Supreme Court of Canada Decision in Redwater: Early implications

INTRODUCTION

Nearly four years ago, Redwater Energy Corporation (Redwater) was petitioned into receivership by its principal secured creditor, Alberta Treasury Branches (ATB). What started as the insolvency of a small oil and gas company with about 100 properties licensed by the Alberta Energy Regulator (AER), became a catalyst for national consideration of environmental policy, the energy industry, and the financial sector. Locally, the case revealed cracks in the Alberta energy regulatory regime and exposed the financial consequences of the failing system on the Alberta public and responsible resource companies in Alberta.

Initially, former Chief Justice Wittmann in  Redwater Energy Corporation (Re), 2016 ABQB 278 determined that the provisions of Alberta’s regulatory regime under the Oil and Gas Conservation Act[1] (OGCA) and the Pipeline Act[2] (PA) were inoperative to the extent such provisions required a Trustee to satisfy the liability inherent in the abandonment and reclamation of an insolvent debtor’s oil and gas wells in priority to claims of its secured creditors. His decision and reasons were affirmed by the Alberta Court of Appeal almost a year later, with a strong dissent by the Honourable Madam Justice Sheila Martin.[3] The eyes of Alberta and the nation turned to the Supreme Court of Canada (SCC), as the energy and financial industries, and various regulatory bodies, among others, sought a determination regarding the ability of insolvency professionals to disclaim end‐of‐life‐liability‐laden assets to maximize recovery for the debtor’s estate.

On January 31, 2019, in a 5‐2 split decision, the majority of the SCC allowed the appeal of the AER and the Orphan Well Association (OWA) and held that the abandonment and reclamation obligations of the debtor were binding on the Trustee, were neither “creditor” claims nor claims provable in bankruptcy and, therefore, did not conflict with the general priority scheme in the Bankruptcy and Insolvency Act[4] (BIA). Adopting a markedly different approach than those of the trial judge and the Court of Appeal majority, Wagner C.J. writing for the SCC majority, held that the AER was acting in the public interest and for the public good in issuing abandonment orders and enforcing licensing liability management ratio requirements. Thus, the provincial regulatory regime can coexist with, and apply alongside, the BIA.

This decision resolves the uncertainty regarding the treatment of end‐of‐life obligations owed by an AER licensee debtor in an insolvency proceeding. According to the SCC, the value of key assets of the debtor, if depressed by abandonment and reclamation obligations, is simply the inherent cost of such licenses held by the debtor, and the regime Alberta has chosen to regulate the oil and gas industry and its impact on the environment. While focused on Alberta, this decision will impact the regulation of natural resources across Canada, and the financing sources available to industry participants.

While the SCC has settled the matier for now, only time will tell whether the federal government will accept the invitation of the various judges deciding this matter on its path through the courts to revisit the federal insolvency regime to ensure it accounts for the distinct character and needs of Canada’s natural resource industries. For now, the AER, industry participants, financial institutions, insolvency professionals and provincial legislators must work together to ensure the ongoing and responsible development of one of our country’s greatest resources – oil and gas in Alberta.