On January 25, 2021, the Alberta Court of Appeal (ABCA) published its reasons in the PricewaterhouseCoopers Inc. v. Perpetual Energy Inc., 2021 ABCA 16 (Perpetual Energy) case. While the question before the ABCA was of a preliminary nature – namely whether the claims of the liquidator (trustee) should be dismissed out of hand or viewed as non-disclosure – the legal principles taken into account by the ABCA go far beyond the immediate parties and encompass broader questions on type and The role of demolition and recovery obligations (AROs) after bankruptcy, the extent of a trustee's insolvency with a third party, a director's obligations with respect to a company's environmental obligations, and the amount of publications in favor of the directors.
In particular, the ABCA has considered (and in some cases highlighted or identified) the following important points:
- the nature of the AROs as set out by the Supreme Court of Canada in its 2019 ruling in the Orphan Well Association v Grant Thornton Ltd case; (1)
- the ability of a bankruptcy trustee to achieve "complainant" status and initiate repression (2) on behalf of the estate of a bankrupt company;
- the scope of the duties of directors and officers in relation to a company's environmental obligations, including whether or not directors and officers have an obligation to the public to ensure that a company meets its environmental obligations;
- the volume of publications in sales transactions; and
- the scope of a trustee in the insolvency obligations.
As a result, the ABCA found that the case administration judge's criticism of the trustee was completely unfounded. According to the ABCA, the claims made by the trustee were complex and in some cases led to novel questions that did not allow a comprehensive fair disposition. The ABCA accordingly allowed the trustee's appeal, other than the case administrative judge's award of costs against the trustee, to be found that the case administrative judge's award of costs against the trustee was "in his personal capacity" "inappropriate". and dismissed the appeal of Perpetual Energy Inc. (Perpetual Energy Parent), Susan Riddell Rose (Ms. Rose) and the other respondents.
background
Perpetual Energy comprised complex claims from the trustee of Sequoia Resources Corp., formerly known as Perpetual Energy Operating Corp. (Perpetual / Sequoia), against a former director of Sequoia and certain other Perpetual Energy Group companies resulting from a pre-bankrupt multi-step transaction.
transaction
In 2016, Perpetual Energy Parent completed a multi-stage transaction (the Aggregate Transaction) in which certain mature waste oil and gas facilities, with which significant AROs were connected, were sold to Kailas Capital Corp. (Kailas) were sold. The overall transaction was structured in such a way that the old systems could be transferred without an official review process being triggered by the Alberta Energy Regulator (VRE).
As part of the overall transaction, Perpetual Operating Trust, the owner of the old assets, initially transferred the economic shares in the assets to its trustee Perpetual / Sequoia, who was then a member of the Perpetual Energy Group (Asset Transaction). Then Perpetual Energy Parent sold all of its shares in Perpetual / Sequoia to a subsidiary of Kailas for $ 1.00, which resulted in Kailas becoming Perpetual / Sequoia's new parent company. As is customary in sales transactions, Kailas and Perpetual / Sequoia's sole director, Ms. Rose, have signed a resignation and mutual clearance (the clearance) whereby Ms. Rose and Perpetual / Sequoia have released each other from any claims they may otherwise raise make be entitled to bring against the other.
Approximately 18 months after the overall transaction, Perpetual / Sequoia went bankrupt and PricewaterhouseCoopers Inc. was appointed trustee.
dispute
Following his appointment, the Trustee reviewed the affairs of Perpetual / Sequoia and concluded that the asset transaction was not in Perpetual / Sequoia's best interests. In particular, the trustee alleged that Perpetual / Sequoia received only $ 5.67 million in value for the assets but assumed commitments in excess of $ 223 million including AROs.
The trustee initiated a lawsuit against Perpetual Energy Parent, Ms. Rose and other members of the Perpetual Energy Group
- The asset transaction was void in accordance with Section 96 (1) (b) of the Insolvency and Insolvency Act (3) (BIA), as it did not take place under normal market conditions, was within five years of insolvency and was undervalued (Section 96 claim);
- The Company's business had been oppressive against the provisions of the Business Corporations Act (Alberta) (the Suppression Claim).
- The entire transaction violated public order, was illegal, or otherwise violated fair principles. and
- Ms. Rose had violated her duties as the sole director of Perpetual / Sequoia.
Both the trustee and the defendants requested a summary assessment of the claims.
Summary judgments
The case administrative judge struck out or dismissed most of the trustee's claims. In particular, the suppression claim was asserted for failure to disclose a cause of action because the trustee was not a “right person” to be a “complainant” within the meaning of the Business Corporations Act (Alberta) or because the suppression claim was not deserved. The lawsuit against Ms. Rose was filed for failure to disclose a cause of action and dismissed on the grounds that her release constituted a full defense.
The case management judge then ruled that the trustee should pay 85% of Ms. Rose's legal and client fees, and that the trustee should be personally liable for those costs. In its cost judgment, the case administrative judge identified several new duties that the trustee owed Ms. Rose (which duties the trustee had violated), including the fact that the trustee owed Ms. Rose a duty of procedural justice in the course of conducting his investigations.
