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  • Writer's pictureByron Nelson

The Supreme Court of Canada Redwater decision

The Supreme Court of Canada released its decision in Orphan Wells Association et al. v. Grant Thornton Limited et al. 2019 SCC 5, on February 1, 2019. This case deal with issues with the bankruptcy of Redwater Energy Corporation and thus this decision of the Supreme Court is loosely referred to as the “Redwater decision”.

Redwater is a publicly traded oil and gas company that was petitioned into receivership in 2015. At the time, it owed $5.1 million to ATB Financial and held assets of 84 wells, 7 facilities and 36 pipelines. Of the wells, 17 were productive. Redwater’s Liability Management Rating (“LMR”) had never dropped below the prescribed ratio and it had therefore never paid any security deposits to the Alberta Energy Regulator (the “Regulator”).

It is often said that “bad facts make bad law”. It remains to be seen whether the Redwater decision is seen as being good law or bad law, but the case certainly had bad facts.


At the time of its being petitioned into receivership, only 17 of Redwater’s wells, 3 facilities and 12 pipelines were deemed to be productive by the appointed receiver, Grant Thornton Limited (“GTL”). GTL sought, as receiver, to take possession and control of those productive assets and did not attempt to take possession or control of any of the other assets. GTL informed the Regulator of its intentions.

The result of GTL’s actions would have been to maximize the return to Redwater’s creditors and leave the end-of-life obligations for Redwater’s non-productive assets to the Orphan Well Association. GTL sought to take these steps because if it assumed, as receiver, all of Redwater’s assets, there would be a negative position in Redwater’s assets. The assets that GTL wanted to take possession and control of had a deemed net value of $4.152 million whereas the other assets had a deemed net liability of $4.705 million, resulting in an overall negative position of $553,000.00. GTL deemed that a sale of the productive assets combined with the non-productive assets would be unlikely because of this financial reality.


Section 14.06(2) of the federal Bankruptcy and Insolvency Act provides that a trustee is not personally liable for pre-bankruptcy environmental conditions unless that trustee has been grossly negligent or guilty of wilful misconduct.

Additionally, S. 14.06(4) provides that a trustee is not personally liable for environmental orders or directives so long as the trustee abandons or releases any interest in the property affected by the condition or damage within a prescribed timeframe.

This is the crux of the issue that the Supreme Court was presented with. GTL did in fact advise the Regulator that they would not be taking possession or control of the non-productive assets within the required time to do so. GTL would not be personally liable for the failure to meet the end-of-life obligations.

Lower Courts

The Regulator and the Orphan Wells Association filed an application seeking a declaration that GTL’s renunciation of the non-productive assets was void and that GTL had to fulfill the end-of-life obligations.

Both the Alberta Court of Queen’s Bench and Alberta Court of Appeal rejected the Regulator’s application on the basis that it conflicted with the Bankruptcy and Insolvency Act in that it sought to impose obligations directly on GTL and that it upended the priority scheme in the Act. The Court of Appeal decision was a majority 2-1 decision and the dissenting opinion would have allowed the Regulator’s application and appeal on the basis that there was no conflict with the Act.

It an obvious point that over the years there has been a shift in the opinion of the public and governments as they relate to environmental issues. One should not think that the courts are immune to such shifts of opinion.

The Supreme Court Decision

The Supreme Court reversed the decisions of all of the lower courts in a 7-2 ruling, with the Chief Justice delivering the majority opinion.

The majority decision found that while GTL would not be personally liable for the end-of-life obligations of the unproductive wells, Redwater nonetheless remains liable for them, and such obligations would have to be discharged prior to a distribution of the proceeds of sale of the assets. Significantly, this even applies to secured creditors and places the discharge of environmental obligations above such secured creditors.

As such, the proceeds of the sale of the productive assets, which had been held in trust pending this decision, were ordered to be used to address Redwater’s end-of-life obligations prior to distribution to creditors.

Looking Forward

Time will tell how this decision will impact the energy industry in Alberta.

Two significant impacts will likely be seen. First, given the impact on secured creditors to be placed in lower priority to environmental obligations, it will likely be more difficult to obtain conventional financing for exploration, particularly for junior and intermediate producers.

Second, trustees will be unlikely to sell an insolvent company’s productive assets separate from unproductive assets with end-of-life obligations. As such, it may be difficult for smaller companies to acquire productive assets in such situations.

Additionally, where such obligations have liabilities that outweigh the value of the productive assets, there will be little incentive for secured lenders to bring enforcement proceedings, and thus the hope of the liabilities being addressed may prove fruitless. More litigation is likely to come in such circumstances.

Byron W. Nelson is the managing partner of Inns Law and practices in commercial litigation and energy law.

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