Vol 16 (2019) - Issue 4

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Insolvency and Environmental Law Collide in Canada: Supreme Court of Canada Rules in Favour of Environmental Protection Over the Interests of Secured Creditors

Synposis

To talk about the intersection of insolvency and environmental law in Canada requires a brief understanding of two very different regulatory regimes. Bankruptcy and insolvency are governed under a federal law regime in Canada, while environmental law is governed under a provincial law regime. All is harmonious until the two intersect. Federal paramountcy is the law in Canada, although the jurisprudence on this attempts to balance the line between the two regimes. Paramountcy will only be engaged where the operation of two laws actually conflict (or where the purpose of the federal law is frustrated by the provincial law) – what has been termed cooperative federalism. This article will not discuss jurisdictional conflicts in a federal versus provincial/state run set of laws. It will, however, discuss the progression of the Supreme Court of Canada’s struggle with this topic on the intersection of federal bankruptcy laws and provincial environmental laws – the advancement of laudable goals of environmental protection, while balancing the rights of secured creditors in a bankruptcy in Canada. Given the globalisation of lending, secured creditors may be found in many jurisdictions, making this particular case noteworthy from a global lending perspective.
The Supreme Court of Canada ('SCC') recently released its decision in Orphan Well Association v Grant Thornton Limited (2019 SCC 5) regarding the bankruptcy of Redwater Energy Corporation. The case arose in the context of the strategy of Redwater’s trustees in bankruptcy to try to sell off productive assets of the company to maximise recovery for creditors, while disclaiming environmentally challenged assets. The impact of this strategy was to leave the environmentally challenged assets (oil wells that required decommissioning and environmental restoration to the areas drilled) to the industry funded Orphan Well Association and potentially the Province of Alberta to address.
The SCC held that there were end-of-life remedial obligations associated with the bankrupt’s non-productive wells that had to be addressed. It ruled that the federal paramountcy rules were not engaged, and decided the case on the basis of a prioritisation of the bankrupt’s assets for compliance with its regulatory obligations to clean up under the terms of its provincially issued licenses. 'Insolvency professionals are bound by and must comply with valid provincial laws during a bankruptcy' says the SCC.