Alberta Court of Appeal Declines to Find Manitok is Distinguishable from Redwater
The Alberta Court of Appeal (the “ABCA”)’s anticipated decision in Manitok Energy Inc (Re), 2022 ABCA 117 (“Manitok”) confirmed that the sales proceeds of a debtor estate’s valuable petroleum and natural gas assets that are subject environmental claims including, notably, abandonment and reclamation obligations, must first be applied to abandonment and reclamation obligations, even where such assets are “unrelated” to the abandonment and reclamation obligations. The decision overturns that of the Alberta Court of Queen’s Bench (the “ABQB”), previously discussed here, and clarifies the scope of the Supreme Court of Canada’s decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (“Redwater”) (previously discussed here).
Manitok Energy Inc. (“Manitok”) was an oil and gas producer that filed a Notice of Intention to make a proposal. Ultimately, Manitok’s senior secured lender successfully applied to court to terminate the proposal proceedings and for the appointment of a receiver and manager. During the course of the receivership, Manitok and its two subsidiaries became bankrupt.
The estates had significant abandonment and reclamation obligations. Two creditors had filed builders’ liens against Manitok property prior to the receivership and ensuing bankruptcy. The receiver negotiated the sale of Manitok’s valuable assets and the net proceeds were held in trust under and pursuant to the provisions of the sale approval and vesting order.
The central issue was whether the estate must satisfy the abandonment and reclamation obligations prior to making any distribution to the holders of the builders’ liens. The resolution turns on the interpretation of Redwater, which held that abandonment and reclamation obligations are not claims “provable in bankruptcy” but, rather, public duties that are not extinguished in the bankruptcy process and must be fulfilled by the trustee to the extent of funds available in the estate.
Alberta Court of Queen’s Bench Decision
The ABQB decision in Manitok held, on the facts as presented, that secured creditors were, in fact, entitled to receive sale proceeds from the sale of certain, discrete assets of the debtor notwithstanding that the estate was unable to fully satisfy abandonment and reclamation obligations associated with assets unrelated to those that were sold. The ABQB distinguished the facts of Manitok from Redwater by noting that the valuable assets sold were “unrelated” to stranded assets, as they were unaffected by an environmental condition and sold to a new licensee before any abandonment or reclamation orders were made by the Alberta Energy Regulator.
Alberta Court of Appeal Decision
The ABCA overturned the ABQB decision and held that end-of-life obligations associated with the abandonment and reclamation of the unsold oil and gas properties must be satisfied in preference to satisfying otherwise prior-ranking secured creditors; even in those circumstances where the end-of-life obligations are in respect of assets that are unrelated to the sale.
The key holdings include:
- The concept of “unrelated” assets is inconsistent with Redwater as “disclaimed and orphaned assets cannot, by definition, be sold because of their abandonment and reclamation obligations [and] unless the sale proceeds of the valuable assets are available to satisfy those obligations, they can never be satisfied.” The bankrupt estate’s assets are a single “package” or “pool.”
- Abandonment and reclamation obligations exist independently of the issuance of abandonment or reclamation orders.
- The fact that the sale proceeds were held in trust in accordance with the provisions of a sale approval and vesting order (and, interestingly, in the case of Manitok, the court approval pre-dated the Supreme Court of Canada’s decision in Redwater) does not singularly reorder the priorities in an insolvency.
With Manitok, the ABCA provides increased clarity for those administering insolvent debtor estates. The decision closes the narrow window occasioned by the ratio of the ABQB decision through which secured creditors could recover in circumstances where there is unsatisfied abandonment and reclamation obligations in the estate.
The reach of Redwater continues to be tested and tried, and unanswered questions still remain. For example, the ABCA declined to rule on whether the proceeds or value of non-oil and gas assets are available for the satisfaction of abandonment and reclamation obligations. It is evident that the law will continue to evolve, and we will monitor and report on additional updates and implications.
Alberta Court of Appeal Alberta Court of Queen's Bench Redwater