In a landmark decision, Canada’s top court has ruled that in bankruptcy, energy companies must clean up old wells. This means bankrupt energy companies must first ensure their environmental obligations are fulfilled before other creditors are paid back in the bankruptcy process. The ruling overturns two lower court decisions, which had held bankruptcy to have priority over environmental responsibilities.

Background

The case began in 2015 when an energy company (“the company”) became insolvent. Alberta’s Energy Regulator (“Regulator”) issues property interests in oil and gas and licenses to extract the resources to oil gas companies. These rights come with what are known as end-of-life responsibilities, which require licensees to plug and cap oil wells, dismantle surface structures, and restore the surface to its previous condition. These end-of-life obligations are known as “abandonment” and “reclamation.”

When the company involved in the case became insolvent, the bankruptcy trustee (“the trustee”) sought to sell the company’s assets in order to satisfy its debts. This action would have meant the company could walk away from the operation without satisfying its end-of-life obligations. If this had occurred, the energy-industry-funded Orphan Well Association (“OWA”) would have been stuck with the bill for the cleanup.

The Regulator, having been advised of the company’s insolvency, warned it would not approve of the transfer of any of the company’s licenses unless all regulatory obligations were fulfilled. The trustee, however, determined these obligations would cost more than the value of the company’s assets. They informed the regulator that they only intended to take control of the company’s 17 most productive wells, 3 associated facilities, and 12 associated pipelines (“retained assets”) while abandoning the rest (“renounced assets”). The Regulator stated the trustee could not simply walk away from the renounced assets, arguing the Bankruptcy and Insolvency Act, while meant to protect trustees from having to pay for the company’s environmental obligations, did not mean the company’s estate could also avoid its environmental responsibilities.

Decisions in the lower courts

Both the chambers judge and a majority of the Court of Appeal issued decisions favouring the trustee, holding the Regulator’s “proposed use of statutory powers to enforce (the company’s) compliance conflicted with the BIA in two ways: (1) it imposed on (the trustee) the obligations of a licensee in relation to the (company’s) assets disclaimed by (the trustee), contrary to s. 14.06(4) of the BIA ; and (2) it upended the priority scheme for the distribution of a bankrupt’s assets established by the BIA  by requiring that the provable claims of the Regulator, an unsecured creditor, be paid ahead of the claims of (the company’s) secured creditors.”

The Supreme Court’s decision

On the first point, the Supreme Court found no evidence in past situations to suggest that the Regulator would ever hold bankruptcy trustees professionally liable for such obligations, adding “here is nothing to suggest that this well-established state of affairs has led insolvency professionals to refuse to accept appointments or has increased the number of orphaned sites. There is no reason why the Regulator and trustees cannot continue to work together collaboratively, as they have for many years, to ensure that end-of-life obligations are satisfied, while at same time maximizing recovery for creditors.”

The Supreme Court went on to hold that there is nothing in the BIA to  relieve the estate of the company from liability. Because of this, the trustee was ordered to expend the assets of the company’s estate on abandonment.

With regards to the second point, the Supreme Court held that the provincial laws governing oil and gas development did not contradict the BIA. An obligation to make sure abandoned wells are not environmental hazardous does not interfere with creditors’ rights. The Court arrived at this decision by applying what is known as the Abitibi test, stemming from a 2012 Supreme Court of Canada decision, which is used to determine if a claim falls within the BIA scheme (and thus, in this case, upends it). The first part of the test states there must be a debt, liability, or obligation to a creditor. The second steps states the debt, liability, or obligation must have been incurred before the debtor became bankrupt, and third, there must be a monetary value to the debit, liability, or obligation. In this case, there the environmental obligations being enforced by the Regulator failed at the first step, in that it was not acting as a creditor, but instead in the public interest. This reaffirmed a 1991 decision from the Alberta Court of Appeal which held that a regulator is not a creditor when enforcing a public duty through a non-monetary order.

The Supreme Court’s decision meant that the trustee would have to use the money from the sale of the company’s assets to fulfill the company’s end-of-life obligations. Going forward, bankruptcy will not allow trustees or companies to abandon these obligations.

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