On January 25, 2021, the Alberta Court of Appeal (the ABCA)
released its reasons in PricewaterhouseCoopers Inc. v Perpetual
Energy Inc., 2021 ABCA 16 (Perpetual Energy). While
the issue before the ABCA was of a preliminary nature —
namely whether the claims of the trustee in bankruptcy (the
Trustee) should be summarily dismissed or struck as not disclosing
a cause of action — the legal principles considered by the
ABCA extend far beyond the immediate parties and include broader
questions around the nature and role of abandonment and reclamation
obligations (AROs) after bankruptcy, the scope of a trustee in
bankruptcy’s duties to third parties, the duties of a director
in respect of a company’s environmental liabilities, and the
scope of releases in favour of directors.
In particular, the ABCA considered (and in some cases,
emphasized or determined) the following important issues:
- the nature of AROs, as set out by the
Supreme Court of Canada in its 2019 decision in Orphan Well
Association v Grant Thornton Ltd;1 - the ability of a trustee in
bankruptcy to obtain status as a “complainant” and launch
an oppression action2 on behalf of the estate of a
bankrupt corporation; - the scope of directors’ and
officers’ duties in respect of environmental obligations owed
by a company, including whether directors and officers owe a duty
to the public to ensure that a corporation complies with its
environmental obligations; - the scope of releases in sale
transactions; and - the scope of a trustee in
bankruptcy’s duties.
In the result, the ABCA determined that the case management
judge’s criticisms of the Trustee were entirely unwarranted.
According to the ABCA, the claims raised by the Trustee were
complex and, in some cases, raised novel issues, which did not
permit for fair disposition on a summary basis. The ABCA
accordingly allowed the Trustee’s appeal, set aside the award
of costs made by the case management judge against the Trustee,
found that the award of costs made by the case management judge
against the Trustee “in its personal capacity” was
“inappropriate,” and dismissed the appeal of Perpetual
Energy Inc. (Perpetual Energy Parent), Susan Riddell Rose (Ms.
Rose) and the other respondents.
Background
Perpetual Energy involved complex claims by the Trustee
of Sequoia Resources Corp., formerly known as Perpetual Energy
Operating Corp. (Perpetual/Sequoia), against a former director of
Sequoia and certain other companies in the Perpetual Energy Group
arising from a pre-bankruptcy multi-step transaction.
Transaction
In 2016, Perpetual Energy Parent entered into a multi-step
transaction (the Aggregate Transaction) whereby certain mature
legacy oil and gas assets, which had significant AROs associated
with them, were sold to Kailas Capital Corp. (Kailas). The
Aggregate Transaction was structured such that the legacy assets
could be transferred without triggering a regulatory review process
from the Alberta Energy Regulator (AER).
As part of the Aggregate Transaction, Perpetual Operating Trust,
the holder of the legacy assets, initially transferred the
beneficial interest in the assets to its trustee,
Perpetual/Sequoia, which was then a member of the Perpetual Energy
Group (the Asset Transaction). Then, Perpetual Energy Parent sold
all of its shares in Perpetual/Sequoia to a subsidiary of Kailas
for $1.00, resulting in Kailas becoming the new parent corporation
of Perpetual/Sequoia. As is common in sale transactions, Kailas and
the sole director of Perpetual/Sequoia, Ms. Rose, signed a
resignation and mutual release (the Release) pursuant to which Ms.
Rose and Perpetual/Sequoia released each other from claims that
they might otherwise be entitled to bring against the other.
Approximately 18 months after the Aggregate Transaction,
Perpetual/Sequoia assigned itself into bankruptcy, and
PricewaterhouseCoopers Inc. was appointed as Trustee.
Dispute
Following its appointment, the Trustee reviewed
Perpetual/Sequoia’s affairs and concluded that the Asset
Transaction was not in the best interests of Perpetual/Sequoia. In
particular, the Trustee alleged that Perpetual/Sequoia obtained
only $5.67 million in value for the assets but assumed more than
$223 million in obligations, including AROs.
The Trustee commenced litigation against Perpetual Energy
Parent, Ms. Rose and other members of the Perpetual Energy Group,
alleging that
- the Asset Transaction was void under
Section 96(1)(b) of the Bankruptcy and Insolvency
Act3 (the BIA), because it was not at arm’s
length, was within five years of the bankruptcy and was at an
undervalue (the Section 96 Claim); - the business of the corporation had
been operated in an oppressive manner, contrary to the provisions
of the Business Corporations Act (Alberta) (the Oppression
Claim); - the Aggregate Transaction was
contrary to public policy, was illegal or otherwise was in
violation of equitable principles; and - Ms. Rose had breached her duties as
the sole director of Perpetual/Sequoia.
