ARE TRADITIONAL CANADIAN FINANCIAL institutions displaying more patience with companies in financial straits? It depends who you’re talking to. “Many traditional banks … are hoping that things get better and holding on,” says Jane Dietrich of Cassels Brock & Blackwell LLP in Toronto. “People are also starting to understand how expensive Companies’ Creditors Arrangement Act [CCCA] proceedings are, so they’re trying to address insolvency issues by other means, including internal corporate reorganizations.”
So much so that pre-litigation counsel is becoming a staple of insolvency and restructuring practice. “Pre-litigation matters — often corporate-type banking work where companies have to deal with their balance sheet, renegotiate bonds and long-term debt, or raise equity — are often becoming the biggest part of a case,” says Kenneth Lenz of Bennett Jones LLP in Calgary. “That’s legal work that is not publicly visible until the press release is issued.”
Canadian lenders, it seems, are getting downright creative in some cases. “I’m currently dealing with a case where the lender is doing some things like taking back equity, which is something you might have expected from a US lender, but never a Canadian lender,” Lenz says.
Still, the leash may be getting shorter, especially in the oil and gas sector. “Once oil got to $50, some lenders who didn’t want to force the issue at $30 have developed a fear of the price dropping again, and have become more aggressive,” Lenz says. Evidence that this is happening can be found in the courts. “Judges are telling us that the insolvency lists are fully booked, that there are lots of last-minute filings and applications, and that they’re seeing four or five briefs a day.”
Sandra Abitan of Osler, Hoskin & Harcourt LLP in Montréal is also expecting more traditional activity on the insolvency and restructuring fronts. “Companies have been selling assets, avoiding fire sales and keeping the lights on, but they may not be able to continue that for much longer,” she says.
RECOGNITION PROCEEDINGS
Cross-border recognition proceedings are becoming a staple for the Canadian insolvency Bar. “I think we’re becoming a lot more comfortable with the flexibility that recognition provides, and with the ways in which Canadian creditors can be protected in proceedings in the US,” Dietrich says. “Some of the best evidence of that can be seen in the fact that Canadian companies are extending debtor-in-possession [DIP] financing to related companies involved in Chapter 11 proceedings.”
Despite the fact that courts have allowed a great deal of latitude in accepting US proceedings as “main proceedings” under Canadian law, what Canadian courts have made clear is that such recognition is not to be taken as indicating that Canadian creditors are ceding any of their rights. A case in point is the February 2016 Ontario Superior Court decision of Justice Frank Newbould in Re Zochem. Newbould took pains in his decision to remind directors of their fiduciary duties, even while recognizing US proceedings as a “main proceeding,” giving his approval to a US interim financing order and granting the security requested for a DIP loan.
For their part, Americans are starting to discover the advantages of some of the unique features of Canadian bankruptcy law. For example, in the cross-border proceedings surrounding the Lac-Mégantic rail disaster, which wiped out part of the southern Québec town and caused huge losses of life and infrastructure, the courts in Québec and in Maine worked seamlessly together to broker a settlement.
Much of the credit for this collaboration can be attributed to Canadian law’s resort to a “monitor,” a concept unfamiliar to bankruptcy law in the United States. “Because monitors are court-appointed officers who are the eyes and ears of the court, they have a special standing and engender a great deal of respect and are in an excellent position to broker settlements,” says Abitan.
Aiding greatly in the Lac-Mégantic settlement as well was the monitor’s ability to implement a number of third-party releases, whose availability is much more restricted in the US. “For sure, the case would have gone on much longer in the US than the two years it took to settle here,” Abitan says.
ACROSS OTHER BORDERS
The past seven years have seen more cross-border insolvencies involving countries other than the United States. “Things have become much more European and Asia-focused, especially in British Columbia,” says William Kaplan of Blake, Cassels & Graydon LLP in Vancouver.
The difficulty, however, is that some countries — including several European countries and none of the Scandinavian states — are not parties to international agreements that bind them to recognition proceedings. “In these instances, we’re back to where we were before we started developing protocols for cross-border cases,” Kaplan says.
HELP FOR ENERGY OUTFITS
In a key decision that may help the struggling oil and gas industry access much needed credit facilities, an Alberta court has ruled that bankruptcy trustees may disclaim non-producing oil wells and sell the producing ones.
