1. Introduction

The potential conflict between federal insolvency law and provincial environmental law that came to a head in Orphan Well Association v Grant Thornton Ltd ("Redwater") was settled by the Supreme Court of Canada (the "SCC") on January 31, 2019 in a split 5-2 decision.[1] Specifically, Redwater addresses whether environmental orders are binding on an insolvent estate, or if a trustee can disclaim unprofitable lands subject to the environmental orders, treating the regulator as an unsecured creditor.

In a contested decision, the SCC considered a test it had previously established to determine whether a regulatory order was enforceable against the debtor's estate as opposed to merely constituting a provable claim in the bankruptcy (the "Abitibi Test", described below). If a regulatory order was found to meet the Abitibi Test and therefore found to be a claim provable in bankruptcy, then it would be stayed and treated as any other unsecured debt. The SCC in Redwater determined that the Abitibi Test had been interpreted too broadly by the lower courts, therefore narrowing the circumstances where such an order would be reduced to a claim provable in bankruptcy. The majority of the SCC in Redwater significantly expanded the circumstances in which costly end-of-life environmental or other regulatory orders will effectively trump secured and other creditors in an insolvency. The SCC further held that the regulator should not be characterized as acting as a "creditor" in this case where the regulator sought to enforce an insolvent company's end of life obligations and consequently does not have a claim provable in bankruptcy.

In arriving at its decision, the SCC held that there was no conflict between the applicable provisions of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA") [2] and Alberta's environmental regulatory statutes that would trigger the doctrine of federal paramountcy. The SCC overturned the decisions of both the Alberta Court of Queen's Bench[3] and the majority of the Alberta Court of Appeal,[4] both of which held that there was a conflict between the applicable federal and provincial acts that found that provincial environmental law, to the extent that it created a practical super‑priority in favour of the regulator, to be inoperative.

The Attorney General of Ontario intervened in the case and supported the Alberta regulator's position that its environmental orders should continue to operate in bankruptcy. Although Ontario's submissions focused on its provincial oil and gas industry, all corporations that could be subject to regulatory orders, including owners and operators of contaminated lands, may be affected.

The decision will have serious consequences for creditors, many of whom are innocent suppliers and investors, but will be left paying for environmental remediation.

2. Background

Redwater Energy Corporation ("REC") was an oil and gas company operating in Alberta. The Alberta oil and gas industry is regulated by the Alberta Energy Regulator ("AER"). The AER regulates the oil and gas industry by issuing licenses for each oil and gas well or pipeline, and then by imposing on each licensee conditions that control all aspects of the operation, disposition and eventual shutting-in of the licensed property.[5] It issues licenses, approvals, permits, orders, decisions and directions pursuant to authority derived from statutes such as the Oil and Gas Conservation Act ("OGCA") and the Pipeline Act ("PA").[6]

In Alberta non-producing wells do not need to be "abandoned"[7] (plugged) and reclaimed[8] (remediated) within any set timeframe.[9] The many non-producing wells often sit for years or even decades.[10] They are also commonly transferred to subsequent licensees, who may or may not be sufficiently capitalized to perform their end‑of‑life obligations. Like many oil and gas companies ceasing operations, REC held licenses for both non-producing oil and gas wells.

In the Redwater case, REC became insolvent and was put into receivership by its senior secured creditor, ATB Financial. Upon learning of REC's receivership, the AER took view that:

  1. it was not a creditor;
  2. environmental obligations were not "claims provable in bankruptcy", and that accordingly the environmental obligations of REC were unaffected by the insolvency proceedings;
  3. the receiver was legally obliged to discharge REC's environmental obligations "prior to distributing any funds . . . to creditors, secured or otherwise"; and
  4. it would not approve any transfers of REC's (valuable) oil and gas assets unless it was satisfied that both the transferor and transferee would be in a position to fulfill all environmental obligations and the proceeds of sale were paid to the AER as security for the end‑of‑life obligations.

