Canadian Lender Defeats Environmental Claim

May 31, 2016 | Bruce Leonard

One of the most vexing commercial insolvency issues is the competition between creditors with security on environmentally troubled property and environmental authorities looking for deep pockets to fix the environmental problems. From a creditor’s point of view, a recent Alberta decision is a potential respite from environmental obligations being imposed on creditors of the owners of environmentally troubled property. 

Most countries have environmental protection legislation which follows a predictable pattern of seeking to place the costs of dealing with environmental problems on the property owner or creditors who have some involvement such as possession or direct management of the property. In some cases, the creditors may have no knowledge that anything was wrong with the property but regulators may be looking for deep pockets. The issue is whether the creditors of the owner of an environmentally impacted property are, or should be, responsible for cleaning up environmental problems created or left by someone else. 

A recent Alberta case (Re Redwater Energy Corporation, 2016 ABQB 278 (Chief Justice Wittmann)) reached a more commercially reasonable outcome for creditors. The borrower was a public company with interests in a number of oil and gas properties. It fell into financial difficulties and was unable to repay its indebtedness to its lender. The lender applied to the Court for the appointment of a receiver and, subsequently, the borrower was placed in bankruptcy. The environmental authorities issued orders directed at the receiver to comply with environmental legislation requiring the reclamation and remediation of environmentally troubled property. With no value in the oil and gas leases on the properties in question, the trustee proceeded to disclaim (reject) its leases of the troubled properties. The environmental authorities then sought an order compelling the trustee to remediate the environmentally troubled property. 

In an extensive opinion, the Chief Justice of the Alberta of Queen’s Bench Court denied the relief sought by the regulators. The Court concluded that the remediation and reclamation sought by the Provincial regulators conflicted with the provisions of the Federal Bankruptcy and Insolvency Act. The Court ruled that in view of the Federal pre-eminence in bankruptcy jurisdiction, where the Provincial legislation was in conflict with the Federal bankruptcy legislation, the Provincial legislation was not enforceable. It was important to the Court’s conclusion that the trustee had not taken possession of the environmentally troubled property and the result might have been different if it had. 

The decision is a welcome analysis in a complicated area where decisions have often gone against creditors. It seems that careful planning by the trustee led to a result that was favourable to the creditors of the borrower. In view of the importance of the Court’s decision, we have probably not heard the last of this case. We will keep readers posted on any important subsequent developments in the case. Copies of the decision are available from any member of our Restructuring and Insolvency Group.

Note: the views expressed here are those of the author alone and cannot be taken as views of Miller Thomson LLP.


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