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RUSSELL WANGERSKY: You can’t always play the bankruptcy card

Scales of justice.
Scales of justice. — SaltWire Network file photo

It’s as simple a concept as buyer beware.

Last week, the Supreme Court of Canada ruled on a case that, in some ways, looked like it could be solved with simple common sense.

When an oil company goes bankrupt, in this particular case, Alberta’s Redwater Energy, is the bankruptcy trustee allowed to break up the company’s wells into two groups — those that make money, and those that don’t — and treat those two groups differently? Can they then abandon those that don’t make money (along with their attendant legally required environmental liabilities) while selling off the profitable ones and splitting up all the resulting money amongst the other creditors?

Like many legal cases that make their way to the Supreme Court, the dispute centred on the conflict between two different sets of laws, one federal, and the other, provincial.

But there’s a thread that, to me, cuts through the whole debate over overlapping legal jurisdictions.

And that’s a concept that, when a resource company agrees to terms with any level of government in exchange for the opportunity to exploit a natural resource, those terms are as much a business contract as any other. Since that business contract predates any other commitments by a resource company, it should have legal primacy over any subsequent contracts — much like the requirements of a first mortgages supersede those of any subsequent borrowings.

Governments, federal and provincial, love to boast about their “partnerships” with business. But true partnerships are a two-way street; neither side gets to arbitrarily shed their commitments and responsibilities.

Clearly, if an oil company is legally bound to clean up its wells, even if it falls into bankruptcy, its trustee can’t decide to abrogate that first contract and pay off other creditors instead. After all, governments grant contractual access to resources that belong to the people. That’s a pretty big commitment.

What about the creditors: the suppliers, the bankers, etc.?

Fair question.

Clearly, if an oil company is legally bound to clean up its wells, even if it falls into bankruptcy, its trustee can’t decide to abrogate that first contract and pay off other creditors instead.

Think of it this way: when you decide whether you’re willing to extend credit to a junior oil company or a mining firm or anyone else, you decide based on the liabilities that they already have.

And one of those pre-existing liabilities is obviously the implicit contract that they have to clean up any mess they make while profiting from natural resources that belong to the nation.

To me, it’s no different than banks extending secured credit to a business that fails, and having the federal government jump in to seize assets to cover unpaid Canada Pension Plan contributions and income tax withheld from employees but not paid to the Canada Revenue Agency. Nor is it any different than the fate that befalls small creditors when it turns out a large, secured creditor like a bank gobbles up all of the available assets, leaving nothing for the second tier of creditors who may have supplied materials in good faith but who end up never getting paid for them. The only real difference is that everyone involved clearly understands what the ground rules are — and in this case, it’s that the polluter is going to pay. Always.

There are, of course, other ways to ensure that companies don’t simply play the bankruptcy card and walk away from their responsibilities: requiring bonds to cover cleanup costs is a good one.

But so is making sure that there isn’t legal wiggle room in bankruptcy law.

Oh, and what did the court decide? Well, that “As a matter of principle, bankruptcy does not amount to a licence to disregard rules … so the Redwater estate must comply with its environmental obligations, to the extent that assets are available to do so.”

It really shouldn’t be any other way.

Russell Wangersky’s column appears in 36 SaltWire newspapers and websites in Atlantic Canada. He can be reached at [email protected] — Twitter: @wangersky.

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