A recent appellate decision from Alberta, Manitok Energy Inc. (Re), marks another chapter in the developing caselaw surrounding environmental obligations in insolvency proceedings. In the decision, the Alberta Court of Appeal overturned the decision of the lower Court, which had decided in favour of lienholders, drawing on the Supreme Court of Canada’s “Redwater” decision (Orphan Well Association v. Grant Thornton Ltd.).

The 2019 Redwater decision had a major impact on oil and gas insolvency proceedings in Alberta. Prior to this decision, a bank could appoint a receiver over the assets of an insolvent debtor, and the receiver would sell the assets with a positive value and distribute the proceeds to the bank in accordance with their priority security status. The assets with a negative value (in many cases, due to large abandonment and reclamation obligations) would be disclaimed by the receiver and fall into the responsibility of the Orphan Well Fund. Redwater affirmed that abandonment and reclamation obligations must be satisfied in priority to any other creditor, even those with a priority security interest registered in the Personal Property Registry or other legislation.

In this case, the receiver (“Receiver”) of Manitok Energy Inc. (“Manitok”), who had been appointed prior to the release of the Redwater decision, applied to the Alberta Court of Queen’s Bench for directions in an uncertain post-sale situation – it had sold some of the assets under a sale approval and vesting order (“SAVO”), and held the sale proceeds (subject to a holdback for the lienholders). However, the Receiver could not distribute those proceeds as it was unable to confirm who had priority rights to the funds – the Alberta Energy Regulator (the “AER”), or the builders’ lien claimants.

Background

Manitok was an oil and gas company. Prentice Creek Contracting, provided equipment and services to Manitok related to the reclamation and cleanup of certain oil and gas well sites. Riverside Fuels provided fuel and lubricants to Manitok. Both parties filed builders’ liens against Manitok for their unpaid work prior to the receivership.

Despite various sales made by the Receiver of Manitok’s valuable assets, Manitok’s end-of-life obligations still exceeded the sale proceeds in its estate. If the AER’s claim for abandonment and reclamation obligations was found to have priority, there would be nothing left for the lienholders or other creditors.

Alberta Court of Queen’s Bench

At first instance, the Court of Queen’s Bench distinguished the facts of Manitok from those in Redwater on the basis that the AER had not taken any steps to issue Abandonment Orders against the valuable assets until after the assets had been sold. As a result, the Receiver was not required to use sale proceeds to fulfill the end-of-life obligations against the sold assets because they were no longer part of Manitok’s estate. In accordance with the industry standard, the new licensee assumed these obligations. The chambers judge ruled in favour of the builders’ lien claimants, who had filed their liens against the sold assets, and held that they were entitled to be paid out of the proceeds of the sale in priority to other claims.

Alberta Court of Appeal

The Alberta Court of Appeal (the “Court of Appeal”) disagreed with the Court of Queen’s Bench decision. It found that unless the sale proceeds of the valuable assets are available to satisfy the abandonment and reclamation obligations, such obligations would never be satisfied. It noted that the “whole point of Redwater, however, is that the proceeds of the sale of the valuable assets must be applied towards reclamation of the worthless orphaned assets”.

The Court of Appeal confirmed that assets in the estate do not cease to be available to discharge end-of-life obligations because they are sold by the Receiver and converted to cash, and that the sale proceeds were part of the Manitok estate. Under the SAVO, the proceeds were to specifically stand in place of the physical assets that had been sold, without affecting in any way the priorities and claims of various claimants.

The Court of Appeal held that there is no distinction to be made between various kinds of assets in the bankrupt estate; all assets of an oil and gas company are to be treated as a “package”. It then clarified that end-of-life obligations are inherent in oil and gas properties from the minute extraction of the resources commences. The Court of Appeal explained that the public duty on the Receiver to use the assets of the estate to discharge the obligations are imposed by statute on all licensees and exist independently of any enforcement action taken by the AER.

As such, the appeal was allowed, and the Court of Queen’s Bench decision was set aside. The Court of Appeal ruled that although the quantum of the two builders’ lien claims was relevant to setting the quantum of the holdback, the end-of-life obligations must be satisfied by the Receiver from Manitok’s estate in preference to the builders’ lien claims.

Key Take-aways

This Court of Appeal’s decision reaffirms the priority of abandonment and reclamation obligations of a licensee. While the Court of Queen’s Bench decision had offered a glimmer of hope for builders’ lienholders and other secured creditors with registered priority security interests, this glimmer of hope was short-lived. A builders’ lien is a powerful tool used by many companies in the oilfield services sector. However, the priority of a validly registered lien will still be defeated by claims from the AER for abandonment and reclamation. Oilfield suppliers and service companies should carefully consider the extent of their lien rights, especially when working on lands which are subject to abandonment and reclamation obligations.