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Court of Appeal Gives Guidance on Scope of Crown’s Super Priority for Environmental Remediation Under the Bankruptcy and Insolvency Act

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Insolvency & Restructuring Bulletin

Overview

This bulletin is the first of a Fasken series about the recent decision of the Court of Appeal of Yukon in the ongoing receivership proceedings of Yukon Zinc Corporation (“Yukon Zinc”), indexed as 2021 YKCA 2. The decision addresses several important issues, including: (i) the scope of Section 14.06(7) of the Bankruptcy and Insolvency Act (“BIA”), which creates the Crown’s super priority charge for environmental remediation over the real property of a debtor; and (ii) Crown claims relating to unfurnished security or future costs.

In this initial bulletin we will provide some background on Yukon Zinc’s receivership proceedings and review the Court of Appeal’s findings relating to Section 14.06(7), which further delineates the scope of Crown environmental claims following on the Supreme Court of Canada’s decisions in AbitibiBowater Inc., Re, 2012 SCC 67 (“Abitibi”) and Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 ("Redwater").

The key finding by the Court of Appeal was that the Crown’s super priority charge is limited to costs that have actually been incurred for environmental remediation, not for anticipated future costs or contingent costs. Further, the charge attaches only to the real property of the debtor, which does not include lesser estates or interests in land, such as mineral claims.

Background to the Proceedings

Yukon Zinc owned and operated the zinc-silver-lead Wolverine Mine located in Yukon Territory. As is typical for many mining companies, Yukon Zinc did not own the land on which its mineral claims and mine were located. Yukon Zinc encountered financial difficulties shortly after commencing mining operations, and in early 2015 placed the Wolverine Mine in a care and maintenance program. The company subsequently restructured its debt obligations under the Companies’ Creditors Arrangement Act (“CCAA”), emerging from protection in October 2015, after which it continued care and maintenance operations at the Wolverine Mine without recommencing mining operations.

Under the Yukon Quartz Mining Act (“QMA”), the Yukon government can require a mining licence holder to furnish security where there is risk of adverse environmental effects from the licensee’s activities (“Reclamation Security”). The Yukon government has recourse to the Reclamation Security if it performs environmental remediation at the licensee’s mine. At the conclusion of the CCAA proceedings, Yukon Zinc furnished the full amount of the Reclamation Security, which was approximately $10.5 million. In May, 2018, the Yukon government increased the required Reclamation Security to approximately $35 million. Yukon Zinc was unable to furnish the additional security.

Commencing in late 2018, the Yukon government began performing remediation work at the Wolverine Mine relating to issues it determined constituted potential environmental risk. The work mainly involved the treatment of underground mine water and tailings water.

In October 2019, the Yukon government obtained an order appointing a receiver of Yukon Zinc’s assets and Yukon Zinc became bankrupt. The receiver continues to perform environmental remediation work at the Wolverine Mine. By January, 2020, the Yukon government had expended about $5.58 million of the $10.5 million Reclamation Security that was available to it, including by way of loans to the receiver to fund its activities.

The Chambers Applications

In late 2020, the Yukon government, the receiver and Welichem Research General Partnership (“Welichem”), a secured creditor and lessor to Yukon Zinc, each set down applications for various relief. Among other things, the Yukon government sought declarations that it had a provable claim in bankruptcy in the amount of $35.5 million, being the anticipated future cost of remediating the Wolverine Mine, and that such claim constituted a first-ranking secure claim against Yukon Zinc’s mineral claims on the basis of Section 14.06(7) of the BIA.

The Court of Appeal Decision

The Application of Section 14.06(7)

Section 14.06(7) provides that any claim by the Crown for costs of remedying an environmental condition or damage affecting real property of the debtor is secured by security on the real property, and any real property contiguous to said real property, and that the charge ranks above any other charge despite any other provision of the BIA or federal or provincial law.

The chambers judge concluded that s. 14.06(7) of the BIA applies only once Yukon has incurred costs in remediating lands. On appeal, the Yukon government argued that chambers judge erred by not holding that the “sufficiently certain” test applies to s. 14.06(7). The “sufficiently certain” test was developed in Abitibi and determines when claims for environmental liabilities are claims provable in bankruptcy. Essentially, when it is sufficiently certain that a cost will be incurred, it is a claim provable in bankruptcy.

The Court of Appeal provided a two-fold answer to this position in affirming the chambers judge’s decision that the charge under s. 14.06(7) is only created after costs have actually been incurred.

The Court of Appeal first clarified that the “sufficiently certain” test set out in Abitibi has no bearing on the question of whether a super priority charge has arisen under s. 14.06(7). The super priority charge afforded the Crown under Section 14.06(7) is limited to circumstances where the Crown has actually incurred out-of-pocket costs remediating the bankrupt’s lands. In so holding, the Court of Appeal looked at the plain wording of Section 14.06(7) noting that if Parliament had intended to create a charge for costs that may be incurred in the future, one would have expected explicit language in that regard.

Does the 14.06(7) Charge Apply to Mineral Claims?

In the court below, the Yukon government and the receiver argued, and the chambers judge held, that the charge created under section 14.06(7) attaches to mineral claims. The Court of Appeal overturned that decision, holding that mineral claims under the Yukon QMA are not real property belonging to Yukon Zinc. In reaching this, the Court of Appeal confirmed that mineral claims in the Yukon are chattels real, a category of property that constitutes an interest in real property. The “real property of the debtor” on the other hand, refers to estates in land greater than a mere interest.

The Court found that the chambers judge made two errors in her analysis. First, the chambers judge incorrectly concluded that Parliament intended that environmental costs should never become a taxpayer burden. The Court of Appeal noted that, to the contrary, Parliament intended to balance the public’s interest in enforcing environmental regulations against the interests of third party creditors.

Second, the chambers judge did not consider the wording of the BIA to determine whether Parliament intended to distinguish real property and interests in real property in s. 14.06(7). The BIA frequently distinguishes between “real property” and an “interest” in real property. The wording of Section 14.06(7) limits the attachment of the secured charge only to the real property. The mineral claims of Yukon Zinc, being only interests in real property, could not be subject to the charge under s. 14.06(7) (were it to arise).

This decision is both important and relevant as it further clarifies the nature and scope of Crown priorities for environmental remediation costs, which frequently compete with priorities afforded to secured creditors and other claimants whose interests are afforded recognition under the BIA.

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