“The ruling will promote increased access to credit because it makes it more likely that lenders will recoup their loans in the event of an oil and gas company’s insolvency,” says Vanessa Allen, a senior manager in Deloitte Restructuring’s financial advisory group in Calgary and a spokesperson for the Canadian Association of Insolvency and Restructuring Professionals, which intervened in the case.
Re Redwater Energy, released in May 2016 by Alberta Court of Queen’s Bench Chief Justice Neil Wittmann, involved an application by the Alberta Energy Regulator (AER) and the Orphan Well Association requiring Grant Thornton, the trustee in Redwater Energy Corp.’s bankruptcy, to carry out the abandonment, reclamation and remediation obligations related to the company’s non-producing wells, which included paying a security deposit under certain circumstances.
Chief Justice Wittmann concluded that Alberta’s Oil and Gas Conservation Act and the province’s Pipeline Act, which prohibits trustees and receivers from disclaiming non-producing wells, conflicted with the federal Bankruptcy and Insolvency Act, which allows such disclaimers. Under the constitutional doctrine of federal paramountcy, the federal legislation governed. The upshot was that the province’s energy regulator could not require non-producing wells to be sold as a condition of issuing licenses for the transfer of producing wells.
Kelly Bourassa of Blakes in Calgary, who represented the Alberta Treasury Branches at the hearing, welcomes the “level of certainty” the Redwater case brings to the industry and its financiers. “What you had before was a can of worms where the AER was telling receivers that it wouldn’t approve license transfers unless all of the wells were sold,” she said. “So receivers were either being forced to take one-dollar offers just so they could get rid of everything, or else were required to turn some of the proceeds of the sales of producing wells over to the AER, which amounted to giving the AER a priority claim it did not have.”
The ruling has sparked an outcry from the public and environmentalists grounded in fears that taxpayers will have to bear the costs of environmental remediation necessitated by the failure of a private company.
To the contrary, Grant Thornton’s Calgary counsel, Jeffrey Oliver of Cassels Brock and Tom Cumming of Gowling WLG (Canada) LLP, argued that the use of public funds to assist the Orphan Well Association was not in the offing. Indeed, the Orphan Well Association (OWA), whose job is to remediate and reclaim wells for which there is no responsible party, is funded by the industry pursuant to a formula devised by the AER. Evidence at the hearing showed the original levy of $15 million on the industry in 2015 had been doubled by the end of the year.
The AER, then, could up the ante for the industry’s contribution to the OWA yet again. “But that would impose yet another burden on companies who are struggling in the current downturn,” Allen says. The fact remains, however, that the OWA has a 10-year backlog of 1,000 non-producing wells requiring remedial work, and there is historical precedent for the use of public funds, which occurred when the provincial government decided to help out the industry in 2008 and 2009.
Proponents of Wittmann’s reasoning say that the outcry has been provoked in part by the public’s misunderstanding of how insolvency works. “The idea that the debtor will have unsatisfied obligations is the whole point of insolvency,” says one lawyer close to the case. “But the regulator is exercised that the trustee can pick and choose good assets and transact with them.”
As it turns out, the AER is appealing Wittmann’s decision. “The AER continues to assert that companies must not be allowed to walk away from their responsibility, even when facing economic uncertainty,” said AER spokesperson Ryan Bartlett in an email. “While we are disappointed in the court’s decision, the AER will continue to protect public safety and the environment in the regulation of oil and gas development in this province.”
MIDSTREAM GATHERERS AT RISK?
Re Sabine Oil & Gas, a US bankruptcy judge’s ruling that midstream gatherer contracts can be rejected in insolvency cases, has raised fears among owners of pipelines and other midstream assets that Canadian courts will follow the precedent. “We’re already seeing a chilling effect because this decision, if followed in Canada, represents a new threat to midstream stakeholders that didn’t exist before,” says Randal Van de Mosselaer of Norton Rose Fulbright Canada LLP in Calgary.
Torys LLP is advising midstream gatherers and producers to review their contracts. “Midstream companies should review pipeline contracts to evaluate the risk of rejection in the event of a bankruptcy by the upstream producers,” says Alison Bauer in the firm’s New York office. “Conversely, oil and gas producers should consider negotiating reductions in price and volume commitment in unfavorable contracts that originated when oil and gas prices were higher — or threaten bankruptcy rejection.”
