Commercial Insolvency Reporter - Norton Rose Fulbright ... · Dina Milivojevic, Associate and...

VOLUME 28, NUMBER 6 Cited as 28 Comm. Insol. R. AUGUST 2016

• ONTARIO COURT AFFIRMS SUPREMACY OF BUSINESS JUDGMENT RULE IN CCAA PROCEEDINGS •

Dina Milivojevic, Associate and Michael Shakra, Associate© Davies Ward Phillips & Vineberg LLP, Toronto and Thornton Grout Finnigan LLP, Toronto

Dina Milivojevic Michael Shakra

It is a fundamental tenet of Canadian corporate law that courts should not interfere with the reasonable business decisions of the directors of a corporation. This principle, referred to as the “business judgment

rule”, is premised on the assumption that the directors and management of a corporation often have business expertise that courts do not.1 In a recent judgment made in the Companies’ Creditors Arrangement Act2 (“CCAA”) proceedings of Essar Steel Algoma Inc. (“Essar”) and certain of its affiliates,3 the Ontario Superior Court of Justice (Commercial List) (the “Court”) has not only confirmed that the business judgment rule applies in proceedings under the CCAA, but that it also extends to the decisions of certain professionals engaged in the restructuring process.

THE BUSINESS JUDGMENT RULE AND CCAA PROCEEDINGS

Essar is not the first case to consider whether the business judgment rule applies in CCAA proceedings. Indeed, there is a line of case law affirming that reasonable decisions made by the board of directors of a company under CCAA protection should not be second-guessed by the courts. For example, in Re Stelco Inc.,4 the issue was whether two individuals who were involved with two companies that owned approximately 20% of Stelco Inc.’s (“Stelco”) public shares should be permitted to serve on Stelco’s board. Stelco’s board appointed the two individuals as directors and Stelco’s employees brought a motion to have them removed on the basis that they may tilt

• In This Issue •ONTARIO COURT AFFIRMS SUPREMACY OF BUSINESS JUDGMENT RULE IN CCAA PROCEEDINGS

Dina Milivojevic and Michael Shakra .................57

TROUBLED WATERS: ALBERTA OIL AND GAS LEGISLATION FRUSTRATES THE PURPOSES OF THE BANKRUPTCY AND INSOLVENCY ACT

Kyle D. Kashuba and Isabel Langlois .................64

Commercial Insolvency Reporter

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August 2016 Volume 28, No. 6 Commercial Insolvency Reporter

the bidding process for the Stelco Group in favour of maximizing shareholder value at the expense of bids that might be more favourable to the interests of the employees. The motion judge granted the order and removed the individuals from the board of Stelco. The two individuals appealed.

One of the arguments made by the two individuals was that the motion judge erred in interfering with the exercise of the business judgment of Stelco’s board of directors in filling the vacancies on the board. The Ontario Court of Appeal agreed, finding that “[i]t is well established that judges supervising restructuring proceedings — and courts in general — will be very hesitant to second-guess the business decisions of directors and management”.5 The Court continued by explaining that, although a judge supervising a CCAA proceeding develops familiarity with the corporate dynamics and a sense of direction for the restructuring, “the court is not catapulted into the shoes of the board of directors, or into the seat of the chair of the board, when acting in its supervisory role in the restructuring”.6 In this case, the motion judge was alive to the “business judgment” aspect of the case before him, but found that the case did not involve the “management of the business and affairs of the corporation”, but rather a “quasi-constitutional aspect of the corporation” in respect of which the board was not entitled to the same level of deference. The Court of Appeal disagreed, finding that there was no distinction between the directors’ role in “the management of the business and affairs of the corporation” and their role with respect to a “quasi-constitutional aspect of the corporation”:

I do not see the distinction between the directors’ role in “the management of the business and affairs of the corporation” ([Canada Business Corporations Act (“CBCA”)], s. 102) — which describes the directors’ overall responsibilities — and their role with respect to a “quasi-constitutional aspect of the corporation”(i.e., in filling out the composition of the board of directors in the event of a vacancy). The “affairs” of the corporation are defined in s. 1 of the CBCA as meaning “the relationships among a corporation, it affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by

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General EditorDina Milivojevic, National Editor Firm: Davies Ward Phillips & Vineberg LLPTel: (416) 367-7460E-mail: [email protected]

Michael Shakra, National EditorFirm: Thornton Grout Finnigan LLPTel: (416) 304-0332E-mail: [email protected]

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Note: This newsletter solicits manuscripts for consideration by the Editors, who reserves the right to reject any manuscript or to publish it in revised form. The articles included in the Commercial Insolvency Reporter reflect the views of the individual authors and do not necessarily reflect the views of the editorial board members. This newsletter is not intended to provide legal or other professional advice and readers should not act on the information contained in this newsletter without seeking specific independent advice on the particular matters with which they are concerned.

