In Alberta, the oil and gas industry carries significant weight and is at the forefront of modern economies by fueling homes, powering vehicles, and propelling technological advancements. However, amidst the towering rigs and vast pipelines, the pressing concern of environmental impacts looms over many oil and gas operations.

There has been a paradigm shift in the discourse surrounding environmental responsibility in recent years, with an increasing emphasis on holding industries accountable for their ecological footprint. The clash between environmental remedial obligations and the interests of secured creditors has become a focal point of debate, raising crucial questions on navigating the delicate equilibrium between economic interests and environmental sustainability.

This blog will explore the complex terrain where financial considerations and environmental stewardship intersect, exploring the challenges and implications of prioritizing environmental remediation over the interests of secured creditors in the context of a recent decision from the Court of King’s Bench of Alberta. 

24 gravel pits operating on private and public land across Alberta

In the recent decision of Re Mantle Materials Group, Ltd, Mantle Materials Group (“Mantle”) operated 14 gravel pits on public land pursuant to surface material leases issued by Alberta Environment and Protected Areas (“AEPA”). Mantle also operated 10 gravel pits on private land in accordance with agreements with the landowners. The surface material leases required the Mantle to complete certain environmental reclamation obligations at the end of the life of the gravel pits. These requirements were secured with a $1 million dollar financial assurance which was held by AEPA. 

Mantle acquired gravel-producing assets in 2021 from JMB Crushing Systems Inc. (“JMB”) through JMB’s proceedings under the Companies’ Creditors Arrangement Act. Under these proceedings, a subsidiary retained JMB’s desirable assets, while the undesirable assets were transferred to a residual company in accordance with the Reverse Vesting Order. Mantle amalgamated with JMB and its subsidiary on May 1, 2021.

Environmental protection orders issued 

Once JMB’s Companies’ Creditors Arrangement Act proceedings started, pursuant to the Environmental Protection and Enhancement Act, AEPA issued several Environmental Protection Orders (also referred to as “EPOs”) to JMB along with 216 orders issued in respect of some of the gravel-producing properties. An inspector with AEPA may “inspector is permitted to “issue an environmental protection order regarding conservation and reclamation to an operator directing the performance of any work or the suspension of any work if, in the inspector’s opinion, the performance or suspension of the work is necessary to conserve and reclaim the land.”

In this case, the Environmental Protection Orders issued by AEPA addressed end-of-life reclamation steps required at various gravel-producing assets operated by JMB on both public and private properties. As a result of Mantle’s amalgamation with JMB and its subsidiary, Mantle became liable for JMB’s outstanding Environmental Protection Orders and obligations. 

Mantle obtains loan; Travelers secures first-ranking purchase-money security interest

To fund the acquisition of equipment to be used in its gravel operations, Mantle obtained a loan for $1.7 million dollars from Travelers Capital Corp. (“Travelers”). This loan was secured by a purchase money security interest in the equipment, and therefore, Travelers was secured by a first-ranking purchase money security interest. 

Soon after this loan was obtained, Mantle experienced problems with operations, compounded by the debt inherited from JMB, leading to financial distress resulting in the company’s insolvency. As such, Mantle sought to restructure through the Notice of Intention proceedings under the Bankruptcy and Insolvency Act. Mantle sought to perform the outstanding abandonment and reclamation of environmental obligations in their proposal to creditors. 

Case law upholds principle that environmental obligations take priority

The issue before the Court was Mantle’s request to approve certain charges, which would take priority over other debts, including the Travelers loan and first-ranking security. The specific Restructuring Charges included an interim financing charge with the interim financing used “primarily” to perform abandonment obligations. However, Travelers disputed this proposal, arguing that Restructuring Charges could not outrank its security interest and should instead be permitted to realize its security immediately. 

The Court considered three leading cases regarding the priority of environmental obligations in insolvency proceedings, all of which affirmed that end-of-life environmental obligations must prioritize the interests of secured creditors. Although all parties proceeded on the basis that the Environmental Protection Orders had the same legal effect as an abandonment and reclamation order issued by the Alberta Energy Regulator, Travelers disputed the application of these cases, arguing that there is an exception to the priority for assets unrelated to the environmental condition or damage. 

Secured creditors may risk ranking behind environmental obligations 

The judge disagreed with Travelers and found that the equipment over which Travelers had a security interest was a part of Mantle’s gravel business. Therefore, the security interest was determined to be subordinate to the restructuring charges, which were necessary to complete the environmental remediation work required by the AEPA. As such, this interest could not be enforced until the environmental reclamation was complete. 

This decision demonstrates the requirement for lenders to conduct thorough due diligence before providing financing. The Court noted that Travelers had conducted its own due diligence, and there were documents highlighting the ongoing nature of Mantle’s environmental reclamation obligations. However, despite this information being readily available, the lender did not appreciate the risks of the Environmental Orders having priority over their security. As such, this decision serves as a reminder to lenders across Alberta and throughout the country of the potential risk that their security may be found to rank behind public duties to protect the environment.

Contact the Lawyers at Getz Collins and Associates for Trusted Advice on Oil and Gas Matters

The experienced oil and gas lawyers at Getz Collins and Associates regularly advise clients on unique issues arising in the oil and gas industry. Whether you require assistance resolving an employment issue, securing project-specific financing, or seeking a review of a Master Service Agreement, our team can help. 

With offices in Calgary and Strathmore, Getz Collins and Associates provides robust legal advice and representation to clients throughout the province. To schedule a consultation with one of our lawyers and learn how we can assist you, call us at 587-391-5600 or contact us online.