At the time of the receivership, REC had both producing and non-producing wells. The receiver concluded that the cost of the end-of-life obligations for the non-producing wells would likely exceed the sale proceeds of the producing wells. As such, the receiver renounced or disclaimed the non-producing wells pursuant to s. 14.06(4) of the BIA, taking possession and control of only the productive wells. Nonetheless, the AER issued orders requiring REC to abandon and reclaim, "for environmental and public safety reasons", the non-producing assets that the receiver had renounced.[11] Subsequently, REC was assigned to bankruptcy and the receiver was appointed as the bankruptcy trustee. The trustee took the position that, as a result of the disclaimer, it had no obligation to comply with the AER's orders in relation to the renounced wells and attempted to maximize recovery for creditors through sale of the profitable wells.

The AER, along with the Orphan Well Association, a non-profit organization operating under authority delegated by the AER,[12] sought a declaration that the trustee's disclaimer was void, and an order compelling compliance by the trustee with the abandonment and remediation orders issued by the AER. The AER's position was, in essence, that the environmental orders were regulatory in nature and continued to bind the trustee during the bankruptcy notwithstanding the consequences this may have for the bankrupt's creditors. The trustee brought a cross-application for approval of the sale of assets, and a ruling on the constitutionality of the AER's position.

The main constitutional issue was whether the AER's abandonment orders and certain provisions of Alberta's applicable environmental legislation conflicted with the federal BIA - which would result in certain provisions of the provincial environmental legislation being held in abeyance and the BIA overriding.

In order to answer this question, the SCC considered the following issues:

  1. whether disclaiming property under s. 14.06(4)(b)(ii) of the BIA has the effect of removing the obligation to comply with the order from the bankrupt estate, or simply eliminating the trustee's personal liability in respect of the order; and
  2. whether environmental orders are provable claims in an insolvency proceeding. If they are, then the environmental order is treated like any other claim in the proceeding - the order is stayed and it generally ranks as an unsecured claim (except for certain statutory security interests). The alternative is that the environmental order is considered as a regulatory obligation that continues to be enforceable during the insolvency proceeding and consequently, effectively has priority over all other claims and, in the case of a restructuring, continues after the restructuring.[13]

The trustee in Redwater argued that (a) while the estate would continue to be liable for the end‑of‑life obligations associated with disclaimed property, the trustee would not be obliged to perform them, and (b) the environmental orders were properly characterized as provable claims and the regulator was attempting to defeat the priority scheme set out in the BIA. For both of these reasons the trustee argued that the provincial statutes that gave rise to the environmental orders conflicted with the federal BIA, and accordingly the federal law was paramount.

3. The Abitibi Test

The characterization of environmental obligations as provable claims has previously been considered by the Supreme Court of Canada. In Newfoundland and Labrador v. AbitibiBowater Inc., ("AbitibiBowater") the SCC considered whether certain orders issued under Newfoundland's Environmental Protection Act were "claims" for the purpose of the CCAA.[14] The SCC established a three-part test for whether a regulatory obligation is a provable claim in an insolvency proceeding:[15]

  1. there must be a debt, liability or obligation to a creditor,
  2. it must be incurred before the debtor's bankruptcy, and
  3. it must be possible to attach a monetary value to the debt, liability or obligation.

Meeting the test would mean that a regulatory order would be stayed and treated the same as other unsecured debts.

The Abitibi Test has been applied by the Ontario Court of Appeal in Nortel Networks Corp. (Re),[16] ("Nortel") and Northstar Aerospace, Inc. (Re) ("Northstar")[17]. Both cases concerned clean-up orders for legacy contaminated sites owned by insolvent corporations.