Commercial Insolvency Reporter August 2016 Volume 28, No. 6

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such bodies corporate”. Corporate governance decisions relate directly to such relationships and are at the heart of the Board’s business decision-making role regarding the corporation’s business and affairs. The dynamics of such decisions, and the intricate balancing of competing interests and other corporate-related factors that goes into making them, are no more within the purview of the court’s knowledge and expertise than other business decisions, and they deserve the same deferential approach. Respectfully, the motion judge erred in declining to give effect to the business judgment rule in the circumstances of this case.7 (emphasis added)

On this basis, the Court found that the decision of the board to appoint the two individuals as directors was entitled to deference and granted the appeal.

Several years later, in Re Grant Forest Products Inc.,8 the issue was whether a key employee retention plan (“KERP”) and related charge which were approved on the initial application should be deleted from the initial order. One argument made by the creditor opposing the KERP was that the quantum of a payment to be made to the employee should his employment be terminated was unreasonable. In concluding that the quantum of the termination payment was reasonable, the Court pointed out that the KERP agreement was approved by the board of directors of the debtor, including by the independent directors, and was supported by the Monitor and Chief Restructuring Advisor. In this regard, the Court stated:

A three year severance payment is not so large on the face of it to be unreasonable, or in this case, unfair to the other stakeholders. The business acumen of the board of directors of Grant Forest, including the independent directors, is one that a court should not ignore unless there is good reason on the record to ignore it. This is particularly so in light of the support of the Monitor and Mr. Stephens for the KERP provisions. Their business judgment cannot be ignored.

The Monitor is, of course, an officer of the court. The Chief Restructuring Advisor is not but has been appointed in the Initial Order. Their views deserve great weight and I would be reluctant to second guess them. The following statement of Gallagan J.A., in Royal Bank v. Soundair Corp.,

[1991] O.J. No. 1137, 4 O.R. (3d) 1 (Ont. C.A.), while made in the context of the approval by a court appointed receiver of the sale of a business, is instructive in my view in considering the views of a Monitor, including the Monitor in this case and the views of the Chief Restructuring Advisor:

When a court appoints a receiver to use its commercial expertise to sell an airline, it is inescapable that it intends to rely upon the receiver’s expertise and not upon its own. Therefore, the court must place a great deal of confidence in the actions taken and in the opinions formed by the receiver. It should also assume that the receiver is acting properly unless the contrary is clearly shown. The second observation is that the court should be reluctant to second-guess, with the benefit of hindsight, the considered business decisions made by its receiver.9 (emphasis added)

The Court reached its conclusion in Re Crystallex International Corp.10 on similar grounds. In this case, the debtor Crystallex International Corp. (“Crystallex”) sought, among other things, approval of a management incentive plan (“MIP”) and debtor-in-possession facility (the “Tenor DIP Facility”) to be provided by Tenor Special Situation I, LLC (“Tenor”). This relief was opposed by, among others, noteholders of Crystallex, who proposed a debtor-in-possession (“DIP”) loan which they would make for a smaller amount and for a shorter term than the Tenor DIP Facility. The Tenor DIP Facility was selected by the board of directors of Crystallex pursuant to an elaborate process which involved Crystallex, the Monitor and a financial advisor that was hired with the approval of the Monitor. Crystallex, in consultation with the financial advisor and on its recommendation, prepared a set of bid procedures to govern the solicitation of bids to provide DIP financing to Crystallex. The bid procedures were approved by the Monitor. They included a provision whereby the DIP lender could obtain a substantial portion of the proceeds of Crystallex’ $3.4 billion arbitration claim against the Venezuelan government, if successful. Ultimately, the financial advisor recommended, and the board of directors of Crystallex agreed to accept,