Both the Trustee and the defendants applied for summary judgment
of the claims.
Summary judgment decisions
The case management judge struck or summarily dismissed most of
the Trustee’s claims. In particular, the Oppression Claim was
struck for failure to disclose a cause of action, because the
Trustee was not a “proper person” to be a
“complainant” pursuant to the Business Corporations
Act (Alberta), or alternatively because the oppression claim
lacked merit. The claim against Ms. Rose was struck for failure to
disclose a cause of action, and it was also summarily dismissed on
the basis that the Release was a complete defence.
Subsequently, the case management judge ruled that the Trustee
should pay 85% of Ms. Rose’s solicitor and client costs, and
that the Trustee should be personally liable for those costs. In
his costs judgment, the case management judge set out several new
duties that he found the Trustee owed to Ms. Rose (which duties he
found the Trustee had breached), including that the Trustee owed a
duty of procedural fairness to Ms. Rose in the course of conducting
its investigations.
The Trustee and the Perpetual Energy defendants both appealed
the summary judgment decisions, and the Trustee also appealed the
costs award.
Result
The ABCA:
- allowed the Trustee’s appeal,
restoring the corporate oppression and public policy claims and
granting the Trustee complainant status to pursue the corporate
oppression claim if it so elected; - dismissed the Perpetual Energy
defendants’ cross-appeal; and - allowed the Trustee’s appeal with
respect to the ruling on costs and found that the case management
judge’s criticisms of the Trustee were
“unwarranted.”
Analysis
Nature of AROs
Central to these decisions was the SCC’s decision in
Redwater, which confirmed that the AER was not a
“creditor” with respect to AROs and that AROs were not
“claims provable in bankruptcy.” In reliance on this
proposition, the case management judge determined that AROs were
“assumptions and speculations” that did not exist, were
not obligations of Perpetual/Sequoia, and therefore should be
valued as “nil” on Perpetual/Sequoia’s balance
sheet.
Rejecting the case management judge’s interpretation of
Redwater, the ABCA noted that AROs may not be current
liabilities or obligations of a company, but are nevertheless real
liabilities. While such obligations may be contingent in the sense
that the moment that production will cease and such obligations
come into existence may be uncertain, they are not contingent in
the sense that they will only come into existence upon the
occurrence of a defined condition precedent. The existence of AROs
is a certainty, as their coming into existence is inevitable.
As a result of this analysis, the ABCA noted that while AROs may
not be conventional “debt,” they are an obligation of oil
and gas companies “owed to the public” and surface
landowners that the trustee in bankruptcy cannot ignore. AROs
operate in the insolvency context by depressing the value of the
assets and, as the SCC held in Redwater, are obligations
that must be “discharged even in priority to paying secured
creditors.”
The ABCA’s conclusions regarding the nature of AROs had a
significant impact on the result reached by the Court:
- First, the ABCA noted that as AROs
depress the value of the assets, they could have an impact on
whether there is a transaction at “undervalue,” so as to
open the door for the Trustee to argue that the Asset Transaction
was void under section 96 of the BIA. Importantly, in determining
that the Section 96 Claim should be restored, the ABCA noted that
the proper focus of the analysis under section 96 of the BIA was on
the Asset Transaction (i.e., one step in the overall transaction),
not the Aggregate Transaction (i.e., the entire multi-step
transaction). Accordingly, each component of a multi-step
transaction must meet statutory requirements and is separately open
to challenge as a transaction at undervalue. - Second, the ABCA noted that, contrary
to the holding of the case management judge, AROs may be relevant
to an oppression claim brought by the Trustee on behalf of
creditors even though such obligations are not directly associated
with a “creditor.” As AROs are real liabilities and
obligations of oil and gas companies, it is possible that the
directors and officers of a corporation might manage AROs in a
manner that is unfairly prejudicial to the interests of
creditors. - Third, the ABCA disagreed with the
case management judge that Redwater had the effect of
extinguishing the Trustee’s public policy claim because AROs
are not corporate liabilities and the AER is not a
“creditor.” The ABCA noted that, in fact,
Redwater held that the public is the beneficiary of the
environmental obligations inherent in AROs and that in this sense
the “public policy” was engaged by the Trustee. The ABCA
left open the question of the exact scope and enforceability of the
public interest but concluded that the Trustee’s public policy
claim should not have been struck.
