Category: Bankruptcy and Insolvency Page 2 of 6

Lessons from Redwater: Discard the AbitibiBowater Test and Legislate Super Priority for the Regulator

Case Commented On: Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII)

Environmental cleanup costs are a natural consequence of operating in the oil and gas industry. Provincial regulations ensure these costs are borne by the company responsible for them, and these regulations work if that company is solvent. An insolvent company, however, cannot bear the costs of outstanding environmental orders, which leaves those costs to the company’s creditors or to the public.

The goal should be, and fairness dictates, that the debtor always covers the cost, regardless of its solvency, but that requires amending the governing legislation, preferably to give the regulator (in this case, the Alberta Energy Regulator (Regulator), and the equivalent regulators in other provinces) a super priority. Knowing the Regulator has a super priority in a bankruptcy will compel the adjusting creditors to modify their agreements ex ante, ensuring, in turn, that companies comply with regulations and have enough capital to cover environmental costs as they arise. This solution is better than our current system, in which creditors must wait for a court to apply the three-part test from Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67 (CanLII) (AbitibiBowater test) to determine who has priority, potentially leaving them to deal with the consequences ex post.

On a matter this important and this costly, a matter that has notable public policy considerations and far-reaching implications for private parties, both sufficient environmental protection as well as certainty in adherence to the legislated priorities, must be the ultimate goals. The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) does not currently provide enough environmental protection, which may compel courts to compensate through the AbitibiBowater test. It is hard to predict the outcome of the test and, depending on its application to a given set of facts, it undermines the BIA priority scheme. Throughout the proceedings of Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII) (commonly known as the Redwater case), in three levels of court, there were five judgments. Eleven judges applied the same test and six of them ruled in favour of the Regulator, while five ruled in favor of the secured creditor. This much disagreement over one set of facts should indicate that these issues should not be handled by the courts through the application of the AbitibiBowater test. The required certainty in this area must come from Parliament by way of legislative amendment to clarify a super priority charge in favour of the Regulator in the BIA.

Preservation of Human Dignity as the Justification for Excluding Personal Rights of Action in Bankruptcy

By Jassmine Girgis

On October 9, 2018

In Bankruptcy and Insolvency

By: Jassmine Girgis

PDF Version: Preservation of Human Dignity as the Justification for Excluding Personal Rights of Action in Bankruptcy

Case Commented On: Cooke (Re), 2018 ABQB 628

This case considers whether a contractual “critical illness” benefit forms part of the property of the bankrupt’s estate. Personal rights of action arising out of tort claims have traditionally not formed part of the bankrupt’s estate, meaning the bankrupt gets to keep the money from these claims. Prior to this case, however, courts do not appear to have addressed the bankrupt’s entitlement to personal rights arising from contract. In this case, the court drew an analogy between the two types of claims. It found that both compensate for the pain and suffering of the bankrupt and consequently concluded that a contractual critical illness claim should also be excluded from the distribution to creditors.

The bigger question raised by this case is why these types of claims are not included in the distribution to creditors. This is not a statutory exemption, but courts have been excluding personal rights of action in bankruptcy distributions for more than a century. This blog explores one possible reason for the exemption. Rather than seeing the debtor as a financial problem that must be solved without requiring state assistance, which has been the pattern of bankruptcy law, this may be the courts seeing and treating the debtor as a human being.

Relevant Considerations in Approving Assignments Under the CCAA

By Nigel Bankes

On July 10, 2018

In Bankruptcy and Insolvency, Energy

By: Nigel Bankes

PDF Version: Relevant considerations in approving assignments under the CCAA

Case Commented On: Dundee Oil and Gas Limited (Re), 2018 ONSC 3678

As part of approving a plan of compromise or arrangement under the Companies’ Creditors Arrangement Act, RSC 1985, c. C-36, s.11.3 (CCAA), the Court on an “application by a debtor company and on notice to every party to an agreement and the monitor, … may make an order assigning the rights and obligations of the company under the agreement to any person who is specified by the court and agrees to the assignment.” Section 11.3(3) provides the following guidance to the Court in exercising this power:

(3) In deciding whether to make the order, the court is to consider, among other things,

(a) whether the monitor approved the proposed assignment;

(b) whether the person to whom the rights and obligations are to be assigned would be able to perform the obligations; and

BIA Preference Payments: Evidence Rebutting the Presumption must be Objectively Reasonable

By Jassmine Girgis

On March 8, 2018

In Bankruptcy and Insolvency

By: Jassmine Girgis

PDF Version: BIA Preference Payments: Evidence Rebutting the Presumption must be Objectively Reasonable

Case Commented On: Gustafson (Re), 2018 ABQB 77 (CanLII)

Introduction

Legislation that governs fraudulent preferences applies if a debtor elects to pay only one or a few of his creditors and not the others, with the consequence of preferring certain creditors. These transfers are improper if they are made on the eve of the debtor’s bankruptcy. Preferences are governed provincially, by the Fraudulent Preferences Act, RSA 2000, c F-24, and federally, under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA). This case deals with the preference provisions in the BIA.

The False Security of Commingled Trust Accounts

By Nigel Bankes

On December 8, 2017

In Bankruptcy and Insolvency, Oil & Gas

By: Nigel Bankes

PDF Version: The False Security of Commingled Trust Accounts

Case Commented On: Alberta Treasury Branches v Exall Energy Corporation, 2017 ABQB 602 (CanLII)

Working interest owners in the western sedimentary basin have long sought to have the best of both worlds: the convenience of allowing an operator to commingle joint account monies from multiple properties in a single general account, while offering (through the provisions of the Canadian Association of Petroleum Landmen (CAPL) operating procedures) the contractual assurance to non-operators that their funds were impressed with a trust while in that commingled account. The weakness of such an assurance is that its underlying premise is that the operator will always have a balance in that commingled general account equal to or greater than the amounts represented by the “monies of the joint operator”, whether those monies are monies contributed by a joint operator to fund joint operations or whether they represent monies received by the operator on account of the sale of a joint operator’s share of production. If that premise turns out not to be the case then a joint operator’s proprietary claim evaporates. The premise of course is most likely to be false when the operator is in financial difficulty – the precise point in time when a joint operator would like to have access to a proprietary remedy.