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the Tenor DIP Facility. The terms of the Tenor DIP Facility included the following:

a) Tenor would advance $36 million to Crystallex due and payable on December 31, 2016 (this date was based on Crystallex’ counsel’s assessment of the likely timing of a decision in the arbitration and collection of the award);

b) Crystallex would pay Tenor a $1 million commitment fee;

c) $35 million of the loan amount would bear payment in kind interest, meaning it would capitalized and payable only upon maturity of the loan or upon receipt of the proceeds of the arbitration at the rate of 10% per annum compounded semi-annually;

d) Tenor would receive additional compensation equal to 35% of the net proceeds of any arbitral award or settlement, conditional upon the second tranche of the loan being advanced; and

e) the governance of Crystallex would be changed to give Tenor a substantial say in the governance of Crystallex, including that Crystallex would have a reduced five person board of directors, two of which would be nominees of Tenor and one of which would be an independent director selected by agreement of Crystallex and Tenor.11

The noteholders proposed a DIP loan of $10 million with an interest rate of 1% repayable on October 15, 2012. During the DIP solicitation process, the noteholders were asked to increase their proposed loan to $35 million and refused, but stated that they were prepared to do so in the future if required by the Court and if the Court ordered that such long-term financing was appropriate and necessary. The noteholders raised a number of objections to the Tenor DIP Facility, including that the size of the loan was too large, Tenor would gain control over Crystallex and the restructuring process, the Tenor DIP Facility was “a pre-ordained coronation rather than the result of a competitive bidding process”, and “giving Tenor 35% of the arbitration proceedings [would] take away from Crystallex a substantial amount of equity making a compromise more difficult and less available for the unsecured creditors”.12

Prior to considering these arguments made by the noteholders, the Court stated as follows with respect to the factors to be taken into account in consider whether a DIP loan should be approved:

I accept that in considering whether security under a DIP loan should be ordered, a court cannot ignore the factors directed to be considered in s. 11.2(4) of the CCAA and could not order such security if a consideration of those factors led to an opposite conclusion. But in my view those factors are not the only factors that can be considered, as s. 11.2(4) directs a court to consider the listed factors “among other things”. One of the considerations that in my view can be taken into account is the exercise or lack thereof of business judgment by the board of directors of a debtor corporation in considering DIP financing.13 (emphasis added)

In this case, the Court concluded that, in selecting the Tenor DIP Facility, the Crystallex board took legal advice from its solicitors and financial advice from its financial advisor. The Court was satisfied that the board carefully considered all relevant matters, including the noteholders’ proposed DIP financing of $10 million, and that they acted on an informed basis and in good faith with a view to the best interests of Crystallex and its stakeholders.14 After rejecting the specific arguments made by the noteholders, the Court ultimately approved the Tenor DIP Facility.

One of the other issues in this case was whether the Court should approve the MIP proposed by Crystallex. The terms of the MIP included the setting aside of up to 10% of the net proceeds of the arbitration up to $700 million and 2% of any further net proceeds, after all costs and charges, including the amounts owing to noteholders. It was proposed that money in this pool could be used to pay the beneficiaries of the MIP, depending on the determination of an independent committee. The amounts to be allocated to participants by the compensation committee were discretionary, and would be determined based on a number of criteria including the amount recovered by Crystallex in the arbitration, the amount of time and energy spent by the individual on the arbitration and The opportunity cost to the individual in staying with Crystallex in


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terms of professional experience, money and the development of new opportunities.15

One of the reasons that the Court approved the MIP was that the reasons for the MIP were considered to be reasonable by the independent directors of Crystallex constituting the compensation committee and by Jay Swartz of Davies Ward Phillips & Vineberg LLP, who was retained by Crystallex to determine, from the perspective of an independent director, what an appropriate MIP would be. Mr. Swartz in turn retained an independent national executive compensation consulting firm to provide expert advice with respect to compensation issues and to provide background information on compensation standards in circumstances analogous to those of Crystallex. Mr. Swartz reviewed extensive documentation, had extensive discussions with various persons including counsel for Crystallex, counsel for the board and arbitration counsel, and concluded that the MIP was reasonable. The Court agreed, finding that the business judgment rule was applicable to the approval of the MIP, particularly because the MIP had been approved by an independent committee of directors who acted on advice from Mr. Swartz, had market information and whose judgment was informed. Accordingly, the Court was in no position to say that the judgment of the directors was unreasonable.16

Stelco, Grant Forest and Crystallex are three decisions which demonstrate the court’s willingness to apply the business judgment rule in CCAA proceedings, and also to extend the scope of the rule to certain professionals engaged in the insolvency process. The recent decision of the Court in Essar is consistent with this case law.