In Nortel, the Ministry of the Environment ("Ministry")[18] issued remediation orders after the corporation's CCAA filing. These orders dealt with a number of properties and would have required certain of the debtor companies (referred to collectively as "Nortel") to expend approximately $18 million to remediate the properties. Nortel brought a motion before the CCAA judge seeking a declaration that the Ministry orders were monetary in nature and thus, were stayed by the CCAA proceedings, meaning it could cease complying with the orders. It also sought a declaration that the Ministry's claims had to be dealt with as part of the CCAA. The Ontario Court of Appeal found that the key issue was the third branch of the Abitibi Test; specifically, the Court of Appeal held that in order for a monetary value to be attached to the debt, it had to be sufficiently certain that the Ministry would perform the remediation work itself and then have a claim for indemnification against Nortel. With the exception of one property, the Court of Appeal found it was not sufficiently certain the Ministry would perform the remediation itself and thus, the claim was not stayed and the regulatory orders had to be complied with, depleting assets from the estate that would otherwise be paid to Nortel's creditors.

By contrast, in Northstar, the Ontario Court of Appeal found it was sufficiently certain that the Ministry would perform the remediation work itself, given that the Ministry had already taken steps towards conducting the remediation itself, there was no funding available to the debtor or the trustee to do remediation work, and there were no other parties who could be required to perform the work. Consequently, the Ministry's order was found to be a provable claim that was stayed by the insolvency proceeding - to be determined and paid in the same manner as all other creditors of the estate. Subsequently, the Ministry chose to pursue Northstar's directors and officers personally.

4. Judicial History

Court of Queen's Bench of Alberta

In his May 19, 2016 decision (the "Chambers Decision"), Chief Justice Wittmann of the Alberta Court Queen's Bench found that there was a conflict between the provincial and federal laws. Specifically, he found that requiring a trustee to comply with abandonment orders issued pursuant to provincial legislation in relation to renounced licensed assets triggered the doctrine of federal paramountcy as there was an operational conflict between s. 14.06(4) of BIA and the provincial law. The obligation to comply with the AER orders required payment of, or the posting of security for, the abandonment costs to the AER in priority to all others, including secured creditors. This frustrated the primary purposes of the BIA, as its distribution scheme would be upset.

Chief Justice Wittman stated that it was conceded by the OWA and AER that the first and second branches of the Abitibi Test were met.[19] However, the AER argued that the fact that there were monetary consequences to its orders was not determinative of the third branch of the test.[20] Chief Justice Wittman disagreed and found that there was no funding for the receiver to carry out the work, the receiver was not in possession of the renounced properties and therefore could not carry out the work, and that there were no other parties who could be required to carry out the work. Further, he found either the AER or OWA would probably carry out the work, and therefore that, although not expressed in monetary terms, the AER orders were "intrinsically financial,"[21] and sufficiently certain.[22] If the regulator's actions indicate that, in substance, it is asserting a provable claim within the meaning of federal legislation, then that claim can be subjected to the insolvency process.[23]

Alberta Court of Appeal

The majority of the Court of Appeal (consisting of the Honourable Mr. Justice Frans Slatter and the Honourable Madam Justice Frederica Schutz) affirmed the Chambers Decision. In considering the constitutional issues, the Alberta Court of Appeal stated that under the principle of cooperative federalism, the court will first attempt to interpret and apply the two provisions in harmony with each other, and only if that fails will paramountcy be invoked.[24] However, the majority found that the regulatory orders of the AER were in operational conflict with section 14.06 of the BIA and that the underlying sections of the OGCA and PA frustrated the federal purpose of the BIA in managing the winding up of insolvent corporations.

The majority held that a trustee is entitled to abandon or renounce oil and gas assets encumbered with environmental obligations and that the AER's demand for security for remediation diverted value from the bankrupt estate. This was reason enough to classify the claims of the AER as financial in nature, thereby making it a "creditor" whose claims are subject to the priorities prescribed by the BIA.

As it did for the Chambers hearing, AER conceded that the first two branches of the Abitibi Test were met: an obligation existed to the AER as a creditor, and the obligation had arisen prior to the conclusion of the insolvency.[25] Therefore the only real issue was the third branch.

In finding that the regulator's orders constituted a claim provable in bankruptcy, the majority applied the Abitibi Test and found that the effect of the abandonment orders was to elevate the priority of environmental claims and upset "the priorities of the BIA."