The Perpetual Energy Trustee and Defendants appealed the summary judgment decisions, and the Trustee also appealed the costs decision.
Result
The ABCA:
- allow the trustee to appeal, restore corporate suppression and public order claims, and grant the trustee's complainant status to pursue the corporate suppression claim if they so choose;
- dismissed the Perpetual Energy defendants' cross appeal; and
- allowed the trustee to appeal on the cost decision and stated that the case administrative judge's criticism of the trustee was "unjustified".
analysis
Type of AROs
At the center of these decisions was the decision of the SCC in Redwater, which confirmed that the ARO was not a "creditor" with respect to AROs and that AROs were not "bankruptcy petitions". Depending on this suggestion, the case management judge determined that AROs were “assumptions and speculations” that did not exist, were not obligations of Perpetual / Sequoia and should therefore be rated as “zero” on Perpetual / Sequoia's balance sheet.
The ABCA dismissed the case management judge's interpretation of Redwater, stating that AROs may not be a company's short-term debt or obligation, but real debt nonetheless. While such obligations may be conditional in the sense that when production stops and such obligations arise may be uncertain, they are not conditional in the sense that they will not occur until a defined precedent is set. The existence of AROs is a certainty as their creation is inevitable.
As a result of this analysis, the ABCA found that while AROs are not conventional “debts”, they are an obligation by oil and gas companies “to the public” and landowners that the bankruptcy trustee cannot ignore. AROs operate in a bankruptcy context by depressing the value of assets and, like the Redwater-owned SCC, are obligations that "must be met before payment by secured creditors."
The ABCA's conclusions on the type of ARO had a significant impact on the Court's outcome:
- First, the ABCA noted that if AROs depress the value of the assets, they could have an impact on whether it was an "undervalued" transaction in order to open the door for the trustee to argue that the asset was -Transaction under section 96 of the BIA is void. In determining that Section 96 entitlement should be restored, the ABCA determined that the focus of the Section 96 BIA analysis was on the asset transaction (i.e., a step in the overall transaction) rather than the overall transaction (i.e., the entire multilevel transaction). Accordingly, each component of a multilevel transaction must meet the legal requirements and can be challenged separately as an undervalued transaction.
- Second, the ABCA found that, contrary to what the case administrative judge found, AROs may be relevant to a trustee repression on behalf of the creditors, even though such obligations are not directly related to a "creditor". Because AROs are real liabilities and obligations of oil and gas companies, it is possible for a company's directors and officers to administer AROs in a way that unfairly prejudices the interests of creditors.
- Third, the ABCA disagreed with the case management judge that Redwater nullified the trustee's right to public order because AROs are not corporate liabilities and the AER is not a "creditor". The ABCA found that Redwater did indeed believe that the public benefited from the AROs' environmental commitments and that in that sense, "public order" was taken over by the trustee. The ABCA left the question of the exact scope and enforceability of the public interest open, but concluded that the trustee's claim to public order should not have been invoked.
The ABCA's determination that AROs are real obligations and liabilities of Alberta oil and gas companies is in line with the general understanding of the term in Alberta and what the ABCA believes is a common practice for many oil and gas companies to include such obligations on their balance sheets to be shown. The ruling resolves what has been criticized as the "absurd" interpretation of AROs achieved by the case management judge. This was seen as "opening the door to interpretations where general laws become meaningless and only count debts to creditors" (4) – a finding that was expressly rejected by the SCC in Redwater. The ABCA's decision addresses the apparent discrepancy between the polluter pays principle endorsed by the SCC in Redwater, on the one hand, and the case management judge's application of Redwater, on the other, in a way that enabled the Perpetual Energy Parent to take advantage of oil and gas facilities in production and lose the associated AROs when they are no longer economical.
The outcome achieved by the ABCA, while only a by-product of the ABCA decision, creates a thread of coherence between the courts and the AER to create greater accountability for the environment and the rehabilitation of those who choose to participate of the oil and gas industry in Alberta. View information on the latest steps the AER is taking to implement their new liability management framework.
The status of the trustee in promoting claims of repression
When the ABCA refused to grant the trustee "complainant" status, it took the view that the case administrative judge did not recognize the collective nature of the trustee's role in the bankruptcy. The trustee did not pretend to be bringing the lawsuit for repression on behalf of individual creditors, but on behalf of the entire Perpetual / Sequoia estate. As the ABCA noted, the trustee, by definition, represents all creditors in bankruptcy, and the total claims of a bankruptcy always consist of a number of individual claims.
Importantly, the ABCA has upheld previous jurisprudence that claims of repression cannot be used as a method of debt collection. The mere fact that a company cannot or cannot pay its debt when it is due does not mean repression. However, as the ABCA clarified, the trustee did not claim that Perpetual / Sequoia could not simply pay a debt. The trustee alleged that Perpetual / Sequoia had been restructured in such a way that it could no longer pay its debts. The trustee alleged that the asset transaction was wrongly affecting Perpetual / Sequoia's creditors.