THE ESSAR DECISION

On May 16, 2016, the Court released its judgment in the Essar CCAA proceedings. The issue on this motion was whether the Court should qualify a bidder (the “Subject Bidder”)17 as a “Phase II Bidder” in Essar’s Sale and Investment Solicitation Process (“SISP”) notwithstanding that Essar, in consultation with its chief restructuring advisor (“CRA”), financial

advisor (the “Financial Advisor”) and the Monitor, determined that the Subject Bidder had not met the conditions to become a Phase II Bidder. The moving party on the motion was the United Steelworkers Local Union 2251 (“Local 2251”), supported by the United Steelworkers (“USW”) and its Local 2724 and the retirees, who argued that it was not properly consulted in the decision to exclude the Subject Bidder from the Phase II process and that the only appropriate remedy was to permit the Subject Bidder to participate in the Phase II process as a Phase II Bidder. It relied on certain provisions of the SISP to make its arguments.

The SISP provided for a two-stage bidding process. Phase I required bidders to deliver to the financial advisor a non-binding letter of interest to finance, purchase or invest in Essar’s business or property. If a bidder was accepted as a “Qualified Phase I Bidder”, that bidder was accepted as a Phase II Bidder who, after a due diligence process, was entitled to make a formal offer to purchase or make an investment in Essar or its property and business. A bidder had to meet several criteria to be accepted as a Phase II Bidder, including satisfactory evidence of the bidder’s financial ability to complete a transaction. The SISP granted different rights to Essar, the CRA and the Financial Advisor on one the hand and the Consultation Parties (which included the USW and the retirees) on the other. Specifically, the SISP provided for the assessment of the Phase I Bids by Essar in consultation with the CRA, the Financial Advisor, the Consultation Parties (which included the USW) and the Monitor, and it also gave the Consultation Parties a right to be consulted in certain aspects of the SISP. However, the SISP provided that the ultimate decision of whether a Phase I Bidder had provided satisfactory evidence of its financial and other capabilities to consummate the proposed transaction was to be made by Essar, in consultation with the CRA, the Financial Advisor and the Monitor (i.e., without the Consultation Parties). The SISP also gave Essar the right to waive compliance with any one or more of the requirements of the SISP and deem a non-compliant bid to be a Qualified Phase I Bid.

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The Subject Bidder submitted a Phase I Bid on the deadline for such bids and, in the subsequent days, the Financial Advisor made inquiries of the Subject Bidder with respect to and requested proof of the sources of funds for the debt and equity components of the bid, including information on the entity funding the equity component. In response, the Subject Bidder provided some unsupported financial information to the Financial Advisor. The Financial Advisor then wrote to the Subject Bidder to advise that Essar, in consultation with the CRA and the Financial Advisor, and with the approval of the Monitor, had determined that the Subject Bid did not constitute a Qualified Phase I Bid, but that Essar was exercising its discretion to waive the technical requirements of the SISP and to declare the Subject Bid a Qualified Phase I Bid, conditional upon the Subject Bidder providing written evidence of its financial and other capabilities to consummate its proposed transaction, satisfactory to Essar in consultation with the CRA, the Financial Advisor and the Monitor, by no later than 5:00 p.m. on April 18, 2016.

On April 18, 2016 the Subject Bidder provided to the Financial Advisor a letter and a one page spreadsheet containing a dated draft valuation of related corporations. Essar, in consultation with the CRA, the Financial Advisor and the Monitor, reviewed the documents provided and determined that the documentation did not constitute sufficient evidence of the Subject Bidder’s ability to consummate the proposed transaction. On April 20, 2016, the Financial Advisor notified the Subject Bidder that its Phase I Bid was rejected.

The USW’s main complaint on this motion was that it was not consulted and given an opportunity to provide input into the decision to disqualify the Subject Bidder at the Phase I stage. The Court agreed that, as a technical matter, the USW had a right to be consulted after the financial information from the Subject Bidder was received on April 18. However, the consultation would have been a meaningless as the USW had no role to play in the decision as to the financial capability of the Subject Bidder and it was

that decision which led to the rejection of the Subject Bid. With respect to the substantive decision not to qualify the Subject Bidder as a Phase II Bidder, the Court stated as follows:

So far as the decision that was made that the Subject Bidder lacked the financial wherewithal to close its intended transaction, this is a decision that a CCAA court is ill equipped to second-guess. Under our corporate law, a court should be loath to interfere with the good faith exercise of the business judgment of directors and officers of a corporation. See Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 SCR 461, 2004 SCC 68 at para. 67 and Brant Investments Ltd. v. KeepRite Inc., [199] O.J. No. 683, 3 O.R. (3d) 289 (C.A.) at 320. This reluctance to interfere with the business judgment is even the more so in this CCAA proceeding in which the parties, including the USW, have agreed in the SISP that the decision is to be made not only by Essar Algoma but also by highly qualified professionals with great experience in restructuring, being the Financial Advisor, the CRA and the Monitor.18 (emphasis added)

Accordingly, the Court dismissed the motion to qualify the Subject Bidder as a Phase II Bidder.