The issue arose when Sabine Oil & Gas Corp., an independent energy company engaged in developing onshore oil and natural gas properties, found itself in Chapter 11 proceedings. Chapter 11 of the United States Bankruptcy Code allows debtors to apply for court approval to terminate existing agreements in certain circumstances. Similar provisions are found in Canada’s Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act.
Sabine applied to terminate gas gathering and handling agreements it had with Nordheim Eagle Ford Gathering LLC and High Point Infrastructure Partners LLC. Sabine maintained it could not restructure operations without rejecting these contracts, which it claimed were too expensive. The pipeline owners countered with the argument that the dedication of production under the agreements created an interest that ran with the land and therefore the contract could not be rejected under the applicable Texas law.
But Judge Shelley Chapman of the United States Bankruptcy Court for the Southern District of New York ruled that the agreements could be rejected as a reasonable exercise of business judgment by Sabine’s management. While she did not — for procedural reasons — make a final ruling on the issue, Judge Chapman did indicate that she was disinclined to find that the agreements ran with the land. Among other things, she reasoned that the agreements only affected Sabine’s personal property interests in products that had already been extracted.
“Meanwhile, the important legal question of whether gathering contracts run with the land remains to be determined in both the US and Canada,” Van de Mosselaer says. “It’s also unclear whether a finding that an interest in land was created would mean that the contracts could be rejected but the particular covenants running with the land would survive.”
In another case, in Delaware, the issue is whether individual transaction confirmations can be severed and rejected as distinct from the umbrella gathering agreement. “But regardless of how midstream companies are defending these applications, they are the ones who stand to lose when these types of agreements are rejected, missing out on the benefit of their bargain in the agreements as well as failing to recover the costs for their own often substantial infrastructure development,” Bauer says.
A decision from US courts would not, of course, be binding in Canada. But that doesn’t mean Canadian courts won’t take notice. “Given the importance that is placed on the decisions of the United States Bankruptcy Court for the Southern District of New York in both the US and Canada, any ruling Judge Chapman makes on this issue may well be influential here,” Van de Mosselaer says.
Still, the CCCA does require courts that are deciding whether to reject contracts to consider whether the disclaimer would create serious financial hardship to the debtor’s counterparty. “That doesn’t appear to have been a consideration in Sabine, but it would be the primary argument in Canada,” Van de Mosselaer says.
That being said, it is also true that the land titles and real estate legal regimes vary greatly from state to state and province to province. “No doubt the real estate law of each jurisdiction will bear heavily on these questions,” Van de Mosselaer adds.
So much so that pre-litigation counsel is becoming a staple of insolvency and restructuring practice. “Pre-litigation matters — often corporate-type banking work where companies have to deal with their balance sheet, renegotiate bonds and long-term debt, or raise equity — are often becoming the biggest part of a case,” says Kenneth Lenz of Bennett Jones LLP in Calgary. “That’s legal work that is not publicly visible until the press release is issued.”
Canadian lenders, it seems, are getting downright creative in some cases. “I’m currently dealing with a case where the lender is doing some things like taking back equity, which is something you might have expected from a US lender, but never a Canadian lender,” Lenz says.
Still, the leash may be getting shorter, especially in the oil and gas sector. “Once oil got to $50, some lenders who didn’t want to force the issue at $30 have developed a fear of the price dropping again, and have become more aggressive,” Lenz says. Evidence that this is happening can be found in the courts. “Judges are telling us that the insolvency lists are fully booked, that there are lots of last-minute filings and applications, and that they’re seeing four or five briefs a day.”
Sandra Abitan of Osler, Hoskin & Harcourt LLP in Montréal is also expecting more traditional activity on the insolvency and restructuring fronts. “Companies have been selling assets, avoiding fire sales and keeping the lights on, but they may not be able to continue that for much longer,” she says.
RECOGNITION PROCEEDINGS
Cross-border recognition proceedings are becoming a staple for the Canadian insolvency Bar. “I think we’re becoming a lot more comfortable with the flexibility that recognition provides, and with the ways in which Canadian creditors can be protected in proceedings in the US,” Dietrich says. “Some of the best evidence of that can be seen in the fact that Canadian companies are extending debtor-in-possession [DIP] financing to related companies involved in Chapter 11 proceedings.”