Whether the trustee can prove this claim remains to be seen, but the ABCA believed that the suppression suit should not have simply been dismissed. Given the complexity of the issues raised by the Trustee, the ABCA decided that the right to suppression should be restored and the Trustee granted the complainant status of such a claim if he so wished.
The scope of the duties of the directors
Without deciding on the issue, the ABCA emphasized that a director may have an obligation to ensure that the company meets its environmental obligations. Such an obligation is currently “potential” and “poorly defined” and could be owed to the public, not necessarily solely to the company. The ABCA emphasized that the Trustee wanted Ms. Rose to be held accountable for allegedly structuring Perpetual / Sequoia affairs in such a way that Perpetual / Sequoia was unable to meet its public obligations. This was a novel claim that should not have been conclusively resolved.
The ABCA noted that general director disclosures (commonly used in change of control situations) may not cover a director's potential obligation with respect to environmental liabilities. Since this obligation may be owed to the public, private parties may not be able to exempt a director from it.
The ABCA also emphasized that when a director acts for a special purpose vehicle or wholly owned subsidiary, a director's duties do not change: a director must always act in the best interests of the company. As sole managing 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 commitment was to resign. “At this point it was inappropriate to remove or dismiss the Trustee's complaint for breach of the Director's duties.
Finally, this decision suggests that directors and officers should be careful to evaluate separately each step in multi-step transactions, often used for tax planning purposes. Although it has long been recognized that a taxpayer can structure their affairs in such a way that their tax liability is reduced, this concept does not apply to Section 96 BIA. When the Perpetual Energy Group addressed the trustee's claim that the Section 96 asset transaction was void, it argued that the asset transaction should only be analyzed as part of the overall aggregated transaction – which, by and large, is a normal market transaction Conditions was and not invalid under Section 96. However, the ABCA agreed to analyze the transactions step by step and not as a whole. The ABCA determined that a transaction that violates Section 96 is not a defense if it is linked to a number of other transactions in which Section 96 was not involved at all. The ABCA has not determined whether an oil and gas company can conduct its business in a way that avoids government scrutiny in a manner consistent with income tax law. Redwater makes no answer on this point and this type of novel problem needs to be tested in court.
The scope of a trustee's duties
The case administrative judge heard a later request from Ms. Rose for an increase in costs and concluded that the trustee should pay 85% of Ms. Rose's legal and client fees and that the trustee should be personally liable for those costs. The case administrative judge made this decision on the basis that the trustee, as a court clerk, should be subject to a higher standard than normal litigation. Because of this higher standard, the trustee was required to adhere to the principles of procedural justice. Compliance with the duties that the courts generally impose on trustees in general (ie not bankruptcy trustees); present facts to the court without opinions, arguments or evidence; and conduct an appropriate investigation before any litigation begins. The case management judge concluded that the trustee's behavior was "outrageous" when he failed to meet these higher standards and that the trustee "exercised very poor judgment equivalent to positive misconduct."
The ABCA overturned the case administration judge and found that the trustee's behavior was not "outrageous", that the criticisms made by the case administration judge against the trustee were "unjustified" and that the case administration judge had both fundamentally and legally made errors in allocating costs against the trustee. Most importantly, the ABCA confirmed that while a bankruptcy administrator is a court clerk, a bankruptcy administrator's bankruptcy is against the creditors of the estate through the inspectors. A bankruptcy administrator owes no obligations to potential defendants in inheritance disputes and would actually get into a conflict of interest if he were also legally obliged to third parties. As the ABCA noted, "an insolvency practitioner is not an administrative tribunal" and the principles of administrative law do not apply in civil commercial matters. As a result, the trustee was under no obligation to hear the defendants' views prior to entering into litigation or to give the defendants advance notice of a statement of claim.
In addition, as the ABCA found, a trustee in a bankruptcy position and in the exercise of his judgment could require him to play a controversial role in litigation. When the Trustee concluded that Perpetual / Sequoia had potential claims against various defendants, the Trustee was not only correct in pursuing those claims, but was also required to do so.
Overall, the ABCA ruling strongly reiterates a trustee's obligation to insolvency vis-à-vis creditors and its obligation to pass its own judgment in favor of bankruptcy assets under the supervision of inspectors. In performing this duty, a trustee is not burdened by administrative obligations and has no general duty of fairness towards third parties.
PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2021 ABQB 2
Prior to the publication of the ABCA's decision, the case management judge published another decision on the merits of the claim under Section 96 on January 14, 2021 in PricewaterhouseCoopers Inc v. Perpetual Energy Inc, 2021 ABQB 2. In this decision, the Alberta Court of Queen & # 39; s Bench (ABQB) determined that Perpetual / Sequoia was not insolvent at the time of the asset transaction or was insolvent as a result of the asset transaction. This finding was backed up by the claim that AROs should be rated zero for the purposes of BIA. Since the ABCA has now clearly rejected this view and thereby undermined the basis of the ABQB decision, the ABCA may have another opportunity to re-examine these issues shortly.