Gowling WLG successfully defends Redwater decision on appeal

25 April 2017

In a landmark appeal decision released on April 24, 2017, the majority of the Alberta Court of Appeal dismissed an appeal by the Alberta Energy Regulator (AER) and Orphan Well Association (OWA) of the decision of the Honourable Neil C. Wittmann, Chief Justice of the Court of Queen's Bench of Alberta in the Redwater Energy Corporation (Redwater) receivership and bankruptcy proceedings.

The majority of the Alberta Court of Appeal held that Grant Thornton Limited, the Receiver and Trustee in the Redwater Energy Corporation receivership and bankruptcy proceedings, was entitled to disclaim Redwater's non-producing oil wells and sell its producing ones. Gowling WLG served as co-counsel to Grant Thornton throughout the proceedings and successfully defended it on the appeal.

The decision dismissed the appeals of the AER and the OWA, who argued that Chief Justice Wittmann erred in finding that Grant Thornton should not have to carry out the abandonment, reclamation and remediation obligations of Redwater's non-producing wells, or perform abandonment orders as issued by the AER, which included paying a security deposit.

Specifically, the majority of the Court of Appeal (comprising the Honourable Mr. Justice Frans Slatter and the Honourable Madam Justice Frederica Schutz) held that:

  • By attempting to extract security deposits or the performance of abandonment obligations on a transfer of AER licenses, the AER was in effect transferring the proprietary value in the bankrupt estate from the underlying real property assets of Redwater (which were interests in its oil and gas properties) to the AER licenses, contrary to the scheme of distribution contemplated under the Bankruptcy and Insolvency Act (BIA).
  • A trustee and receiver is entitled to abandon or renounce oil and gas assets encumbered with environmental obligations.
  • The AER's requirement that security be posted for abandonment obligations, or diverting value from the bankrupt estate to ensure that remediation is performed, is sufficient to classify the claims of the AER as financial in nature, making them a "creditor" whose claims are subject to the priorities prescribed by the BIA.
  • The AER cannot indirectly interfere with the value of assets in a bankruptcy by placing financial preconditions on the transfer of AER licences.
  • Based on the doctrine of federal paramountcy, the obligations of trustees and receivers under both the Oil and Gas Conservation Act (OGCA) and the Pipeline Act (PA) to abandon oil wells and pipelines; pay the costs of remediation performed by other persons; and to obey any order of the AER is in operational conflict with section 14.06 of the BIA. Section 14.06 of the BIA exempts a receiver or a trustee from personal liability, allows a trustee and receiver to disclaim assets, and prescribes the priority of environmental remediation costs.
  • The majority also held that the applicable sections of the OGCA and PA frustrate the federal purpose of the BIA of managing the winding up of insolvent corporations and settling the priority of claims against them. The majority of the Court of Appeal therefore confirmed that such obligations of the AER are unenforceable as against the Receiver and Trustee.

Arguing the applications on behalf of Grant Thornton were Tom Cumming of Gowling WLG and Jeffrey Oliver of Cassels Brock & Blackwell LLP.

With more than 1,500 legal professionals in 19 cities across Canada, the U.K., Europe, the Middle East and Asia, Gowling WLG delivers comprehensive, strategic solutions that address a broad range of litigation matters — both in the courtroom and through negotiation and alternative dispute resolution — so that clients can achieve their desired results as quickly as possible.