CONCLUSION

With its decision in Essar, the Court has once again confirmed that the business judgment rule is a fundamental tenet of Canadian corporate law that applies equally in proceedings under the CCAA as it does in situations when a corporation is thriving financially. The Court has also confirmed that the rule is to be applied broadly to protect the decisions of not only the board of directors of an insolvent company, but also certain professionals engaged in the restructuring process. The fact that this decision was made in the context of a sale process under the CCAA is of particular significance as it sets an important precedent for sale processes going forward. Given the volatile and real-time nature of CCAA proceedings, and given the business expertise of the board of directors of the debtor company and the professionals engaged in the restructuring process, it would be inappropriate for the court to second-guess


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the business judgment of these parties each time a stakeholder argued that another bidder should have been selected.

[Dina Milivojevic is an associate in the bankruptcy and insolvency practice group. She is developing a broad practice in corporate restructuring and insolvency.

Since joining Davies Ward Phillips & Vineberg LLP as a student in 2011, Dina has been involved in a variety of insolvency proceedings, including restructurings under the Companies’ Creditors Arrangement Act and bankruptcies and proposals under the Bankruptcy and Insolvency Act. She has also worked on a variety of litigation proceedings, including class actions, contractual disputes and debtor/creditor disputes.

Michael Shakra has a broad practice that focuses on corporate restructuring and insolvency matters. Michael has experience with receiverships, security enforcement, debt collection, creditors’ rights and proceedings under the Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act. In addition, Michael has been involved in cross-border insolvency proceedings and the treatment of corporate enterprise groups in insolvency at both the national and international levels.

Michael also has experience in corporate/commercial litigation. Michael’s litigation practice has included large commercial disputes, mediations and the preparation and litigation of creditor claims

in some of Canada’s largest and most complex insolvency proceedings, including cross-border proceedings. Michael has appeared before the Ontario Superior Court of Justice (Commercial List), the Divisional Court and the Ontario Court of Appeal.]

1 Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 SCR 461, 2004 SCC 68 at paras. 64-65.

2 R.S.C. 1985, c. C-36.3 Re Essar Steel Algoma Inc. et al., 2016 ONSC 3205

[Essar].4 [2005] O.J. No. 1171 (C.A.) [Stelco].5 Ibid. at para. 65.6 Ibid. at paras. 65-68.7 Ibid. at paras. 69-70.8 [2009] O.J. No. 3344 [Grant Forest].9 Ibid. at paras. 18-19. See similarly Re Timminco Ltd.,

[2012] .O.J. No. 472 at para. 73 (S.C.J.).10 2012 ONSC 2125, affd 2012 ONCA 404, leave to

appeal refused [2012] S.C.C.A. No. 254 [Crystallex].11 Ibid. at paras. 23-25.12 Ibid. at paras. 37-6113 Ibid. at para. 35.14 Ibid. at para. 36.15 Ibid. at paras. 102-103.16 Ibid. at paras. 106-114.17 The bidder was referred to as the “Subject Bidder”

in the endorsement as a result of the confidentiality provisions of the SISP.

18 Essar, supra at paras. 24-29.

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• TROUBLED WATERS: ALBERTA OIL AND GAS LEGISLATION FRUSTRATES THE PURPOSES OF THE BANKRUPTCY

AND INSOLVENCY ACT•

Kyle D. Kashuba, Partner, and Isabel Langlois, Associate©Norton Rose Fulbright LLP, Calgary

On May 19, 2016, the Alberta Court of Queen’s Bench released its much anticipated decision in the receivership proceedings of Redwater Energy Corporation (“Redwater”).1 Chief Justice Wittmann ruled that certain sections of Alberta’s provincial oil and gas legislation frustrates the purposes of the federal Bankruptcy and Insolvency Act (“BIA”).2 Justice Whittmann held that the Trustee in Bankruptcy could disclaim its interest in certain oil and gas licensed properties and was not bound by oil and gas well abandonment orders issued by the Alberta Energy Regulator (the “AER”) with respect to the disclaimed licensed properties.