The majority found that AER's claims met the test for a provable claim in s. 14.06 of the BIA and did not have higher or special "super priority" over the claims of secured creditors. Under the proper interpretation of the BIA, the AER could not insist that substantial parts of the bankrupt estate be set aside in satisfaction of the environmental claims in super priority over the claims of secured creditors.

In her dissent, The Honourable Madam Justice Sheilah Martin, prior to her elevation to the Supreme Court of Canada, disagreed with the majority, found no conflict between the legislation, and noted that the environment was an area that called for "co-operative federalism."[26] Justice Martin noted that that the "cradle to grave" approach to regulation now stopped at "insolvency," moving the "polluter pays" policy to a "third party pays" system. Justice Martin found that license obligations are public duties, not debts owed to the regulator. Abandonment and reclamation are necessary for public health and safety, reducing the environmental impact of drilling activities, and ensuring private landowners are not left with unused and potentially unsafe well sites on their land.

Ultimately, Justice Martin held that there was no conflict between the legislative schemes and that both schemes could continue to co-exist. In examining the third branch of the Abitibi Test, Justice Martin distinguished the nature of the remedial work being performed in Redwater from AbitibiBowater, Nortel and Northstar:[27]

…. During the course of its operations, various contaminants spilled on the lands owned by Abitibi and the government issued orders and tried to have those lands transferred to the government through legislation. As the Supreme Court noted, when such conditions arise, "regulatory bodies sometimes have to perform remediation work". The decisions of the Ontario Court of Appeal in Nortel and Northstar Aerospace Inc., Re, 2013 ONCA 600, 234 A.C.W.S. (3d) 642 (Ont. C.A.), both decided after Abitibi, also dealt with the same type of industrial contamination on land owned by the debtors, and the same kind of clean-up order. Contrast that with the licensing and regulatory regime here. The abandonment obligations are not an unknown or unexpected event; all parties involved know these obligations will arise at the end of the life of the well.

Given the foregoing, Justice Martin found that the third branch of the Abitibi Test had not been made out as there was insufficient certainty that remediation work would be done or that a claim for reimbursement would be made.

In significant contrast to the majority justices and Chief Justice Wittman in the Chambers Decisions, Justice Martin also held that the first branch of the Abitibi Test had also not been met because the regulatory body was not a creditor of the insolvent company.[28] Quoting Laycraft CJA in Northern Badger,[29] Justice Martin held that the cost of abandoning licensed wells "was one of the expenses, inherent in the nature of the properties themselves, taken over for management by the Receiver," and that the cost was not owed to the regulator, or to the province.

5. The Supreme Court of Canada Decision

The SCC decision was released January 31, 2019. The SCC, split 5:2 in favour of granting the regulator's appeal. The intervenors supporting the AER and OWA in its arguments included Greenpeace, Ecojustice and the Attorney General of Ontario, among others. The majority decision, penned by Chief Justice Wagner, found:

  • the regulator's use of its statutory powers did not create a conflict with the BIA so as to trigger the doctrine of federal paramountcy;
  • section 14.06(4) of the BIA permits a trustee to avoid any personal liability in respect of environmental obligations for a property it has disclaimed, however those obligations remain a liability of the insolvent estate; and
  • not all environmental obligations enforced by a regulator will be claims provable in bankruptcy. Further, the regulator's orders in this case were not claims provable in bankruptcy, and the priority scheme in the BIA was not upended. Thus, no conflict was caused by the trustee's status as a licensee under Alberta legislation. Alberta's regulatory regime can coexist with and apply alongside the BIA.

The majority of the SCC also reframed its own Abitibi Test to determine whether a regulator's action amounts to a claim provable in bankruptcy with respect to the first and third branches of the test.