Despite the fact that courts have allowed a great deal of latitude in accepting US proceedings as “main proceedings” under Canadian law, what Canadian courts have made clear is that such recognition is not to be taken as indicating that Canadian creditors are ceding any of their rights. A case in point is the February 2016 Ontario Superior Court decision of Justice Frank Newbould in Re Zochem. Newbould took pains in his decision to remind directors of their fiduciary duties, even while recognizing US proceedings as a “main proceeding,” giving his approval to a US interim financing order and granting the security requested for a DIP loan.
For their part, Americans are starting to discover the advantages of some of the unique features of Canadian bankruptcy law. For example, in the cross-border proceedings surrounding the Lac-Mégantic rail disaster, which wiped out part of the southern Québec town and caused huge losses of life and infrastructure, the courts in Québec and in Maine worked seamlessly together to broker a settlement.
Much of the credit for this collaboration can be attributed to Canadian law’s resort to a “monitor,” a concept unfamiliar to bankruptcy law in the United States. “Because monitors are court-appointed officers who are the eyes and ears of the court, they have a special standing and engender a great deal of respect and are in an excellent position to broker settlements,” says Abitan.
Aiding greatly in the Lac-Mégantic settlement as well was the monitor’s ability to implement a number of third-party releases, whose availability is much more restricted in the US. “For sure, the case would have gone on much longer in the US than the two years it took to settle here,” Abitan says.
ACROSS OTHER BORDERS
The past seven years have seen more cross-border insolvencies involving countries other than the United States. “Things have become much more European and Asia-focused, especially in British Columbia,” says William Kaplan of Blake, Cassels & Graydon LLP in Vancouver.
The difficulty, however, is that some countries — including several European countries and none of the Scandinavian states — are not parties to international agreements that bind them to recognition proceedings. “In these instances, we’re back to where we were before we started developing protocols for cross-border cases,” Kaplan says.
HELP FOR ENERGY OUTFITS
In a key decision that may help the struggling oil and gas industry access much needed credit facilities, an Alberta court has ruled that bankruptcy trustees may disclaim non-producing oil wells and sell the producing ones.
“The ruling will promote increased access to credit because it makes it more likely that lenders will recoup their loans in the event of an oil and gas company’s insolvency,” says Vanessa Allen, a senior manager in Deloitte Restructuring’s financial advisory group in Calgary and a spokesperson for the Canadian Association of Insolvency and Restructuring Professionals, which intervened in the case.
Re Redwater Energy, released in May 2016 by Alberta Court of Queen’s Bench Chief Justice Neil Wittmann, involved an application by the Alberta Energy Regulator (AER) and the Orphan Well Association requiring Grant Thornton, the trustee in Redwater Energy Corp.’s bankruptcy, to carry out the abandonment, reclamation and remediation obligations related to the company’s non-producing wells, which included paying a security deposit under certain circumstances.
Chief Justice Wittmann concluded that Alberta’s Oil and Gas Conservation Act and the province’s Pipeline Act, which prohibits trustees and receivers from disclaiming non-producing wells, conflicted with the federal Bankruptcy and Insolvency Act, which allows such disclaimers. Under the constitutional doctrine of federal paramountcy, the federal legislation governed. The upshot was that the province’s energy regulator could not require non-producing wells to be sold as a condition of issuing licenses for the transfer of producing wells.
Kelly Bourassa of Blakes in Calgary, who represented the Alberta Treasury Branches at the hearing, welcomes the “level of certainty” the Redwater case brings to the industry and its financiers. “What you had before was a can of worms where the AER was telling receivers that it wouldn’t approve license transfers unless all of the wells were sold,” she said. “So receivers were either being forced to take one-dollar offers just so they could get rid of everything, or else were required to turn some of the proceeds of the sales of producing wells over to the AER, which amounted to giving the AER a priority claim it did not have.”
The ruling has sparked an outcry from the public and environmentalists grounded in fears that taxpayers will have to bear the costs of environmental remediation necessitated by the failure of a private company.
To the contrary, Grant Thornton’s Calgary counsel, Jeffrey Oliver of Cassels Brock and Tom Cumming of Gowling WLG (Canada) LLP, argued that the use of public funds to assist the Orphan Well Association was not in the offing. Indeed, the Orphan Well Association (OWA), whose job is to remediate and reclaim wells for which there is no responsible party, is funded by the industry pursuant to a formula devised by the AER. Evidence at the hearing showed the original levy of $15 million on the industry in 2015 had been doubled by the end of the year.