BACKGROUND

Redwater held a number of oil and gas licensed properties in Alberta, which were licensed under the Oil and Gas Conservation Act (“OGCA”)3 and the Pipeline Act (“PA”)4. On May 12, 2015, Redwater’s principal secured lender successfully sought the appointment of a Receiver (the “Receiver”) over all of the current and future assets, undertakings and properties of Redwater pursuant to s. 243 of the BIA. Redwater was subsequently assigned into bankruptcy and a Trustee in Bankruptcy (the “Trustee”) was appointed.

The AER asked the Receiver to confirm it had taken possession and control of all of Redwater’s oil and gas licensed properties. In response, the Receiver advised the AER that it took possession of Redwater’s producing wells which represented only 20 of Redwater’s 127 AER-licensed properties. Subsequently, the Trustee opted to disclaim its interest in the 107 non-operational wells pursuant to s. 14.06(4) of the BIA. The effect of such a disclaimer was that those wells would become the

responsibility of the AER and ultimately the Orphan Well Association (the “OWA”).

The AER responded by issuing abandonment orders with respect to the disclaimed licensed properties. The Trustee refused to comply with the abandonment orders and advised that it intended to establish a sales process for the 20 licensed properties which it assumed possession of. Due to the restriction imposed by the AER’s Licensee Liability Rating Program, the AER took the position that it would not authorize the transfer and sale of the 20 licensed properties until the Trustee had complied with the abandonment orders. The AER’s practice is to refuse the transfer of licensed properties by an insolvent licensee in cases where the insolvent licensee’s Liability Management Rating (“LMR”) is less than zero, unless the licensee posts security.

THE APPLICATION AND CROSS-APPLICATION

The AER and the OWA brought a joint application and asked the Alberta Court of Queen’s Bench to determine whether the Trustee could pick and choose amongst Redwater’s realizable properties and ignore the abandonment orders. The Trustee cross-applied and sought the approval of a sales process to market and sell the licensed properties it took possession of.

The AER argued that when the Trustee was appointed, it stepped into the shoes of the AER licensee and assumed the care, custody and control of all of Redwater’s licensed properties. Under s. 1(1)(cc) of the OGCA and section 1(1)(n) of the PA, receivers and trustees are considered licensees and, as such, they are subject to the statutory obligations of the AER. The legislation imposes liability on licensees without considering whether the assets are sold or disclaimed. The AER argued that the


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Trustee could not rely on s.14.06(4) of the BIA to disclaim its interest in the AER-licensed properties because it is not possible to disclaim AER-licensed properties under provincial legislation. Finally, the AER submitted that if receivers and trustees were permitted to disclaim assets and avoid their regulatory obligations, this would create situations where there is no responsible party for the purposes of the care and custody, abandonment, reclamation and remediation obligations of the debtor’s licensed assets.

The Trustee, on the other hand, relied on the constitutional doctrine of paramountcy to argue that there was an operational conflict between s. 14.06(4) of the BIA and the definitions of licensee under the OGCA and the PA. The doctrine of federal paramountcy provides that when otherwise validly enacted federal and provincial laws cover the same or similar subject matter, but there is an operational conflict between the two, the federal legislation prevails and the provincial law is rendered inoperative to the extent of the conflict or inconsistency with the federal law. In the present case, the Trustee argued that the provincial oil and gas legislation frustrated the legislative purposes of the BIA by preventing a sale of the retained licensed properties and should be inoperative to the extent of the frustration. To hold otherwise would allow the AER, a provincial regulator, to create a super-priority for abandonment and environmental liabilities, ranking before all other claims, a result which would jeopardize the current distribution scheme and the certainty provided to creditors under the BIA.

The Trustee contended it had validly disclaimed the licensed properties pursuant to s. 14.06(4) of the BIA and could not be compelled to comply with the abandonment orders. Once the licensed properties had been disclaimed, the bankrupt estate owed no further obligations to the AER except to the extent that the AER has valid financial claims against the estate, to be dealt with in accordance with the BIA scheme of distribution. Under s. 14.06(7), the Crown is granted a super-priority over contaminated real property or property contiguous to it for its costs of remedying any environmental condition or environmental damage

affecting real property. Further, under s. 14.06(8), the Crown’s clean-up costs are a provable claim against all the assets of the debtor, whether the damage or condition arose before or after the bankruptcy, but will rank as an unsecured claim.

