Court Of Appeal Clarifies Treatment Of Asset Retirement Obligations

• Published date: 01 April 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Bennett Jones LLP
• Author: Mr Kenneth Lenz and Andrea Stempien

On March 25, 2022, the Alberta Court of Appeal issued its decision in PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2022 ABCA 111. Briefly, the Court held that abandonment and reclamation obligations (ARO) of oil and gas assets operate to depress the value of those assets for the purposes of fraudulent preferences legislation, notwithstanding that they are not provable claims in bankruptcy. The Court also held that serial summary dismissal applications on different grounds are an abuse of process.

The case provides further clarity to the judicial treatment of ARO following the Supreme Court of Canada decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 [Redwater].

PricewaterhouseCoopers in its capacity as Trustee in Bankruptcy for Sequoia Resources Corp. (Sequoia) sued Perpetual Energy Inc., Perpetual Operating Trust (POT) and Perpetual Operating Corp., and others in 2018. The Action alleges that the sale for nominal consideration of certain oil and gas assets from POT to Perpetual Energy

Operating Corp. constituted a transfer at undervalue pursuant to section 96 of the Bankruptcy and Insolvency Act (BIA). The assets transferred consisted of mature legacy assets, allegedly with more than $200 million of ARO. Sequoia became bankrupt approximately 17 months after the transfer.

The Defendants brought an application for summary dismissal in 2018. That application was heard and granted in 2020, but much of it was overturned by the Court of Appeal in 2021 (2021 ABCA 6). In February 2020, the Defendants brought a second summary dismissal application, seeking to dismiss the claim under section 96 of the BIA, raising different arguments than it had previously (the 2020 Application). The application was again successful before the Chambers Justice. The Trustee again appealed to the Court of Appeal.

The Court of Appeal held that the Chambers Justice erred by asking whether ARO are "obligations due, or accruing due" pursuant to section 96 of the BIA, rather than considering whether ARO could or should be incorporated elsewhere into...