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Supreme Court of Canada finds bankrupt energy company cannot ignore environmental obligations

In a long-awaited decision, the Supreme Court of Canada has overturned the Alberta Court of Appeal, and determined that a bankrupt company does not have carte blanche to ignore its environmental obligations.

In a 7-2 decision, the majority of the SCC found that the environmental regulatory regime applicable to oil wells in Alberta does not conflict with the federal Bankruptcy and Insolvency Act. The Court accordingly determined that the Alberta Energy Regulator ("AER") was entitled to require a bankrupt oil company to devote its remaining oil well assets towards meeting environmental oil well obligations instead of distributing those assets to secured creditors.

By way of background, the bankrupt oil company, Redwater, had property comprising a large number of unproductive oil wells, which no longer had value carried environmental obligations under the provincial regulatory and licensing regime, and a smaller number of productive wells, which had substantial value, but which were subject to licenses which could only be transferred with AER's approval. Redwater's bankruptcy trustee attempted to disclaim any interest in the orphan wells, in an attempt to avoid the environmental obligations, and to allow it to sell the productive wells for the benefit of Redwater's creditors. AER claimed it was entitled to refuse to allow the licenses for the productive wells to be transferred to new purchasers without the environmental obligations being met, and that one way or another, the remaining value of the Redwater estate must be applied to the environmental obligations.

The majority determined that the BIA did not empower a trustee in bankruptcy to walk away from environmental liabilities; a trustee's disclaimer of real property that is subject to environmental obligations protects a trustee from personal liability, but the underlying liability of the bankrupt for the environmental obligations is unaffected.

The Court also determined that the AER was acting in the public interest in enforcing environmental regulations, and was not advancing a claim for compensation as a creditor, and therefore was not interfering with the BIA priority scheme. More particularly, the court determined that the AER's oil well licensing regime inherently links all of the well licenses in the hands of a company, such that the environmental obligations of unproductive well licenses suppress the value of productive well licenses. The right of AER to force the value of the bankrupt's assets to be devoted to environmental obligations arose in this case only because the bankrupt's assets, namely its productive wells, were subject to AER's regulation.

How this decision will affect lending in polluting industries remains to be seen but it will certainly invite caution. For now, the Court has confirmed that the "polluter pays" principle is alive and well in Canada, and can continue to apply in bankruptcy.

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