THE ALBERTA COURT OF QUEEN’S BENCH DECISION

Chief Justice Wittmann agreed with the Trustee, holding that there was an operational conflict between s. 14.06(4) of the BIA and the definitions of licensee under the OGCA and the PA. Section 14.06(4) allows receivers and trustees to disclaim assets and not be found responsible for environmental and remediation work. On the other hand, the OGCA and the PA do not allow a licensee, which is defined to include receivers and trustees, to disclaim assets. Pursuant to the AER orders, the Trustee remains liable for abandonment and remediation obligations with respect to the disclaimed assets, despite the fact that it disclaimed them under s. 14.06(4) of the BIA. Therefore, compliance with both the federal insolvency regime under the BIA and the provincial regime under the OGCA and PA is not possible.

The Court concluded that requiring the Trustee to comply with the abandonment orders triggered the doctrine of federal paramountcy. The effect of the provincial legislation was to remove the benefits otherwise available to receivers and trustees in disclaiming undesired assets and thus frustrated the purposes of the federal BIA. Forcing receivers and trustees to comply with AER orders would also frustrate the legislative purpose of the BIA by requiring receivers and trustees to give priority to the abandonment orders over the payment of fees and disbursements or the claims of any secured or unsecured creditors.

The Court held that the Trustee had lawfully disclaimed the 107 licensed properties. Given that the Trustee had disclaimed the affected properties in accordance with the provisions of the BIA, the AER could not impose upon the Trustee the obligation to remediate the disclaimed properties. The Court

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further held that the AER could not request that the Trustee comply with the abandonment orders or pay security deposits as a pre-condition to approve the transfer of Redwater’s AER licenses. Finally, the Court applied the criteria set out by the Supreme Court of Canada in Newfoundland and Labrador v. AbitibiBowater Inc.5 and the subsequent case law and held that the abandonment orders were monetary in nature and constituted “provable claims”. Therefore, their priority should be determined according to the current scheme of distribution under the BIA.

The Court concluded by stating that under s. 14.06 of the BIA, Parliament had expressly legislated with regard to priorities and claims concerning environmental liabilities. Had it been Parliament’s intention to give AER claims a priority over the other creditors of the debtor, it would have expressly said so.

IMPLICATIONS

In light of the Court’s decision in Redwater, a trustee in bankruptcy can disclaim AER-licensed properties and will not be bound by the abandonment orders issued by the AER relating to the disclaimed properties. Further, in the bankruptcy context, the AER will not be permitted to consider disclaimed properties in evaluating a licensee’s LMR for the purpose of approving and authorizing the transfer of AER-licensed properties. This decision is positive for secured lenders and ensures that their priority is maintained over the assets of the debtor, albeit subject to remediation claims as contemplated in the BIA distribution scheme.

On the other hand, it is expected that the number of disclaimed AER-licensed properties will increase significantly, placing a heavier burden on

the AER and the OWA to abandon, reclaim, and remediate such properties. This, in turn, could result in the OWA requesting higher levies from oil and gas companies to fund the abandonment and remediation of orphan wells. The clarification and certainty provided by Redwater is welcome, but it may not be the final word, as the AER and the OWA are expected to appeal the decision to the Court of Appeal of Alberta.

[Kyle Kashuba is Partner at Norton Rose Fulbright, and practices in the areas of financial insolvency and corporate restructuring, and commercial litigation, primarily focusing on the oil and gas industry. He regularly acts as first chair counsel to numerous insolvency professionals in their capacities as monitors, receivers, trustees and otherwise, as well as to various secured and unsecured creditors, purchasers and prospective purchasers, and financially challenged corporations both public and private. He is currently the Chair of the Insolvency Section for the Canadian Bar Association, for the Province of Alberta.

Isabel Langlois is an Associate at Norton Rose Fulbright. She practices primarily in the areas of commercial litigation, insolvency and restructuring. Isabel was awarded the Tenth Annual Lloyd Houlden Fellowship by the Canadian Association of Insolvency and Restructuring Professionals and is currently working on a research paper that studies the interaction between trusts and the Bankruptcy and Insolvency Act.]

1 2016 ABQB 278.2 R.S.C. 1985, c B-3.3 R.S.A. 2000, c O-6.4 R.S.A. 2000, c P-15.5 2012 SCC 67.