The ABCA’s determination that AROs are real obligations and
liabilities of oil and gas companies in Alberta accords with common
understandings of the term in Alberta and with what the ABCA found
to be common practice amongst many oil and gas companies to report
such obligations on their balance sheets. The decision resolves
what has been criticized as the “absurd” interpretation
of AROs reached by the case management judge, which has been noted
as “open[ing] the door to interpretations where general laws
become meaningless and only debts owed to creditors
count”4 — a result expressly rejected by the SCC
in Redwater. The ABCA’s decision resolves the apparent
disjunction between, on the one hand, the “polluter pays”
principle endorsed by the SCC in Redwater and, on the
other hand, the case management judge’s application of
Redwater in a manner that permitted the Perpetual Energy
Parent to take the benefit of oil and gas assets while producing,
and then shed associated AROs when no longer economically
viable.
While simply a byproduct of the ABCA’s decision, the result
reached by the ABCA establishes a thread of consistency between the
courts and the AER to create greater accountability for
environmental protection and remediation by those who choose to
participate in Alberta’s oil and gas industry. View information on the latest steps taken by the
AER to implement its new Liability Management Framework.
The status of the Trustee in advancing oppression claims
In declining to grant the Trustee status as a
“complainant,” the ABCA held that the case management
judge failed to appreciate the collective nature of the role of the
trustee in bankruptcy. The Trustee was not purporting to bring the
oppression action on behalf of individual creditors, but on
behalf of the entire estate of Perpetual/Sequoia. As the ABCA
noted, by definition, the Trustee represents all creditors of the
bankrupt, and the aggregate claims in a bankruptcy always consist
of a number of individual claims.
Importantly, the ABCA confirmed prior jurisprudence establishing
that oppression claims are not to be used as a method of debt
collection; the mere fact that a corporation does not or cannot pay
its debts as they come due does not amount to oppression. However,
as the ABCA clarified, the Trustee was not asserting that
Perpetual/Sequoia could not simply pay a debt. The Trustee’s
allegation was that Perpetual/Sequoia had been reorganized in such
a way that it had been rendered unable to pay its debts. The
Trustee alleged that the Asset Transaction was unfairly prejudicial
to the creditors of Perpetual/Sequoia.
Whether the Trustee will be able to prove this claim remains to
be seen, but the ABCA held that the oppression claim ought not to
have been summarily dismissed. Noting the complexity of the issues
raised by the Trustee, the ABCA determined that the oppression
claim should be restored and the Trustee granted complainant status
to pursue such claim if it so wished.
The scope of directors’ duties
Without deciding the issue, the ABCA highlighted that a director
may potentially owe an obligation to ensure that the corporation
complies with its environmental obligations. Such obligation is
currently “potential” and “ill-defined,” and
could be owed to the public, not necessarily to the corporation
exclusively. The ABCA emphasized that the Trustee sought to hold
Ms. Rose to account for allegedly having structured the affairs of
Perpetual/Sequoia in such a way that made it impossible for
Perpetual/Sequoia to discharge its public obligations. This was a
novel claim that should not have been resolved summarily.
The ABCA observed that generalized releases of directors (which
are commonly used in change of control situations) may not cover a
director’s potential obligation regarding environmental
liabilities. Since this obligation may be owed to the public,
private parties may not be able to release a director from it.
The ABCA also emphasized that there is no change in a
director’s duties when a director is acting for a special
purpose corporation or wholly owned subsidiary: a director must
always act in the best interest of the corporation. As sole
director, Ms. Rose was responsible for ensuring that the Asset
Transaction was in the best interests of Perpetual/Sequoia:
“if Ms. Rose did not agree that the instructions [from
Perpetual Energy Parent] were in the best interests of
Perpetual/Sequoia, her obligation was to resign.” At this
stage, it was inappropriate to strike or dismiss the Trustee’s
claim for breach of director’s duties.
