Insolvency And Environmental Law Collide: Supreme Court Of Canada Rules In Favour Of Alberta Energy Regulator In Redwater Decision

The Supreme Court of Canada ("SCC") has released its decision in Orphan Well Association v. Grant Thornton Limited (2019 SCC 5) regarding the bankruptcy of Redwater Energy Corporation, and the strategy of Redwater's trustees in bankruptcy to try to sell off productive assets of the company to pay creditors, while disclaiming environmentally challenged assets and leaving them to the industry funded Orphan Well Association and potentially the Government of Alberta to address.

Not so fast, says the Supreme Court of Canada! There are end-of-life remedial obligations associated with the bankrupt's non-productive wells that have to be addressed. This isn't a battle of federal versus provincial legislation and paramountcy; it's a prioritization of the use of the bankrupt's assets for compliance with its regulatory obligations to clean up under the terms of its licenses.

"Insolvency professionals are bound by and must comply with valid provincial laws during a bankruptcy" says the SCC in its decision.

The story began when Grant Thornton ("GT") was appointed as receiver and trustee over the assets and liabilities of Redwater Energy Corporation ("Redwater") under Canada's Bankruptcy and Insolvency Act ("BIA") in 2015. Redwater was a publicly traded oil and gas company, which held licenses under the jurisdiction of the Alberta Energy Regulator ("AER") for various properties. Under the applicable provincial legislation, a receiver/trustee is a "licensee" who can operate the licensed assets of the debtor. GT's strategy was to disclaim non-producing wells - those that had no economic value and significant environmental liabilities - using the BIA to effectively pick and choose the prime assets to maximize recovery for Redwater's creditors. GT took the position that the end-of-life abandonment and reclamation obligations of Redwater were unsecured claims which could not take priority over the claims of secured creditors.

The AER, on the other hand, took the position that the remaining value of the bankrupt estate should be applied to satisfy the abandonment and reclamation obligations associated with the estate's licensed assets before any distribution to creditors. AER and the Orphan Well Association brought proceedings to compel GT, as trustee under the remedial orders in effect for each well, to comply with proper abandonment and remedial obligations. AER reasoned, as a regulator, that it was not a creditor, that Redwater's environmental obligations...