The first branch of the test requires that there must be a debt, liability or obligation to a "creditor". The SCC agreed with the regulator and Martin JA and held that the Court of Queen's Bench and Alberta Court of Appeal (as well as the Ontario Court of Appeal in Nortel) had incorrectly, and overly broadly, interpreted the circumstances in which a regulator will be considered a creditor. The majority rejected the concessions made by the regulator on the creditor issue at the lower courts, noting that "concessions of law are not binding." In Nortel and Northstar the courts applied the Abitibi Test to find that the first branch of the test was always made out when a regulator exercises its statutory enforcement powers against a debtor. The SCC found that where the regulator acts in a bona fide regulatory capacity in the public interest and for the public good, and is not seeking a pecuniary benefit, it is acting in a regulatory capacity rather than as a creditor. Echoing Justice Martin's statement, the SCC held that where the public is the beneficiary of the enforcement action (and not the government's coffers as in AbitibiBowater), the first branch of the test will not be made out. Rather, in Redwater the majority found that the orders were made in the public interest and for the public good. Therefore the regulator was not a creditor of REC as the public was the beneficiary of the environmental obligations. The majority rejected the trustee's argument that the first "creditor" branch of the Abitibi Test would be satisfied whenever a regulator exercises its enforcement powers against a debtor. The majority instead agreed with the submissions of Ontario that the creditor part of the test would be meaningless if it were not possible for the test to turn on whether a regulator is a creditor of the bankrupt.[30]

The Supreme Court went on to discuss the third branch of the Abitibi Test, or the "sufficiently certain" branch. The majority noted that the regulatory end-of-life obligations did not directly require REC to make a payment to the regulator, but rather obliged REC to "do something".[31] The majority rejected the characterization of the orders as "intrinsically financial" applied by the majority of the Alberta Court of Appeal, finding that this application would be too broad. This would result in a provable claim being established even where the existence of a monetary claim in bankruptcy was merely speculative.[32] The third branch of the test was the focus of the courts analysis in Nortel and Northstar. The Supreme Court confirmed the approach of the Ontario Court of Appeal in Nortel, finding that ongoing environmental remediation obligations may be reduced to monetary claims only where: (i) the regulator has performed the remediation work and advanced a claim for reimbursement, or (ii) it is sufficiently certain that the province will do the work and seek reimbursement. The Supreme Court stated that Northstar could be distinguished, because in that case the Ministry had already stepped in to conduct the remediation.

In a detailed dissent that is sure to be cited in future cases, Justices Moldaver and Côté found that both an operational conflict and frustration of purpose existed between the provincial legislation and the federal BIA, and thus invoked the doctrine of federal paramountcy. Consistent with the lower court decisions, the dissenting judges found that Alberta's statutory regime does not recognize the disclaimers by trustees of assets as lawful by virtue of the fact that receivers and trustees are treated by regulators as licensees who cannot disclaim assets. The minority was of the view that, because of the unavoidable conflict the provincial legislation should be held inoperative to the extent that it does not recognize the legal effect of the trustee's disclaimers. The minority also applied the Abitibi Test and found that, as in the AbitibiBowater case itself, the regulator was a creditor and "most environmental regulatory bodies can be creditors…and that government entities cannot systematically evade the priority requirements of federal bankruptcy legislation under the guise of enforcing public duties."[33]

6. Implications for Ontario

Insolvency Proceedings

The Redwater decision has significantly expanded the circumstances in which an environmental order, or any regulatory enforcement action for that matter, will not be provable in an insolvency proceeding. The decision will impact companies with environment liabilities in the following ways:

  • There may be a chilling effect on the availability of financing in industries where environmental liabilities are likely, because secured creditors will take a backseat to environmental liabilities. Lenders may expand environmental due diligence requirements and increasingly demand stricter covenants from businesses regarding the state of environmental liabilities. We may also see a decrease in the number of lenders offering debtor-in-possession loans to fund the insolvency proceedings and ongoing operations of an insolvent company. While these loans were traditionally provided a super-priority charge against the assets of the debtor, it is possible that such a charge would also take a backseat to environmental liabilities.
  • Professionals may begin to demand indemnities for the payment of their fees from creditors before agreeing to insolvency mandates. While trustees are protected from personal liability under subsections 14.06(2) and (4) of the BIA, where environmental liabilities exceed the value of the estate, it is possible, although not clear, that insolvency professionals might not be paid.
  • It may become more challenging to retain key employees during the insolvency period. When a company enters insolvency proceedings it is often important to keep certain key employees working through the insolvency period in order to maximize value and ensure the debtor can be sold as a going concern. In order to retain these employees, it is common in restructuring proceedings (and occasionally in receiverships) to obtain a super-priority charge for a bonus payment plan for key employees (referred to as a KERP) provided they continue to work through the insolvency period. As with the above charges, the ability to retain key employees is brought into question by the possibility that all those funds will be spent complying with environmental orders.

