Canada: Court Of Appeal Clarifies Treatment Of Asset Retirement Obligations

On March 25, 2022, the Alberta Court of Appeal issued its decision in PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2022 ABCA 111. Briefly, the Court held that abandonment and reclamation obligations (ARO)  of oil and gas assets operate to depress the value of those assets for the purposes of fraudulent preferences legislation, notwithstanding that they are not provable claims in bankruptcy. The Court also held that serial summary dismissal applications on different grounds are an abuse of process.

The case provides further clarity to the judicial treatment of ARO following the Supreme Court of Canada decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 [Redwater].

PricewaterhouseCoopers in its capacity as Trustee in Bankruptcy for Sequoia Resources Corp. (Sequoia) sued Perpetual Energy Inc., Perpetual Operating Trust (POT) and Perpetual Operating Corp., and others in 2018. The Action alleges that the sale for nominal consideration of certain oil and gas assets from POT to Perpetual Energy

Operating Corp. constituted a transfer at undervalue pursuant to section 96 of the Bankruptcy and Insolvency Act  (BIA). The assets transferred consisted of mature legacy assets, allegedly with more than $200 million of ARO. Sequoia became bankrupt approximately 17 months after the transfer.

The Defendants brought an application for summary dismissal in 2018. That application was heard and granted in 2020, but much of it was overturned by the Court of Appeal in 2021 (2021 ABCA 6). In February 2020, the Defendants brought a second summary dismissal application, seeking to dismiss the claim under section 96 of the BIA, raising different arguments than it had previously (the 2020 Application). The application was again successful before the Chambers Justice. The Trustee again appealed to the Court of Appeal.

The Court of Appeal held that the Chambers Justice erred by asking whether ARO are "obligations due, or accruing due" pursuant to section 96 of the BIA,  rather than considering whether ARO could or should be incorporated elsewhere into the balance sheet solvency test in the definition of insolvent person in the BIA.

The Court held that ARO is an inherent part of asset value that may depress the value of the asset, even though it may not be easily quantified as fixed amounts currently owing to identified creditors. While recognizing the difficulty associated with valuing ARO, the Court found that was not a sufficient reason to not bring it to account. Companies routinely calculate ARO for their public disclosure. The attribution of a nil value to ARO by the Chambers Justice was accordingly an error, particularly where the evidence of the Trustee was the ARO impacted the assets in excess of negative $200 million.

Finally, the Court held that the 2020 Application constituted an abuse of the Court's process by attempting to seek summary dismissal of the same claim a second time, in the absence of a material change. This was a situation where the argument could have been made in the first instance, but was not. Litigation by installment is an abuse of process.

Takeaway

The Alberta Court of Appeal's definitive statement requiring the calculation and accounting of end-of-life obligations in determining a company's solvency will make it difficult to transfer ARO for substantially less than its fair value without attracting liability either in the context of insolvency proceedings, or pursuant to fraudulent preferences legislation generally.

Bennett Jones was counsel to the Orphan Well Association, as Intervenor, in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.