67

Director anD officer LiabiLity in corporate insoLvency: a comprehensive

GuiDe to riGhts & obLiGations, 3rD eDition

Janis P. Sarra, B.A., M.A., LL.B., LL.M., S.J.D. & Ronald B. Davis, LL.B., S.J.D.

This 3rd edition covers the various sources of personal liability faced by company directors and officers during corporate insolvencies, and identifies the pitfalls to avoid and best practices to adopt. Authors Janis Sarra and Ronald Davis address the latest and most significant legislative amendments, and provide an in-depth analysis of current case law. This comprehensive text will help you advise clients about their scope of liability, and offer suggestions to mitigate risk.

Features and Benefits

• An analysis of relevant cases, as well as the underlying public policies implicated in the choice of liability regime• Cutting-edge insight into the latest legislative amendments• Readers will learn about conflicting provincial and federal legislation relating to officer and director liability

during insolvency• Comprehensive coverage of the amendments to the Bankruptcy and Insolvency Act, Companies’ Creditors

Arrangement Act, and discussion of the Wage Earner Protection Program Act, along with provincial legislative changes

New in This Edition

• Discussion about the Supreme Court of Canada’s recent decision in Bhasin v. Hrynew and why directors and officers need to be aware of the good faith obligation in commercial dealings

• Expanded discussion of director and officer liability in employment law matters, including content relating to directors’ personal liability for unpaid wage claims in Canada Labour Code proceedings as well as amendments to the Saskatchewan Employment Act and Ontario Employment Standards Act

• New common law developments with regard to potential liability arising from pension legislation• Discussion about the Supreme Court of Canada’s 2012 decision in Newfoundland and Labrador v.

AbitibiBowater Inc. and the interplay between environmental remediation orders and insolvency restructuring or liquidation proceedings

An Ideal Resource For

• Bankruptcy and insolvency lawyers, and corporate counsel – advise your clients about costly civil and criminal liability, and assist them in developing creative solutions to mitigate risk

• Corporate officers and directors – learn about your scope of liability, and how you can mitigate your per-sonal risks. Identify situations that may expose you to unnecessary risk

• Securities regulators – learn to identify potentially liable conduct, and create standards of corporate management conduct

• Business and law schools – stay updated on this growing area of law

For further details of the publication or to subscribe, go to www.lexisnexis.ca/store.

68


canaDian personaL property security Law

Bruce MacDougall, B.A. (Acadia), B.A. (Oxford), LL.B. (Dalhousie), B.C.L. (Oxford), M.A. (Oxford)

As author Bruce MacDougall states in the preface to this volume, “The nature of personal property and the multiple ways in which it can be used in a credit context make it inherently intricate.” And that intricacy is precisely what makes Canadian Personal Property Security Law a particularly timely and relevant publication.

Building on the success of his earlier book that focused on personal property security law in British Columbia, MacDougall has taken that content and nationalized, revised and expanded it to facilitate its appeal and application to all common law jurisdictions in the country.

Features and Benefits

A comprehensive, up-to-date treatise covering personal property secured transactions law in Canada, this resource deals with all significant statutory and regulatory provisions applicable under the Personal Property Security Act (PPSA), the Securities Transfer Act and the Bank Act. The treatise also provides a comprehensive coverage of case law in this area. Much of the information in the book is provided through charts and tables that offer valuable visual summaries of the rules and how they apply. As well, the text provides an extensive discussion of the common law personal property regime that lies behind and is still relevant to the PPSA.

Of particular interest

In addition to providing a more in-depth treatment of the application of the Securities Transfer Act, in this volume MacDougall has greatly expanded on the information in his original book and offers a wholly new look at:

• Guarantors as debtors• The meanings of “knowledge” in the PPSA and the Securities Transfer Act• The role of equitable principles in the PPSA• The use of estoppel in the PPSA• The relevance of attachment giving an “inchoate” interest in future goods• The effect of subsequent satisfaction of writing requirements• The effect of the exclusion of a transaction from the PPSA• Proceeds and the mechanism for tracing an interest in collateral• Remedial use of credit bidding• The effect of sequential subordination or priority agreements• Constraints on using both original collateral and proceeds remedially• The effect of transfers of negotiable power

MacDougall also examines the ramifications of recent significant decisions from all Canadian courts at all levels, including numerous cases from the Supreme Court of Canada and Courts of Appeal from across the country.

For further details of the publication or to subscribe, go to www.lexisnexis.ca/store.

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