Bankruptcy is not a license to ignore rules

When oil and gas companies go bankrupt, the proceeds of the sale of remaining assets should go to the clean-up of left behind orphan wells and take priority over paying off creditors. That’s what the Supreme Court of Canada ruled in a 5-2 ruling that has major implications on the priority and treatment of environmental claims in bankruptcy.

“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy,” Chief Justice Richard Wagner wrote for the majority. “They must, for example, comply with non-monetary obligations that are binding on the bankrupt estate, that cannot be reduced to provable claims, and the effects of which do not conflict with the [Bankruptcy and Insolvency Act]…”

The case, which reverses an earlier Alberta Court of Appeal ruling, focused on Redwater Energy Corporation, a small oil & gas company that held licences in oil and gas properties and that went out of business in 2015.  Its properties included some 72 inactive wells. Because the cost of remediation likely exceeded their value, the company’s trustee, Grant Thornton, had been trying to disclaim the bankrupt’s interest in those wells, and sell only the valuable assets. 

In Alberta, disclaimed wells fall under the responsibility of the Alberta Energy Regulator and the Orphan Well Association. The regulator and the OWA have argued that the trustee has to fulfill end-of-life obligations before it can distribute proceeds to any creditors. The regulator even issued abandonment and remediation orders to the trustee, who refused to comply.

Alberta’s Court of Appeal initially held that the trustee had the right to renounce oil and gas assets encumbered with environmental obligations. It drew heavily upon the three-part test the Supreme Court crafted in its 2012 AbitibiBowater ruling to determine when an environmental obligation imposed by a regulator is a provable claim under the federal Bankruptcy and Insolvency Act. In that decision, the top court ruled against the government of Newfoundland and Labrador in its effort to force insolvent AbitibiBowater Inc. to pay for an environmental clean-up of one of its mills.

Even so, the Alberta Court of Appeal found that a regulatory order should be treated merely as a provable claim in bankruptcy, to be ranked behind secured and preferred creditors. 

The Alberta Energy Regulator challenged that decision, and the Supreme Court sided with it. “Neither the Regulator nor the Government of Alberta stands to benefit financially from the enforcement of these obligations,” the majority wrote. “These public duties are owed, not to a creditor, but, rather, to fellow citizens, and are therefore outside the scope of “provable claims.”

“End-of-life obligations are imposed by valid provincial laws which define the contours of the bankrupt estate available for distribution,” it concluded.

The case generated a lot of interest among environmental activists. Following the downturn in commodity prices that began in 2014, Alberta saw a proliferation in the number of orphaned wells. There is a cost to sealing wells, removing equipment and restoring the land when their productive life ends.  There was concern that taxpayers would ultimately find themselves on the hook for clean-up costs that by some estimates could easily reach into the tens of billions of dollars. According to Orphan Well Association figures, it costs on average of $304,448 to reclaim a well. And according to a C.D. Howe Institute report published in 2017, Alberta has roughly 155,000 abandoned or inactive wells that have not yet been fully remediated.

Martin Olszynski, an associate professor of law at the University of Calgary, wrote in an email that the Supreme Court has given regulators “a bit of a reprieve, which could be considered a mixed blessing. It seems clear that regulators throughout Canada are back-ending clean up responsibilities, when they should be requiring financial assurance up front. There has been some momentum in this direction lately; it would be unfortunate for that to dissipate as a result of this decision.”