Industries with the Potential for Environmental Liabilities

Anxiety among lenders in Alberta's oil and gas industry, where the number of non-producing wells is rapidly escalating, could signal rapid market decline. If lenders, given the uncertainty, are unwilling to provide additional credit, many more wells may end up in the orphan system, with fewer industry participants contributing to the fund. Many commentators have noted that as a result of the Redwater decision, companies with potential significant environmental liabilities may have difficulty finding new capital or restructuring.

In Ontario, the operator of a well that is no longer producing should plug the well within 12 months after it is taken out of use,[34] and return the well site to its original condition no later than 6 months from the plugging date.[35] There is no such requirement in Alberta, despite proposed legislation. In many industries in Ontario, closure, reclamation and anticipated end-of life remediation obligations are also secured by financial assurance (usually through a letter of credit). For example, mining operations with closure plans or landfills that might require remediation and monitoring upon closure would normally be subject to financial assurance requirements by the regulator. Consequently, even if the business were to become insolvent, the environmental obligations would be secured by financial assurance. In those cases, assuming that the financial assurance numbers accurately capture the risk, lender anxiety should be reduced.

Contaminated Sites and Brownfield Development

In Ontario, owners and those in management or control (including former owners or those previously in management or control) of an environmentally contaminated or brownfield site, as well as persons who caused or permitted a discharge of a contaminant, may be subject to regulatory orders for both on and off-site work (including investigation, delineation, and in some cases, remediation). The characterization of such environmental orders was litigated in Northstar and Nortel, which involved Ontario properties subject to Ministry orders that were owned or previously owned by insolvent companies.

The outcome of Nortel would likely be the same under the new Redwater decision. The Supreme Court in Redwater cites the Northstar case in support of the proposition that where the Ministry steps in to conduct remediation, the third branch of the Abitibi Test is made out. However, it is possible that the Supreme Court's approach to the first branch of the Abitibi Test could mean that in certain circumstances, even where the Ministry has demonstrated that it will conduct the remediation itself, the Ministry is still considered a bona fide regulator and thus, the order would not be a provable claim.

Unless there is legislative change, it is clear that the Redwater decision will have implications on the way that regulatory "clean-up" orders are treated during an insolvency, particularly in cases where the facts fall somewhere between Nortel and Northstar. We expect the Ministry (and other environmental stakeholders) will take the position that, except in unusual circumstances, regulatory orders are not stayed during insolvency and must be complied with before the distribution of the insolvent corporation's assets to other creditors. Where an insolvent estate does not have significant assets, environmental costs may mean there is nothing left for creditors.

In some cases, the decision may be welcome news to stakeholders such as directors and officers of insolvent companies, other persons who may also be obliged to address the contamination and neighbouring property owners because they will not have to bear the burden of the clean-up. In Northstar, for example, the Ministry pursued the directors and officers personally after the remediation obligations of the company were found to rank alongside the claims of unsecured creditors. For creditors, however, the Redwater decision may reinforce the recent trend in environmental law of displacing polluter pays for "third-party pays", particularly when that third party has deep pockets.

For corporations that own or operate a number of brownfield properties or have significant historical environmental liability for previous industrial activities, the insolvency calculus may change. Creditors, even secured creditors, are less likely to see full recovery in cases where there is environmental contamination the Ministry wants addressed.