The AER, then, could up the ante for the industry’s contribution to the OWA yet again. “But that would impose yet another burden on companies who are struggling in the current downturn,” Allen says. The fact remains, however, that the OWA has a 10-year backlog of 1,000 non-producing wells requiring remedial work, and there is historical precedent for the use of public funds, which occurred when the provincial government decided to help out the industry in 2008 and 2009.
Proponents of Wittmann’s reasoning say that the outcry has been provoked in part by the public’s misunderstanding of how insolvency works. “The idea that the debtor will have unsatisfied obligations is the whole point of insolvency,” says one lawyer close to the case. “But the regulator is exercised that the trustee can pick and choose good assets and transact with them.”
As it turns out, the AER is appealing Wittmann’s decision. “The AER continues to assert that companies must not be allowed to walk away from their responsibility, even when facing economic uncertainty,” said AER spokesperson Ryan Bartlett in an email. “While we are disappointed in the court’s decision, the AER will continue to protect public safety and the environment in the regulation of oil and gas development in this province.”
MIDSTREAM GATHERERS AT RISK?
Re Sabine Oil & Gas, a US bankruptcy judge’s ruling that midstream gatherer contracts can be rejected in insolvency cases, has raised fears among owners of pipelines and other midstream assets that Canadian courts will follow the precedent. “We’re already seeing a chilling effect because this decision, if followed in Canada, represents a new threat to midstream stakeholders that didn’t exist before,” says Randal Van de Mosselaer of Norton Rose Fulbright Canada LLP in Calgary.
Torys LLP is advising midstream gatherers and producers to review their contracts. “Midstream companies should review pipeline contracts to evaluate the risk of rejection in the event of a bankruptcy by the upstream producers,” says Alison Bauer in the firm’s New York office. “Conversely, oil and gas producers should consider negotiating reductions in price and volume commitment in unfavorable contracts that originated when oil and gas prices were higher — or threaten bankruptcy rejection.”
The issue arose when Sabine Oil & Gas Corp., an independent energy company engaged in developing onshore oil and natural gas properties, found itself in Chapter 11 proceedings. Chapter 11 of the United States Bankruptcy Code allows debtors to apply for court approval to terminate existing agreements in certain circumstances. Similar provisions are found in Canada’s Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act.
Sabine applied to terminate gas gathering and handling agreements it had with Nordheim Eagle Ford Gathering LLC and High Point Infrastructure Partners LLC. Sabine maintained it could not restructure operations without rejecting these contracts, which it claimed were too expensive. The pipeline owners countered with the argument that the dedication of production under the agreements created an interest that ran with the land and therefore the contract could not be rejected under the applicable Texas law.
But Judge Shelley Chapman of the United States Bankruptcy Court for the Southern District of New York ruled that the agreements could be rejected as a reasonable exercise of business judgment by Sabine’s management. While she did not — for procedural reasons — make a final ruling on the issue, Judge Chapman did indicate that she was disinclined to find that the agreements ran with the land. Among other things, she reasoned that the agreements only affected Sabine’s personal property interests in products that had already been extracted.
“Meanwhile, the important legal question of whether gathering contracts run with the land remains to be determined in both the US and Canada,” Van de Mosselaer says. “It’s also unclear whether a finding that an interest in land was created would mean that the contracts could be rejected but the particular covenants running with the land would survive.”
In another case, in Delaware, the issue is whether individual transaction confirmations can be severed and rejected as distinct from the umbrella gathering agreement. “But regardless of how midstream companies are defending these applications, they are the ones who stand to lose when these types of agreements are rejected, missing out on the benefit of their bargain in the agreements as well as failing to recover the costs for their own often substantial infrastructure development,” Bauer says.
A decision from US courts would not, of course, be binding in Canada. But that doesn’t mean Canadian courts won’t take notice. “Given the importance that is placed on the decisions of the United States Bankruptcy Court for the Southern District of New York in both the US and Canada, any ruling Judge Chapman makes on this issue may well be influential here,” Van de Mosselaer says.
Still, the CCCA does require courts that are deciding whether to reject contracts to consider whether the disclaimer would create serious financial hardship to the debtor’s counterparty. “That doesn’t appear to have been a consideration in Sabine, but it would be the primary argument in Canada,” Van de Mosselaer says.
That being said, it is also true that the land titles and real estate legal regimes vary greatly from state to state and province to province. “No doubt the real estate law of each jurisdiction will bear heavily on these questions,” Van de Mosselaer adds.
