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Secured Creditors Beware: The SCC Surprises the Insolvency World in Redwater

Fasken
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Insolvency & Restructuring Bulletin

As Yeats said in his poem, The Second Coming: "mere anarchy is loosed upon the world". While perhaps not anarchy, certainly most insolvency practitioners expected the Alberta Court of Appeal decision in Redwater[1] to be upheld, preserving the priorities afforded to secured creditors and rendering the Provincial Government to be an unsecured Creditor. This seemed to be the most inescapable result of Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, [2012] 3 S.C.R. 443 where Newfoundland was unsuccessful in visiting liability for clean up on the secured creditors. That expectation was dashed on January 31, 2019, when the Supreme Court of Canada issued its decision in Redwater

In dealing with Abitibi the majority of the SCC, speaking through Mr. Justice Wagner, said this:

With respect to the first part of the test, Abitibi should not be taken as standing for the proposition that a regulator is always a creditor when it exercises its statutory enforcement powers against a debtor. A regulator exercising a power to enforce a public duty is not a creditor of the individual or corporation subject to that duty. Here, it is not disputed that, in seeking to enforce Redwater's end of life obligations, the Regulator is acting in a bona fide regulatory capacity and does not stand to benefit financially. It is clear that the Regulator acted in the public interest and for the public good in issuing the Abandonment Orders and enforcing the LMR requirements and that it is, therefore, not a creditor of Redwater. The public is the beneficiary of those environmental obligations; the province does not stand to gain financially from them. Strictly speaking, this is sufficient to dispose of this aspect of the appeal.

As it may prove helpful in future cases, under the third part of the test, a court must determine whether there are sufficient facts indicating the existence of an environmental duty that will ripen into a financial liability owed to a regulator. In determining whether a non-monetary regulatory obligation of a bankrupt is too remote or too speculative to be included in the bankruptcy proceeding, the court must apply the general rules that apply to future or contingent claims. It must be sufficiently certain that the contingency will come to pass — in other words, that the regulator will enforce the obligation by performing the environmental work and seeking reimbursement. In the instant case, the Abandonment Orders and the LMR requirements fail to satisfy this part of the test. It is not established by the evidence that it is sufficiently certain that the Regulator will perform the abandonments and advance a claim for reimbursement. This claim is too remote and speculative to be included in the bankruptcy process. Furthermore, the Regulator's refusal to approve licence transfers unless and until the LMR requirements have been satisfied does not give it a monetary claim against Redwater.

It is difficult to understand how the majority of the SCC got to this conclusion in the face of Abitibi. The minority reasons of Moldaver and Côté JJ. articulately suggest that the distinctions made by the majority are form over substance. If it was clear in Abitibi that Newfoundland was a creditor and was going to get left with clean up costs, one would have thought that it is equally clear in Redwater

Although we are not quite sure how the SCC got there, we do understand their sentiment. This is a policy decision and in these challenging times, the SCC chose the environment over the rights of secured creditors. Whether this will render financing in the oil patch obsolete or will change current practices with existing loans remains to be seen, but what is going to occur is that other Provincial Governments are going to start mimicking the Alberta legislation upheld in Redwater to deal with any industry that has an environmental foot print. Mining and Forestry come to mind but there will be others. For example, there is now nothing stopping the provincial governments from enacting legislation akin to the Alberta EPEA requiring pulp mill and mining corporations to make deposits as they continue to increase their environmental footprint, or face the consequences when they abandon environmentally damaging assets. In the case of oil wells, secured creditors will have to monitor their borrowers to make sure that they have a reserve sufficient to deal with abandoned wells. Soon, secured creditors may have to do the same thing with other environmentally damaging borrowers. Given the result in Redwater secured creditors with existing loans in the oil patch should review their security to determine if their borrowers are now in technical default for not having sufficient funds reserved to pay these costs. Depending on the wording of their security, secured creditors may well be within their rights to insist that this occurs. It is not hard to imagine that failing to be in a position to deal with abandoned wells might now constitute a material adverse change. Whether their clients have the funds to fund these reservers is another matter. Regulators will often permit an underfunded obligation, as in the case of underfunded pension obligations, to be caught up over time to avoid mutual self assured destruction. This may well be the case here as well. 

What is interesting about the majority decision is that it is based in large part on the purpose of the Bankruptcy and Insolvency Act. After an introduction, Mr. Justice Wagner prefaced his comments by saying this:

Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. They must, for example, comply with non-monetary obligations that are binding on the bankrupt estate, that cannot be reduced to provable claims, and the effects of which do not conflict with the BIA, notwithstanding the consequences this may have for the bankrupt's secured creditors. Given the procedural nature of the BIA, the bankruptcy regime relies heavily on the continued operation of provincial laws but, where there is a genuine conflict between provincial laws concerning property and civil rights and federal bankruptcy legislation, the BIA prevails. The BIA as a whole is intended to further two purposes: the equitable distribution of the bankrupt's assets among his or her creditors and the bankrupt's financial rehabilitation. As Redwater is a corporation that will never emerge from bankruptcy, only the former purpose is relevant here.

These may be the two fundamental objects of the BIA, but they are not the fundamental objects of the Companies' Creditors Arrangement Act (CCAA). Historically, the purpose of the CCAA has been to provide a forum for financially distressed companies to devise a plan with a view to becoming viable in the future. However, in recent years courts have recognized that one of the purposes of the CCAA is to permit an orderly liquidation under a plan, or indeed, without a plan. Most CCAA's in recent years have been liquidating CCAA's. If, as the SCC has suggested, the Alberta Government is not a creditor, then it would not be able to vote on a CCAA plan and it may well be that the results of Redwater could be avoided by filing a plan and having it approved. The secured creditors may have to give up something to get that plan approved, but it does offer the hope of avoiding the result of Redwater.

All of this will become clear in the fullness of time but for now secured creditors should be aware of the risks posed by the Redwater decision not just in the oil patch, but in any industry that has a large environmental impact. 


 

[1] Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 (37627) ("Redwater")

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