Introduction
From the public policy standpoint, there has been a shift towards more environmental stewardship in
Canada, evidenced by heightened media attention on environmental issues and by an expanded legal framework
relating to the management of environmental liabilities. For example, directors may be personally liable
for violation of environmental statutes1 and may face reputational harm if the corporations they manage
are found to have breached environmental rules or norms. The case of Redwater Energy Corporation
(Re) ("Redwater") is a new example where directors and officers have
been opened up to the potential of greater personal liability for environmental costs.2 How does
this trend towards environmental sustainability affect the actions of the board of directors?
Redwater Background and Implications
In 2016, the Alberta Court of Queen's Bench released its decision on Redwater. In this decision, the
Court determined that a trustee in bankruptcy could disclaim uneconomic assets which were subject to
Alberta Energy Regulator (the "AER") licenses. In particular, the Trustee of
Redwater Energy Corporation disclaimed assets which were subject to environmental abandonment, reclamation
and remediation obligations. The AER then sought an order to compel the Trustee to comply with the
provincial requirements. This case determined that the requirements of a trustee under the Bankruptcy
and Insolvency Act take precedence to the remediation requirements of the Oil and Gas Conservation
Act (the "OCGA") and the Pipeline Act.3 As such, the Trustee
was not obligated to comply with the provincial requirements and could disclaim the assets and absolve
itself of any responsibility for the environmental liabilities associated with those assets. This decision
has been appealed and there has yet to be a decision at the appeal level.
As a result of Redwater, there has been a large impact on Alberta's orphan well fund — a fund governed
by the Orphan Well Association which is used to cover the costs of abandoned assets. By allowing trustees
in bankruptcy to disclaim assets, there has been an increase in the amount of orphan wells in the orphan
well fund.
The Redwater decision is expected to shift more environmental risk onto directors and officers, as
the AER will likely use other mechanisms in its power to recover environmental costs when it cannot
enforce them directly against an insolvent corporation.
On April 8, 2016, the AER released Bulletin 2016-10 which reminded licensees and their directors and
officers of their statutory responsibilities when a corporation enters insolvency proceedings or ceases
operations. The AER has the power to restrict the ability of directors and officers to act in the capacity
as a director or officer in the future for oil and gas companies in the event that a licensee has outstanding
abandonment, reclamation or remediation debts to the Orphan Well Association.4 This power extends
even after the termination of the director or officer.
Another mechanism that can be used to recover environmental costs is the statutory regime that allows
directors and officers to be personally named in environmental protection orders. Directors and officers
can be held personally liable for environmental obligations and as such may be subject to fines and/or
imprisonment if reclamation costs are not paid.5 While this mechanism has not been used frequently
in Alberta, in a recent case in Ontario, the directors and officers of a corporation personally paid
over $4 million after being named personally in an environmental cleanup order.6
Board of Directors' Duty Generally
A board of directors of a corporation has a duty to "exercise the care, diligence and skill that
a reasonably prudent person would exercise in comparable circumstances".7 This duty
is codified in legislation and has been expanded on in the common law. In the case of People's
Department Stores Ltd. (1992) Inc., Re, the Court looked at the legislative provisions encompassing
the duty of the board of directors.8 The Court determined that a contextual approach is
required when determining the duty of care of a board of directors, factoring in prevailing socio-economic
conditions in the analysis.9 Pursuant to this case, decisions of a board of directors will be considered
based on the business judgment rule — a rule in which courts will look at whether the decision of the
board was reasonable in light of the circumstances in which the decision was made.10 A board of directors
has multiple factors to balance when making decisions on behalf of a corporation and Courts will take
these factors into consideration when determining if a board of directors acted in a reasonably prudent
and informed basis.
How Should the Board of Directors Move Forward?
With the release of the Redwater decision, board of directors for oil and gas companies in Alberta
must be aware of their potential heightened exposure to personal liability in insolvency proceedings
or in ceasing operations. Their actions in these circumstances will be defended by statutory standards
set out in legislation or common law. For directors of oil and gas companies it is even more imperative
that they are proactive in understanding and overseeing their corporation's practises, plans and
potential risks for environmental contamination, as there are potential implications for them if they
do not.
1 Canadian
Environmental Protection Act, 1999, SC 1999, c 33, s. 95.
2 Redwater Energy Corporation (Re), 2016 ABQB 278.
3 Oil and Gas Conservation Act, RSA 2000, c O-6, Pipeline Act, RSA 2000,
c P-15 and Bankruptcy and Insolvency Act, RSC 1985, c B-3.
4 OGCA, s. 106.
5 Environmental Protection and Enhancement Act, s. 228 and s.232.
6 Baker v Ministry of the Environment, 2013 ONSC 4142.
7 Alberta Business Corporations Act, RSA 2000, B- 9 ("ABCA"),
s. 122(1)(b).
8 People's Department Stores Ltd. (1992) Inc., Re 2004 SCC 68 [Peoples].
The Court looked at s. 122 of the Canadian Business Corporations Act, RSC 1985, c C-44 which
is substantially the same as s. 122 of the ABCA.
9 Peoples at para 64.
10 Peoples at para 64.
