Redwater – SCC Delivers The Final Word

On February 1, 2019, the Supreme Court of Canada (SCC) released its highly anticipated decision in the Orphan Well Association, et al. v. Grant Thornton Limited, et al, 2019 SCC 5 (Redwater). The majority of the SCC overturned the Alberta Court of Appeal (ABCA) in Orphan Well Association v Grant Thornton Limited, 2017 ABCA.

This decision has far-reaching implications for all of the stakeholders (including the Crown, Alberta's Energy Regulator (AER) and Orphan Well Association (OWA), surface rights holders, producers, lenders, receivers and bankruptcy trustees – we will refer to receivers and trustees simply as "trustees") in the upstream production of oil and gas. This decision may also affect other provinces and industrial sectors as well.

In overturning the Alberta Court of Appeal, the Supreme Court ruled that while trustees will not be personally liable for abandonment and reclamation obligations, the estate will remain liable for such obligations. The most immediate and profound effect of this decision relates to the relative financial priority between the company's creditors and the cost to reclaim and abandon the wells. Prior to the Supreme Court's decision, a trustee was entitled to sell economic wells and direct the proceeds to the bankrupt's creditors (usually, its secured lender) and disclaim uneconomic wells without paying or accounting for the costs required to abandon and reclaim such wells. In short, the Supreme Court of Canada has settled this issue by holding that reclamation and abandonment liabilities must be dealt with before there can be any distribution to the insolvent party's creditors, including its secured creditors.

Background

The Supreme Court's Redwater decision represents the law coming full-circle since the 1989 trial decision and 1991 appeal proceedings in the PanAmericana de Bienes y Servicios v. Northern Badger Oil & Gas Limited 1991 ABCA 181 (Northern Badger). Northern Badger stood for the proposition that a court-appointed receiver and manager was personally liable for discharging environmental obligations of an insolvent oil and gas producer including end of life abandonment obligations. Northern Badger granted priority to the costs of remedying environmental conditions over claims of secured creditors.

Given the potential for personal liability, Northern Badger, together with other developments in the law relating to the personal liability of trustees, created a chill over the willingness of trustees to accept appointments as trustees. As a result, in 1992 Parliament enacted (and in 1997 subsequently amended) section 14.06 of the Bankruptcy and Insolvency Act (BIA) to provide a measure of comfort to trustees that they are not personally liable for: (i) pre-bankruptcy environmental conditions or...