Casual Legal: Collecting taxes in Oil & Gas insolvencies
DISCLAIMER: This article is meant to provide information to Alberta Municipalities members only and is not intended to provide legal advice. You should seek the advice of legal counsel to address your specific set of circumstances. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this article to be outdated. This content is not intended for the general public.
By Michael E. Swanberg
Reynolds Mirth Richards Farmer LLP
Alberta Municipalities Casual Legal Service Provider
Insolvencies in the oil and gas sector create significant challenges for municipalities that are owed municipal tax arrears.
Under sections 348 and 348.1 of the Municipal Government Act (MGA), municipal tax arrears are secured by special liens which attach to the debtor’s assessable property located in the municipality. These special liens take priority over all other claims except for claims by the Crown.
While these special liens provide municipalities with some protection to ensure municipal taxes are paid, problems arise when oil and gas companies become insolvent and are put into receivership, or seek creditor protection via the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act. This is because pursuant to the Supreme Court of Canada’s decision in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5, environmental abandonment and reclamation regulatory obligations take priority to all other provable claims, including claims for unpaid municipal taxes.
Invariably, insolvent oil and gas companies will be subject to significant unsatisfied environmental abandonment and reclamation regulatory obligations. In many cases, these regulatory obligations eclipse the monetary amounts of all other claims combined, which creates a significant risk that creditors, regardless of their priority, will receive nothing.
Practically speaking, as assets are sold as part of the insolvency process, any abandonment and reclamation regulatory obligations associated with those assets will need to be assumed by the purchaser for any proceeds from those sales to be distributable to creditors. Problems arise in situations where certain assets are uneconomic and cannot be sold, since any proceeds from sales of economic assets must be used to satisfy any environmental abandonment and reclamation obligations pertaining to uneconomic and unsold assets first before any proceeds are distributed to creditors.
Municipalities should proactively participate in oil and gas insolvency proceedings to ensure municipal interests are being properly considered. This includes ensuring that the sales process is being conducted fairly and in a manner that is most likely to result in recovery to creditors, and that the municipalities’ special liens are properly recognized in any distributions.
To access Alberta Municipalities Casual Legal Helpline, Alberta Municipalities members can call toll-free to 1-800-661-7673 or casuallegal [at] abmunis.ca (email) to reach the municipal legal experts at Reynolds Mirth Richards and Farmer LLP. For more information on the Casual Legal Service, please call 310-MUNI (6864) or riskcontrol [at] abmunis.ca (email) to connect with Alberta Municipalities Risk Management staff. Any Regular or Associate member of Alberta Municipalities can access the Casual Legal Service.
