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Environmental regulator prevails over liquidators’ right of disclaimer – decision of the Supreme Court of Canada

The rights of an environmental regulator against an insolvent company prevail over the right of the company’s liquidator to disclaim property of the company that is environmentally damaged.

This is a policy issue before an Australian Senate inquiry due to report on 20 March 2019.

This was the broad outcome of an important and controversial decision of the Supreme Court of Canada of 31 January 2019, by a majority of 5 to 2, which took nearly 12 months to deliver: Orphan Well Association and the Albert Energy Regulator v Grant Thornton.

The Association and the Regulator therefore succeeded in their appeal against a split decision of the Alberta Court of Appeal in favour of the bankruptcy trustee of the insolvent company, Redwater Energy.

The case was of such interest that numerous parties intervened, including various Attorneys General, the Canadian Association of Petroleum Producers, Greenpeace Canada, and the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and the Canadian Bankers Association.

The majority

The majority[1] held that the Regulator’s use of its statutory powers to enforce Redwater’s compliance with the legal abandonment and reclamation obligations during its bankruptcy did not conflict with the Canadian Bankruptcy and Insolvency Act, even though this allowed the Regulator to gain access to the remaining funds ahead of unsecured creditors.

“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy”.

The dissent

The dissenting judges[2] expressed what I myself think is the preferred policy outcome which a legislature should apply.

As they said, a decision in favour of the trustee did not mean that the Regulator was without options to protect the public from bearing the costs of abandoning oil wells. It could adjust its licensing requirements “to prevent other oil companies from reaching the point of bankruptcy with unfunded abandonment obligations”, which as they explained, had already occurred in Alberta since this litigation began.

“It could adopt strategies used in other jurisdictions, such as requiring the posting of security up-front so that abandonment costs are not borne entirely at the end of an oil well’s life cycle”.

Such systems of up-front bonding are prevalent in American jurisdictions, and, they might have added, in Australia.

Also, the Regulator could work with industry to increase levies so that the orphan fund set up to meet the costs of remediation was adequate to respond to what is, in Canada, a recent increase in the number of orphaned properties.

The Regulator could also seek judicial intervention in cases where it suspects that a company is strategically using insolvency as a voluntary step to avoid its environmental liabilities (Sydco Energy Inc. (Re), 2018 ABQB 75).

And the Regulator could continue to apply the regulatory regime to wells and facilities that the receiver or trustee seeks to operate rather than sell.

“The [Regulator] may not, however, disregard federal bankruptcy law in the pursuit of otherwise valid statutory objectives. Yet that is precisely what it has done here by effectively displacing the “polluter-pays” principle enacted by Parliament in favour of a “lender-pays” regime, in which responsibility for the bankrupt’s environmental liabilities is transferred to the estate’s creditors”.

Comment

While based on Canadian law, the policy issues involved in this decision, are important in Australia, and in many comparable jurisdictions. The Australian High Court’s refusal of special leave to appeal from the Queensland Court of Appeal decision in Linc Energy ([2018] QCA 32), in favour of the liquidators over the state regulator, raised such issues. Our current Senate inquiry looking at the question may give some recommendations as to how the tension evident in the Redwater case is to be resolved in Australia. This should preferably be considered at a national level, rather than, as at present, each state – Queensland for one – pursuing its own agenda.

The Senate inquiry is due to report by 20 March 2019.

[1] Wagner C.J, Abella, Karakatsanis, Gascon and Brown JJ. Concurring.

[2] Côté J, Moldaver J. concurring.

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