Finally, this decision suggests that directors and officers
should take care to evaluate separately all steps involved in
multi-step transactions, which are often used for tax planning
purposes. Although it has long been accepted that a taxpayer can
structure its affairs to reduce tax liability, that concept does
not apply to Section 96 of the BIA. When addressing the
Trustee’s claim that the Asset Transaction was void pursuant to
Section 96, the Perpetual Energy Group argued that the Asset
Transaction should be analyzed only as a component of the overall
Aggregate Transaction — which was, writ large, an
arm’s-length transaction and not voidable under Section 96.
However, the ABCA indicated a willingness to analyze the
transactions on a step-by-step basis, and not in the aggregate. The
ABCA observed that if a transaction is entered into in violation of
Section 96, it is no defence that it was connected to a number of
other transactions that did not engage Section 96 at all. The ABCA
did not determine whether an oil and gas company can arrange its
affairs so as to avoid regulatory scrutiny, in a manner that is
analogous to income tax law. Redwater does not provide an
answer on this point and this type of novel issue must be tested at
trial.
The scope of the duties of a trustee
The case management judge heard a subsequent application by Ms.
Rose for enhanced costs and concluded that the Trustee should pay
85% of Ms. Rose’s solicitor and client costs and that the
Trustee should be personally liable for those costs. The case
management judge made that determination on the basis that the
Trustee, as an officer of the court, should be held to a higher
standard than normal litigants. Such higher standard required the
Trustee to comply with principles of procedural fairness; comply
with duties imposed by the courts of equity on trustees in general
(that is, not trustees in bankruptcy); present facts to the court
without opinions, argument or evidence; and complete an appropriate
investigation prior to commencing litigation. The case management
judge concluded that in failing to meet those higher standards, the
Trustee’s conduct was “egregious” and the Trustee
“exercised very poor judgment that equate to positive
misconduct.”
Overturning the case management judge, the ABCA found that there
was nothing “egregious” about the Trustee’s conduct,
that the criticisms levied by the case management judge against the
Trustee were “unwarranted,” and that the case management
judge had made errors both in principle and in law in awarding
costs against the Trustee. Most importantly, the ABCA affirmed that
while a trustee in bankruptcy is an officer of the court, a trustee
in bankruptcy’s “primary duty… is to the creditors of
the estate through the inspectors.” A trustee in bankruptcy
does not owe duties to potential defendants in estate litigation,
and in fact would be placed in a conflict of interest if it was
also under a legal duty to third parties. As the ABCA noted,
“a trustee in bankruptcy is not an administrative
tribunal,” and the principles of administrative law have no
application in civil commercial matters. As a result, the Trustee
had no obligation to hear the defendants’ views before pursuing
litigation or provide the defendants with advance notice of a
statement of claim.
Furthermore, as the ABCA noted, a trustee in bankruptcy’s
position and exercise of judgment could require it to take an
adversarial role in litigation. Once the Trustee came to the
conclusion that Perpetual/Sequoia had potential claims against
various defendants, the Trustee was not only correct to pursue
those claims but obliged to do so.
Overall, the ABCA judgment strongly affirms a trustee in
bankruptcy’s duty to creditors and its obligation to exercise
its own judgment, under the supervision of inspectors, for the
benefit of the bankrupt estate. In pursuing this duty, a trustee is
not burdened by administrative law obligations and has no
generalized duty of fairness to third parties.
PricewaterhouseCoopers Inc v Perpetual Energy Inc,
2021 ABQB 2
Prior to the release of the ABCA’s decision, the case
management judge released a further decision on the merits of the
Section 96 Claim on January 14, 2021, in PricewaterhouseCoopers
Inc v Perpetual Energy Inc, 2021 ABQB 2. In this decision, the
Alberta Court of Queen’s Bench (the ABQB) found that
Perpetual/Sequoia was not insolvent at the time of the Asset
Transaction or rendered insolvent by the Asset Transaction.
Underpinning this finding was the assertion that AROs should be
valued at nil for the purposes of the BIA. As the ABCA has now
unequivocally rejected this view, thereby undermining the
foundation of the ABQB decision, the ABCA may have a further
opportunity to revisit these issues in short order.
Footnotes
1. 2019 SCC 5.
2. Under the Business Corporations Act, RSA
2000, c. B-9.
3. RSC 1985, c. B-3.
4. Yewchuk, Drew, The Sequoia Bankruptcy Part 1:
The Motion to Strike and the Interveners, https://ablawg.ca/2021/01/18/the-sequoia-bankruptcy-part-1-the-motion-to-strike-and-the-interveners/
(January 18, 2021).
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