Alberta Court of Queen’s Bench Permits Enforcement Against Insolvent Operator

In a recent decision that is relevant to oil and gas receiverships, the Alberta Court of Queen’s Bench lifted a stay of proceedings against an insolvent operator to allow the non-operating party to enforce its right to take over operatorship pursuant to the CAPL 2007 Operating Procedure. The judgment is noteworthy as it represents the second time in the last eighteen months that the Court has lifted a stay of proceedings in an insolvency proceeding (the first being Bank of Montreal v Bumper Development Corporation Ltd) to permit the exercise of the contractual rights of a non-operator.

The background facts are relatively straightforward. Firenze Energy Ltd and Scollard Energy Ltd were joint working interest owners in various oil and gas wells, licenses and related facilities.  Firenze and Scollard were parties to a joint operating, farm-out royalty agreement that incorporated CAPL 2007 with Scollard acting as the operator of the Facilities under the agreement.  Scollard entered into receivership under the Bankruptcy and Insolvency Act on September 2, 2017 and all rights and remedies against Scollard were stayed by virtue of the receivership order.  Firenze applied to lift the stay on the basis that it had both the right to immediately replace Scollard as operator due to its insolvency pursuant to clause 2.02A(a) of CAPL 2007 and the right to assume operatorship on assignment of the Facilities pursuant to sections 2.06 and 2.09 of CAPL 2007.

Clause 2.02A(a) of CAPL 2007 provides for immediate replacement of an operator in circumstances where it becomes bankrupt or insolvent. The Court found that “…the existence of the contractual right of transfer upon insolvency (or any other conditions set out in clause 2.02A(a)) is not in itself a sufficient basis to lift the stay.”  Somewhat surprisingly however, the Court went on to analyze clause 2.02A(g) of CAPL 2007, which provides that the operator will be immediately replaced upon service of notice from a non-operating party if “…the Operator assigns or attempts to assign its general powers and responsibilities of supervision and management as Operator to a non-Affiliate assignee”.  In this regard, the Court held that clause 202.A(g), in connection with clauses 2.06 and 2.09 of CAPL 2007, provided an equitable basis to lift the stay and allow Firenze to assume operatorship for wells and facilities that it had more than a 40% working interest in.  Two factors were identified as being material in this analysis: first, Scollard’s working interests in the Facilities were being marketed to suggest that the right of operatorship would transfer to the purchaser; and, second, Firenze clearly stated that it would subsequently seek to enforce its right to assume operatorship.

In the previously referenced Bumper decision, the non-operating party also asserted its right to become operator pursuant to provisions dealing with the disposition of the operator’s interest. Although neither clause 2.06 nor 2.09 were mentioned in Bumper, Justice Dario found that “…much like in [Bumper], the right to elect to become the Operator is a material, if not determinative factor in the present case”.  However, in Firenze, the Court also applied the test for lifting a stay as previously established in decisions such as Alignvest Private Debt Ltd v Surefire Industries Ltd , which “…focuses on the totality of the circumstances and the relative prejudice to the parties involved in the receivership.” Alignvest includes recognition that a lift-stay application should not be routinely granted and generally involves consideration of material prejudice.  While it is perhaps difficult to articulate how the non-operator can meet this relatively high burden in an instance where a court-appointed receiver is in possession and control of the assets, is continuing operations with committed funding from a creditworthy third party and is conducting marketing activities expressly authorized by the template order, all energy industry participants as well as creditors and receivers should be aware of the possible implications of the Firenze and Bumper decisions.

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