By: Jassmine Girgis
PDF Version: 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.
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