Insolvency disclaimer of orphan wells – Linc Energy compared

While Australia is pondering the quirk in its Constitutional referral of powers arrangements which has resulted in Queensland’s environmental protection law being found to prevail over the disclaimer rights of the liquidators of Linc Energy under the Corporations Act, the same issue has just been determined on appeal in Canada.

On 24 April 2017, the Alberta Court of Appeal upheld a trial judge interpretation that disclaimer rights under the national insolvency law of Canada prevailed over provincial (Alberta) environmental law that sought to recoup the costs of remediation of contaminated oil wells: Orphan Well Association v Grant Thornton, 2017 ABCA 124

The decision of the Court of Appeal was much anticipated, given the financial and environmental significance of what are termed “orphan wells” in Canada, that have no funds to clean up their environmental contamination.  That cost is met by Alberta’s Orphan Well Association, a not-for-profit group financed by industry.  Its remediation of oil wells is being increasingly overtaken in number by more problem sites, the result of increased corporate failures in the oil and gas industry.

The reality is that environmental harm is a significant world problem. The desirable approach is that degradation, if inevitable, should be controlled, and any costs of remediation should be factored into the running costs and pricing, licensed and regulated closely along the way. 

A response of the Canadian environmental regulator to the trial decision has been to raise the liability management ratio of enterprises that can buy well licences.  That then raises the issue of balancing environmental protection against oil and gas exploration and development. 

Leaving the recoupment of those remediation costs to come from the failed or closed enterprise is hardly the best way, being one view of the outcome of the Linc Energy finding. In fact, Queensland’s CORA laws offer a better approach in principle, in requiring those involved with the investment and financing of the business to themselves take or share responsibility for its environmental responsibilities.

A similar approach appears to be adopted in relation to the responsibility of those in franchising to ensure employee rights and protection, under the Work Amendment (Protecting Vulnerable Workers) Bill 2017, presently before the Senate Standing Committees on Education and Employment. 

As to the “last man standing” – the liquidator – called in when the business fails, my recent article explained that Canadian law sensibly draws a line (if this need be said at all) confirming that liquidators are not to be found responsible for past environmental breaches of companies to which they have just been appointed.  The law then provides a more realistic standard of care for the liquidator’s handling of the environmental issues during the winding up or restructure of the business.  See “The last man standing” (2017) 18(2) Insolvency Law Bulletin 38.

The Alberta Court of Appeal was split 2 to 1 and while there may be a further appeal, in this and other cases raising similar issues, including in Australia, the issue is one best dealt with by both economics and legal and environmental regulation, rather than insolvency law.


Some paraphrased extracts from the decision follow:

As the majority judgment noted (Slatter, Schutz JJ), the Alberta Energy Regulator took the position that receivers and trustees are liable for all of the obligations imposed on licensees because the definition of “licensee” in the legislation included receivers and trustees. On this theory, receivers and trustees would be liable for the duty to abandon oil wells and pipelines, the costs of remediation, and to obey any order of the Regulator, all under various laws.

These obligations are in operational conflict with the provisions of the Bankruptcy and Insolvency Act that exempt a trustee and receiver from personal liability, the provisions allowing a trustee and receiver to disclaim assets, and the provisions respecting the priority of remediation costs. They also frustrate the federal purpose of managing the winding up of insolvent corporations and settling the priority of claims against them. As such they are unenforceable by the Regulator.

The Court said that the Regulator effectively conceded the outcome of the appeal by its acknowledgment that:

“compliance with its orders may ultimately lessen amounts recovered by the creditors because the costs of compliance are paid from the assets in the estate. However, the AER submits that the objective of maximizing recovery for creditors cannot be at the expense of complying with the licensee’s statutory end of life obligations”.

“This frank statement confirms that the effect of the Regulator’s orders is to interfere with the priority of distribution in the bankrupt estate. It also confirms that the Regulator’s orders directly engage the paramountcy doctrine” (by which federal laws prevail over inconsistent provincial laws, as in Australia, mostly).

It followed that

“under the proper interpretation of the BIA, the Regulator cannot insist that the Trustee devote substantial parts of the bankrupt estate in satisfaction of the environmental claims in priority to the claims of the secured creditor”.

As to arguments

“based on general policy considerations, the overall fairness or reasonableness of the outcome, and the impact that the trial court’s decision would have on environmental regulation, while these should be kept in mind, it must also be assumed Parliament considered and balanced them in drafting the BIA … The bankruptcy court has no ability to create exceptions to the statute based on general considerations of fairness or public policy”.

The judge in the minority (Martin J) concluded her judgment with these comments:

“The appellants argue that if Redwater can shed its end of life obligations, this would provide an incentive for many other similarly situated enterprises to organize their affairs to do the same, resulting in even more orphaned wells. They have a point, as the ability to avoid end of life obligations will not arise only on bankruptcy, but under the CCAA as well. This may encourage licensees to place wells with significant end of life expenses into one entity and separate that entity from other, more profitable, holdings. If that entity goes bankrupt or is re-organized, there is the fear that these public duties would be washed away from the entity and placed instead on others. There is unfairness if the entity is permitted to reserve and preserve any “assets” for itself and to avoid the costs of the public obligations assumed to gain access to the resource in the first place. The respondent and bankruptcy professionals before this Court argued that this fear is exaggerated. With respect, it is difficult to share their optimism. It is more realistic to assume that individuals will operate as rational economic actors who organize their affairs to maximize their own self- interest, within the limits allowed by law. If they are allowed to avoid or evade the end of life responsibilities attached to their licences, abandonment and reclamation, so necessary for the environment, would likely be among the first sacrifices made in times of fiscal difficulty”.


Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published.