Supreme Court says bankruptcy is no excuse ‘to ignore rules’ in Canadian oilpatch

The Supreme Court of Canada has reversed a ruling that prevented the Alberta Energy Regulator from seizing assets of a bankrupt energy company to pay the cost of cleaning up contamination from its abandoned wells.

In a 5-2 decision, the ruling makes it clear that companies cannot use federal Bankruptcy and Insolvency Act (BIA) to avoid regulations requiring them to pay for abandoned well cleanup.

"Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy," said the majority decision, signed by Chief Justice Richard Wagner. "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, not withstanding the consequences this may have for the bankrupt's secure creditors."

The case relates to a small oilpatch company, Redwater Energy Company, that had licences to operate dozens of wells, most of which were no longer producing and needed to be cleaned up.

The company's main lender, ATB Financial and its trustee, Grant Thornton Limited, argued that federal bankruptcy legislation would allow it to sell the assets to pay debts. The regulator argued that it should be allowed to seize the assets to cover the cost of cleaning up the abandoned wells. ATB Financial, which offers financial services, is also a provincially-owned Crown corporation in Alberta.

The case has sweeping implications across the country, related to growing liabilities in the oilpatch as more companies face bankruptcies due to unfavourable market conditions. In recent months, a range of stakeholders, including politicians, economists and environmentalists have questioned whether taxpayers would be on the hook for billions of dollars of financial liabilities left behind by struggling oil and gas companies in British Columbia, Alberta and Saskatchewan.

ATB says it will continue to support energy companies

Last fall, Ryerson University accounting professor Thomas Schneider told National Observer in an interview that the numbers suggested that a "slow speed financial crisis" was hitting the oilpatch.

The court ruling could now make some banks think twice before lending money to oil and gas companies.

But a few hours after the Supreme Court decision was released, ATB Financial's president and chief executive, Curtis Stange, suggested the bank wasn't about to walk away from the industry.

"We are going to take some time to understand the implications of the decision, but ATB will continue to support the energy industry as it has in the past," Stange said in a telephone interview.

He declined to provide details about how the decision might affect the bank's financial health.

At the end of its last fiscal year, the government-owned bank had loans of over $21 billion — nearly half its total lending portfolio — with Alberta businesses. Some $476 million or 2.2 per cent of that amount was impaired. During the prior 12 months, the bank wrote off $113 million of all its loans and it made provisions for further losses of another $132 million.

The regulator and the provincial NDP government, led by Alberta Premier Rachel Notley, have also mused about toughening their regulatory laws to require more security deposits collected from companies to cover the cost of future liabilities.

In its internal analysis, the Alberta Energy Regulator has estimated that these liabilities could be as high as $260 billion for all existing oil and gas facilities, operations and pipelines, including oilsands sites and tailings ponds. A senior official at the regulator has also warned that these estimates are "likely less than the actual cost."

The regulator's position in the court case was backed by numerous intervenors, including the governments of Ontario, British Columbia and Saskatchewan, as well as environmental groups.

Even the oilpatch industry's biggest lobby group, the Canadian Association of Petroleum Producers backed the regulator's case arguing that ATB Financial and Grant Thornton Limited were asking the court to artificially inflate the value of a debtor's assets to benefit creditors, to the detriment of other producers.

"This artificial splitting of assets and liabilities gives rise to a legal fiction disguised as federal paramountcy and provides a windfall to creditors at the expense of the solvent oil and gas industry, landowners and the public," CAPP had argued in its submission to the court. "This cannot have been Parliament’s intention in enacting the BIA."

Wagner also wrote in the ruling that the federal Parliament "may very well wish to re-examine" a section of the federal bankruptcy legislation that have caused "confusion" about whether there's a conflict between Alberta's regulations and federal law.

Justices Suzanne Côté and Michael Moldaver were the dissenting justices in the ruling.

Justice Sheilah Martin did not participate in Supreme Court deliberations on the case. Previously she had sat on the bench during a lower court ruling that sided with ATB Financial and Grant Thornton Limited. In that case, she had wrote the dissenting opinion, siding with the regulator and taking the same position that was ultimately accepted by the Supreme Court.

Editor's note: This article was updated at 10:06 a.m. ET on Jan 31, 2019 with additional quotes from the ruling and background information. It was updated again at 5:50 p.m. ET to add comments from ATB Financial, based on an interview by journalist Matthew McClure.