The Redwater decision confirms that the Ministry will not be seen as a creditor where it acts in a regulatory role. However, the Supreme Court's comments demonstrate that even post-Redwater, if the Ministry steps in to do the work itself, then it becomes a creditor and its order will be relegated to a claim provable in bankruptcy. This leaves the Ministry in a difficult position when requiring clean-up work from a company that may become insolvent. If the risk to human health or the environment is so significant that the Ministry must step in to do the work, the Ministry may prejudice its position in the insolvency. If the Ministry does not take steps to do the work and the corporation becomes insolvent, the estate will have to fund the remediation. This creates a potentially perverse incentive where allowing the risk to remain for the interim ultimately improves the Ministry's position.

Environmental Receivers

The implications of the Redwater decision will encourage creative solutions to deal with remediation during insolvency proceedings. One such solution is the appointment of an environmental receiver, such as the one used in the Outboard Marine insolvency. In that case, an environmental receiver (an environmental consulting firm) was appointed by the court to manage the fund for remediation and to conduct the Ministry-ordered clean-up during the insolvency process. The receivership order authorized the environmental receiver to implement environmental remediation activities, to retain consultants, to apply for permits, licenses and approvals as may be required, to receive funds from the disbursement receiver, and to disburse funds to pay approved environmental remediation costs. There may be other situations where it would be "just or convenient"[36] to appoint an environmental receiver to address irreparable harm or imminent danger to health, safety, private and public property, wildlife, natural resources and compliance with environmental laws caused by ongoing and historical contamination of source sites.[37]

Appointing an environmental receiver, along with a regular disbursement receiver, to manage remediation in tandem with winding up may also help to balance environmental obligations and creditors. Such a creative solution may only be appropriate when sufficient assets exist and the efficiency or certainty gained will merit the extra administration costs. However, there may be tension between the insolvency process, which has among its goals an expeditious resolution, and environmental remediation, which may require many years of investigation or delineation work before a remedial approach can be pursued.

7. Conclusion

At first glance the Redwater case appears to be good news from both an environmental and cooperative federalism perspective. However, in addition to the lender and insolvency uncertainty in the oil and gas industry noted by many commentators, the Redwater decision may complicate insolvency proceedings in any industry with an inherent environmental impact. While Ontario's smaller oil and gas extraction industry is regulated differently and may not face the same pressures as the industry in Alberta, the Redwater decision will have legal, economic and environmental implications on owners and users of potentially contaminated property, those helping them wind down operations, and other stakeholders.


[1] Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 ("Redwater SCC") Note that, while this article concerns the impact of the Redwater decision on industrial operations in Ontario, our colleagues in Alberta have written about the impact of the decision from their perspective as counsel for the trustee/respondent on the appeal.

[2] Although Redwater was a bankruptcy and accordingly, the court analyzed the case under the BIA, analogous issues arise with respect to restructurings under the Companies' Creditors Arrangement Act, RCS 1985, c C-36 ("CCAA"). This paper will refer to "insolvency proceedings" generally as proceedings instituted under either act. Note that this relationship is not perfect as there are different purposes for the CCAA as compared to the BIA and accordingly, it is possible that a court would reach a different conclusion with respect to paramountcy under the "frustrating the purpose of the act" branch of the paramountcy test. However, the courts have generally interpreted the statutes harmoniously.

[3] Redwater Energy Corporation (Re) 2016 ABQB 278 ("Chambers Decision")

[4] Orphan Well Association v Grant Thornton Limited 2017 ABCA 124 ("Redwater ABCA")

[5] Redwater ABCA at para 11.

[6] Redwater ABCA at paras 11 and 124.

[7] SCC Decision at para 16: Abandonment" refers to "the permanent dismantlement of a well or facility in the manner prescribed by the regulations or rules" made by the Regulator (OGCA, s. 1(1)(a)). Specifically, the abandonment of a well has been defined as "the process of sealing a hole which has been drilled for oil or gas, at the end of its useful life, to render it environmentally safe" (Panamericana de Bienes y Servicios S.A. v. Northern Badger Oil & Gas Ltd., 1991 ABCA 181, 81 Alta. L.R. (2d) 45 ("Northern Badger"), at para. 2). The abandonment of a pipeline refers to its "permanent deactivation . . . in the manner prescribed by the rules" (Pipeline Act, s. 1(1)(a)).

