Written By Keely Cameron, Kelsey Meyer and Manpreet Dhillon
On March 30, 2022, the Alberta Court of Appeal issued its much anticipated decision in Manitok Energy Inc (Re), 2022 ABCA 117 [Manitok ABCA] which considered whether, as a result of the Supreme Court of Canada's decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 [Redwater], end-of-life obligations associated with the abandonment and reclamation of unsold oil and gas properties must be satisfied from the estate of an insolvent party in receivership, in preference to what might otherwise be first-ranking builders' lien claims, based on services provided by the lien claimants before the date of the receivership.
The court-appointed receiver of Manitok had entered into an asset purchase agreement to sell certain of Manitok's assets. Prior to the issuance of the SCC's decision in Redwater, Manitok's receiver had applied for and was granted a sale approval and vesting order, which operated to discharge builders' lien registrations against the assets to be purchased, but also required the receiver to establish a holdback of funds from the proceeds of the assets, to stand in place of the liens, and with the same priority. The purchaser agreed to assume all environmental liabilities with respect to the assets to be purchased.
Before the Manitok transaction closed, the SCC issued its decision in Redwater, holding that abandonment and reclamation obligations take priority to all claims against an insolvent oil and gas company. Manitok's end-of-life abandonment and reclamation obligations substantially exceeded the proceeds of its estate. Despite that, the Alberta Court of Queen's Bench held that the holdback funds were to be used to address the builders' lien claims rather than the abandonment and reclamation obligations, on the basis that the Alberta Energy Regulator (AER) had not taken any steps to issue an abandonment order until after the assets had been sold (Re Manitok Energy Inc., 2021 ABQB 227 [Manitok ABQB] at para 39). The chambers judge relied on paragraph 159 of the SCC's decision in Redwater, where Wagner, CJ on behalf of the majority held as follows:
In crafting the priority scheme set out in the BIA, Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage in order to fund remediation (see s. 14.06(7)). Thus, the BIA explicitly contemplates that environmental regulators will extract value from the bankrupt's real property if that property is affected by an environmental condition or damage. Although the nature of property ownership in the Alberta oil and gas industry meant that s.14.06(7) was unavailable to the Regulator, the Abandonment Order and the LMR replicate s.14.06(7)'s effect in this case. Furthermore, it is important to note that Redwater's only substantial assets were affected by an environmental condition or damage. Accordingly, the Abandonment Orders and LMR requirements did not seek to force Redwater to fulfill end-of-life obligations with assets unrelated to the environmental condition or damage. In other words, recognizing that the Abandonment Orders and LMR requirements are not provable claims in this case does not interfere with the aims of the BIA - rather, it facilitates them (Ibid at para 38, citing Redwater at para 159 (emphasis added by the chambers judge)).
In Manitok ABQB, the chambers judge held that Redwater expands the limited scope of s. 14.06(7), but not to cover trust funds relating to the proceeds of sale of property to which the debtors no longer have the status of "owner, party in control, or licensee" at the time the AER issued the abandonment order (Ibid at para 41). The chambers judge interpreted paragraph 159 of Redwater as limiting the ability of the AER to enforce obligations against assets that are contaminated or affected by an environmental condition or damage, and over which the AER has issued abandonment orders, or property that is contiguous (Ibid at paras 39-42).
On appeal, the Court of Appeal noted the potential challenges with interpreting paragraph 159 of Redwater (Manitok ABCA at para 22), but ultimately confirmed that:
- all assets of an oil and gas company are to be treated as a single pool to be used to address regulatory obligations; there is no distinction in relation to "assets unrelated to the environmental condition or damage." Unless the sale proceeds of the valuable assets of an insolvent corporation are available to satisfy abandonment and reclamation obligations, such obligations can never be satisfied (Ibid at paras 28-29, 31);
- selling assets in an insolvent estate and converting them to cash does not cause the proceeds of those assets to cease to be available to discharge abandonment and reclamation obligations (Ibid at para 32);
- an agreement to hold proceeds in trust as part of a sale and vesting order did not rearrange priorities (Ibid at paras 42, 44); and
- abandonment and reclamation obligations are inherent in oil and gas properties, from the minute extraction of the resource commences; they, and the public duty on the receiver to use the assets of the insolvent estate to discharge them, exist independently of any enforcement action taken by the AER. The timing of issuance of an abandonment order is not determinative as to which funds in the estate are captured by the obligation to abandon and reclaim (Ibid at paras 38-41).
However, the Court of Appeal left it open as to whether assets completely unrelated to the oil and gas business would be required to be used to address environmental obligations (Ibid at para 36). In both Redwater and Manitok, the funds at issue were related to oil and gas assets.
Manitok ABCA reaffirms the priority of abandonment and reclamation obligations of a licensee over claims of secured and unsecured creditors of an insolvent estate, as was held in Redwater, and that all licensed assets (oil and gas assets licensed by a regulator) are subject to that priority.
Following the decision in Manitok ABQB, the AER started issuing abandonment and reclamation orders upon the commencement of insolvency proceedings so as to ensure such orders were issued before any assets of the insolvent estate were sold, which has created extra costs and some challenges to conducting the insolvency proceedings. As a result of this decision, the AER may reconsider this step.
Undoubtedly, though, the issue of whether proceeds of assets completely unrelated to the oil and gas business of an insolvent debtor must be first applied toward satisfaction of abandonment and reclamation obligations will continue to be debated, pending further guidance from the courts.