Written by Ken Lenz, Q.C., Keely Cameron and David Gruber
We previously discussed the Court's decision in Yukon (Government of) v Yukon Zinc Corporation, 2020 YKSC 16, which opened the door to partial termination of agreements in a receivership, an action generally considered to not be permitted in the past. The effect of which on the facts before the Court, was to provide the receiver with access to certain equipment for the purpose of carrying out environmental reclamation at a zinc-silver-lead mine known as the Wolverine Mine at a cost less than required under the lease agreement.
On March 5, 2021, the Court of Appeal issued a unanimous decision overturning the decision permitting the partial termination and made other findings which have provided some clarity regarding the priority of environmental obligations in a receivership.
The Court of Appeal characterized the findings of the lower court to be such that no partial disclaimer had occurred, rather the entire contract was found to be disclaimed, with the receiver improperly appropriating the equipment. While the Court of Appeal was sympathetic to the receiver attempting to minimize costs to the estate in addressing the regulatory obligations, the Court of Appeal noted that a receivership is not a license to ignore the rules and that a receiver cannot appropriate third parties' property without their agreement. Further the Court of Appeal found that the discretion of the Court provided for under section 243 of the Bankruptcy and Insolvency Act and section 26 of the Judicature Act is not unfettered and does not extend to permitting interference with the property rights of third parties as was done in this instance. The Court of Appeal notes that express language would have been required in the receivership order to permit the use of a third party's property since it is outside of the normal function of such orders.
In the circumstances, the receiver was directed to make payment in accordance with the agreement for the period during which the equipment was used.
Also at issue was whether the Government of the Yukon had a provable claim in bankruptcy as a result of the failure of the debtor to provide reclamation security and the extent of priority provided for under section 14.06(7) of the Bankruptcy and Insolvency Act for where the Government steps in to carry out the environmental work and in doing so incurs remediation costs.
In Orphan Well Association v Grant Thornton Ltd., 2019 SCC 5, otherwise known as the Redwater decision, a case involving amongst other things outstanding security obligations in the context of Alberta oil and gas wells, the Supreme Court of Canada found on the legislation and facts before it, that the requirement to post security was not a provable claim but rather a regulatory obligation to be addressed ahead of any payments to creditors. This does not mean however, "that the intention of Parliament was to ensure that remediation costs would not become a burden to the taxpayer."
The Court of Appeal found that Government's requirements to provide security for reclamation costs do not constitute a debt, noting that there is no ability for the Government to collect security directly through an action under its legislation. While the end result is the same, this differs from the approach taken in the Redwater decision as rather than applying the Abitibi test, the Court of Appeal focused on whether the legislation provided the Government with an ability to commence legal action to enforce the obligation.
The Court also considered the priority afforded the Government under section 14.06(7) of the Bankruptcy and Insolvency Act should the Government carryout reclamation work at the mine. Section 14.06(7) provides for a super priority security interest over "real property or immovable" of the debtor affected by the environmental condition and any contiguous real property or immovable with respect to costs incurred by a Government in carrying out environmental work.
The Court of Appeal found that "real property" as utilized in section 14.06(7) does not include a partial interest in land such as a mineral interest such that the security interest does not attach to any mineral rights held by the debtor. In reaching this conclusion, the Court of Appeal looked at the definition of "property" under the Bankruptcy and Insolvency Act and found that "real property" was not intended to include an "interest in real property" which is referenced separately in the definition of property. It is also noted that throughout the Bankruptcy and Insolvency Act various sections differentiate between "real property" and "any interest in real property". In circumstances where the minerals are crown owned, the decision is likely of little significance given that the Crown already owns the minerals and leases contain a requirement that all laws be complied with.
While the broader application of the Court of Appeal's decision is unknown given the differences in the legislative regime at issue in the decision, it does serve as a reminder of the importance of ensuring clear language and requisite authority when attempting to disclaim interests.
While the Court of Appeal did not fully rule out the ability to partially disclaim an agreement or otherwise unilaterally vary it, it seems clear that where such actions would impact third-party property rights they will be unsuccessful.
Regarding the priority to be afforded environmental obligations, the decision provides a good reminder of the importance of reviewing the applicable legislation to determine whether the regulator is acting as a creditor or as a regulator seeking to enforce a regulatory obligation for the public good, as its rights are different depending on the role.