made in times of fiscal difficulty

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