It was one year ago that we shared what we believed was an important case before the Supreme Court of Canada (SCC). See Supreme Court of Canada Considers Environmental Liability Case. We, along with others, suggested that this case had potentially far-reaching consequences.
On January 31, 2019, the SCC handed down their much-anticipated decision in Orphan Well Association v. Grant Thornton Ltd. (“The Redwater Decision”). Redwater refers to Redwater Energy Corporation. This is a complex case with many legalities – we are simply touching on an aspect in this blog.
Brief Overview of Redwater Case
Redwater, an Alberta-based energy company that owned oil wells and pipelines, was experiencing financial difficulty in 2014. ATB Financial agreed to provide secured financing to Redwater. ATB Financial was aware that Redwater had financial obligations with respect to end-of-life environmental issues. About a year later, these environmental issues became the center of legal discussions.
Quoting from a blog by Goodmans, “By 2015, Redwater’s finances had deteriorated and Grant Thornton Limited (GTL) was appointed receiver of the company’s property, assets and undertaking. At that time, Redwater owed ATB approximately $5.1 million, and its assets consisted of 84 wells, 7 facilities and 36 pipelines. Many of its assets were inactive or spent, but given its LMR (Liability Management Rating), Redwater was never required to pay a security deposit to the (Alberta Energy) Regulator for its end-of-life obligations.”
Following the receivership, the Alberta Energy Regulator advised Grant Thornton that it was legally required to fulfill Redwater’s obligations for abandonment and reclamation before paying creditors. Grant Thornton said they could not meet these obligations and that they had no duty to do so. The Alberta Energy Regulator ordered Grant Thornton to address the end-of-life environmental issues. Redwater then filed for bankruptcy.
At issue were legalities under the Bankruptcy and Insolvency Act. Quoting from Goodmans’ blog, “The question before the courts was how should a trustee in bankruptcy deal with such environmental obligations when tasked with distributing assets of a bankrupt company to secured creditors according to the rules in the federal Bankruptcy and Insolvency Act…”
Cannot Walk Away from the Liability
For those who want to “unpack” all the legalities of this issue, there are no shortages of excellent summaries available on the internet. But the bottom line is that in a 5-2 majority decision, the SCC concluded that Grant Thornton could not walk away from the environmental liabilities. This ruling overturned the 2016 Alberta Court of Appeal ruling.
Lawyers have weighed in on this SCC ruling, stating that ruling will impact lenders as well as directors and officers. The SCC Case Brief states, “The majority at the Supreme Court said the trustee couldn’t walk away from the disowned sites.”
Again, from the Goodmans’ blog, “The Redwater Decision will most certainly impact lenders in the oil and gas sector and in other industries that have significant end-of-life environmental abandonment and reclamation obligations. Directors and officers should also be cognizant of the impact this decision may have on a company’s lending value and capacity.”
As we said, this is a complex case. If this may affect you, contact your legal counsel to discuss.
Assessment Increasingly Important
From our perspective, this may place increased emphasis on future merger/acquisition activity and lending practices. Clearly understanding potential environmental liability requires a thoughtful, measured approach by experienced environmental professionals (legal and technical) who will advise you as you consider your options. If you have questions or comments, please feel free to contact me at 519-979-7300, Ext. 104.