The potential conflict between federal insolvency law and provincial environmental law that came to a head in Orphan Well Association v Grant Thornton Ltd (“Redwater”) was settled by the Supreme Court of Canada (the “SCC”) on January 31, 2019 in a split 5-2 decision. Specifically, Redwater addresses whether environmental orders are binding on an insolvent estate, or if a trustee can disclaim unprofitable lands subject to the environmental orders, treating the regulator as an unsecured creditor.
In a contested decision, the SCC held that the test that the SCC had previously established to determine whether a regulatory claim was enforceable against the debtor’s estate as opposed to merely constituting a provable claim in the bankruptcy (the “Abitibi Test”, described below) had been interpreted too narrowly. If a regulatory order was found to meet the Abitibi Test and therefore found to be a claim provable in bankruptcy, then it would be stayed and treated as any other unsecured debt. The majority of the SCC in Redwater significantly expanded the circumstances in which costly end-of-life environmental or other regulatory orders will effectively trump secured and other creditors in an insolvency. The decision will have serious consequences for creditors, many of whom are innocent suppliers and investors, but will be left paying for environmental remediation.
In arriving at its decision, the SCC held that there was no conflict between the applicable provisions of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”)  and Alberta’s environmental regulatory statutes that would trigger the doctrine of federal paramountcy. The SCC further held that the regulator should not be characterized as acting as a “creditor” in this case where the regulator sought to enforce an insolvent company’s end of life obligations and consequently does not have a claim provable in bankruptcy.