[8] "Reclamation" includes "the removal of equipment or buildings", "the decontamination of buildings . . . land or water", and the "stabilization, contouring, maintenance, conditioning or reconstruction of the surface of the land" (EPEA, s. 1(ddd))

[9] See for the following Globe and Mail articles for a discussion of attempts in Western Canada at introducing timelines for cleanup of dormant oil and gas wells: December 13, 2018 "B.C. to be first among western provinces to tackle inactive wells" by Jeff Lewis; and November 30, 2018 "B.C. joins Alberta in pledge to impose cleanup timelines on oil, gas wells" by Jeff Lewis and Renata D'aliesio

[10] As the AG of Ontario noted in its submissions, in Ontario the operator of a non-producing oil or gas well is expected to plug the well (abandon in Alberta) within 12 months after it is taken out of use. [O. Reg. 245/97: Exploration, Drilling and Production under the Oil, Gas and Salt Resources Act, R.S.O. 1990, c. P.12 "O.Reg. 245/97"), s. 19; Oil, Gas and Salt Resources of Ontario, Provincial Operating Standards ("Provincial Standards"), ss. 11.01-11.14.] Operators are also required to return the well site to its original condition no later than 6 months from the plugging date. [Provincial Standards, s. 11.13]. In practice this does not always happen.

[11] Redwater ABCA at para 6.

[12] The Orphan Well Association is funded by a levy imposed by the AER, security deposits that licensees have been required to post, and some limited government funding. ABCA decision at para 22.

[13] In a bankruptcy (or liquidating CCAA), the amount available to regulatory obligations that are in substance provable claims is subject to their priority ranking. Generally, these obligations will be unsecured except to the extent they are secured by a specific charge under section 14.06(7) of the BIA. Previously any regulatory or environmental obligations that were not provable in bankruptcy may continue to exist in theory, but typically the burden of those obligations essentially fell on the government. Accordingly, there is an increased incentive for the regulator to extract whatever value it can from the bankrupt estate during its administration

[14] Newfoundland and Labrador v. AbitibiBowater Inc., [2012] 3 SCR 443, 2012 SCC 67 ("AbitibiBowater")

[15] Chambers Decision at para 139 citing Newfoundland and Labrador v. AbitibiBowater Inc. 2012 SCC 67.

[16] Nortel Networks Corp. (Re), 2013 ONCA 599 (CanLII), leave to appeal to SCC refused, 35642 (17 April 2014) ("Nortel")

[17] Northstar Aerospace, Inc. (Re), 2013 ONCA 600 (CanLII) ("Northstar")

[18] Now knowns as the Ministry of Environment, Conservation and Parks.

[19] Chambers Decision at para 164.

[20] Chambers Decision at para 164.

[21] Chambers Decision at para 173.

[22] Chambers Decision at para 173.

[23] Chambers Decision at para 177.

[24]Redwater ABCA at para 24.

[25] Redwater ABCA para 73.

[26] Redwater ABCA Martin dissent at para 107

[27] Redwater ABCA dissent at paras 178-179

[28] Redwater ABCA dissent at para 185

[29] Panamericana de Bienes y Servicios S.A. v. Northern Badger Oil & Gas Ltd., 1991 ABCA 181, 81 Alta. L.R. (2d) 45, 117 A.R. 44 (Alta. C.A.), leave to appeal denied [1992] 1 S.C.R. (S.C.C.)

[30] Redwater SCC at para 124

[31] Redwater SCC at para 139

[32] Redwater SCC at para 146

[33] Redwater SCC at para 236, citing Deschamps J. in AbitibiBowater at para 27.

[34] O.Reg. 245/97, s. 19; Provincial Standards, ss. 11.01-11.14

[35] Provincial Standards, s. 11.13

[36] See Courts of Justice Act, s. 101 provides that "a receiver or receiver and manager may be appointed by an interlocutory order, where it appears to a judge of the court to be just or convenient to do so."

[37] Sherry A Kettle "The Creative Receivership" 2016 Annual Review of Insolvency Law 18