Court of Appeal clarifies treatment of asset retirement obligations
On March 25, 2022, the Alberta Court of Appeal released its decision in PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2022 ABCA 111. Briefly, the Court held that Abandonment and Reclamation Bonds (ORAs) of oil and gas assets have the effect of reducing the value of those assets for the purposes of fraudulent preference legislation. , even though they are not provable claims in bankruptcy. The Court has also ruled that applications for serial summary dismissal on various grounds constitute an abuse of process.
The case further clarifies the judicial treatment of ARO following the Supreme Court of Canada’s decision in Orphan Well Association v Grant Thornton Ltd2019 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 suit alleges that the sale for nominal consideration of certain oil and gas assets of POT to Perpetual Energy
Operating Corp. constituted an undervalued transfer under section 96 of the Bankruptcy and Insolvency Law (BAI). The transferred assets consisted of mature legacy assets, allegedly with over $200 million in ARO. Sequoia went bankrupt about 17 months after the transfer.
The defendants filed a motion for summary dismissal in 2018. That motion was heard and granted in 2020, but much of it was reversed by the Court of Appeals in 2021 (2021 ABCA 6). In February 2020, the defendants filed a second motion for summary dismissal, seeking to dismiss the claim under section 96 of the BIA, raising different arguments than they had previously (the 2020 claim). The application was again successfully granted in Chambers Justice. The trustee again appealed to the Court of Appeal.
The Court of Appeal ruled that the chambers judge erred in asking whether SOs are “obligations due or accrued” under section 96 of the BIA., rather than asking whether ARO could or should be incorporated elsewhere in 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 can drive down asset value, although it may not be easily quantified as fixed amounts currently owed to identified creditors. . While acknowledging the difficulty associated with valuing ARO, the Court concluded that this was not sufficient reason to disregard it. Companies routinely calculate ARO for their public disclosure. The chambers judge’s assignment of a zero value to the ARO was therefore an error, particularly when the trustee’s evidence was that the ARO had affected assets in excess of negative $200 million.
Finally, the Court found that the 2020 motion constituted an abuse of the Court’s process by attempting to seek the summary dismissal of the same application a second time, in the absence of a material change. This was a situation where the argument could have been made in the first place, but was not. Litigation in installments is an abuse of process.
The Alberta Court of Appeal’s definitive statement requiring the calculation and accounting for end-of-life obligations in determining a company’s solvency will make it difficult to transfer ARO for an amount substantially less than its fair value without incurring liability either under insolvency proceedings or under fraudulent preference legislation generally.
Bennett Jones was intervenor counsel for the Orphan Well Association in this case.