Appeal court backs decision favouring Redwater creditors

Eco-related case closely watched amid hike in oil and gas industry bankruptcies

CALGARY A court decision that gave secured creditors priority over environmental cleanup in the case of bankrupt Redwater Energy Corp. has been upheld by the Alberta Court of Appeal.

The lawsuit has been closely watched as a precedent-setting case as bankruptcies continue to afflict the oil and gas industry after more than two years of low commodity prices.

In a 2-1 decision released Monday, the appeal court upheld the ruling in favour of Grant Thornton, Redwater’s trustee in bankruptcy, and its lender, ATB Financial, who wanted to sell off its productive wells to pay creditors and leave the others for the industry-supported Orphan Well Association to remediate. The Alberta Energy Regulator, however, argued funds from the sale of the productive wells must be used to cover cleanup expenses for the unproductive wells, a position backed by appeal interveners from the Alberta, B.C. and Saskatchewan governments as well as the Canadian Association of Petroleum Producers.

In a statement Monday night, the Alberta Energy Regulator said it is reviewing the decision and determining whether to appeal.

“While we are disappointed in the court’s decision, the AER will continue to take steps to protect the public from the environmental costs associated with suspension, abandonment and reclamation,” spokesman Ryan Bartlett said in the statement.

Brad Herald, chairman of the Orphan Well Association, said there have been other cases since Redwater where a receiver wants to “disclaim” an insolvent company’s liabilities. He wouldn’t give company names, but said the trend shows the precedent-setting nature of the Redwater decision and suggests further appeal is warranted by the regulator.

“I think the potential of the dissenting opinion here can bolster the justification for resolution to the Supreme Court,” he said.

In their majority decision, two of the appeal court judges found “no errors” in the Alberta Court of Queen’s Bench ruling in May 2016 that provincial regulations are in conflict with the federal Bankruptcy and Insolvency Act and the latter takes precedence.

In a dissenting opinion, however, the third judge argued that the regulations are consistent with the act and said the appeal should be allowed.

A spokesperson for Energy Minister Marg McCuaig-Boyd said the department has begun analyzing the decision.

“This ruling demonstrates the need to do a thorough review of the oil and gas liability management system that we have inherited,” press secretary Mike McKinnon said in an email.

The regulator had appealed the decision because it said it could encourage more companies to enter receivership and bankruptcy to avoid obligations to clean up oil and gas well sites.