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Priority of Lien Claims in a Post-Redwater World

The Supreme Court of Canada's Redwater decision concluded that provincial end-of-life abandonment and reclamation obligations, which are not claims provable in bankruptcy, must still be satisfied by a bankrupt estate, regardless of any impact on secured creditors looking to recover in an insolvency proceeding. Following Redwater, priority between creditors and reclamation costs remains a live issue. Subsequent case law has grappled with the interpretation and application of Redwater on a case-by-case basis.

Do builders' lien claims take priority over abandonment and reclamation obligations? The Alberta Court of Appeal faced this scenario in Manitok Energy Inc. (Re).


Manitok was an oil and gas company that became insolvent and was declared bankrupt. Before Manitok's bankruptcy, Prentice Creek Contracting and Riverside Fuels filed builders' liens for equipment and services provided to Manitok.

Manitok's receiver identified some assets of value and arranged for their sale, subject to court approval. However, after the sale negotiations, the receiver intended to abandon, dispose of, or otherwise release the bankrupt estate's interest in the assets that were burdened with inherent and inchoate abandonment and reclamation obligations, totalling approximately $44.5 million. This amount far exceeded the value of assets in Manitok's estate. As a result, any reclamation obligations would likely fall on the Orphan Well Association.

The Alberta Energy Regulator and the Orphan Well Association took the position that the abandonment and reclamation obligations must be satisfied in priority to the builders' liens. The lien claimants claimed a secured position that should be satisfied in priority to other claims, including abandonment and reclamation obligations.

The Chambers judge ruled in favour of the lien claimants, finding that the proceeds of the sale of the assets of value no longer formed part of Manitok's Estate. Instead, the sale proceeds were held in trust in accordance with the Sale and Vesting Order pending resolution of the claims.

The Chambers judge acknowledged that Redwater expanded the scope of section 14.06(7) of the Bankruptcy and Insolvency Act, but not to the extent that it covers trust funds related to the sale of property to which debtors no longer have the status of "owner, party in control, or licensee" at the time the orders were issued. The AER and Orphan Well Association appealed the Chambers judge's decision.

End of Life Obligations Given Priority Over Liens

The essential priority issue under appeal was whether end-of-life obligations associated with the abandonment and reclamation of unsold oil and gas properties must be satisfied by the Receiver from Manitok's estate in preference to satisfying what may otherwise be first-ranking builders' lien claims based on services provided by the lien claimants before the receivership date.

In interpreting and applying Redwater, the Court of Appeal confirmed that:

  • The assets of an oil and gas company should be treated as a single pool of assets when addressing abandonment and reclamation obligations. There is no distinction in relation to "assets unrelated to the environmental condition or damage."
  •  Assets in the estate do not cease to be available to discharge abandonment and reclamation obligations because they are converted to cash. The proceeds of the sale of the valuable assets must be applied towards the reclamation of the worthless orphaned assets.
  • A "trust" does not create any new or enhanced right in any stakeholder. It is only to hold the assets for the stakeholders in the insolvency, in the same priority as their interests may appear. In Manitok, under the Sale and Vesting Order, the cash proceeds were specifically to stand in place of the physical assets that had been sold without affecting the priorities and claims of claimants.
  • Abandonment and reclamation obligations exist independently of any enforcement mechanism. Therefore, the timing of any enforcement action is not determinative as to what estate funds are available to meet abandonment and reclamation obligations.  

Based on the above, the Court of Appeal set aside the Chambers judge's decision and held that Manitok's abandonment and reclamation obligations took priority over the builders' liens.

A point of interest for contractors arising from this case is that Prentice Creek's lien was for work related to the reclamation of specific oil and gas sites. Nonetheless, the Court's decision holds that this work cannot be paid in priority to general abandonment and reclamation costs with respect to all of a bankrupt's oil and gas assets.


While the extent of the priority given to reclamation costs post-Redwater remains a live issue, the Court of Appeal's decision demonstrates continued support for the 'polluter-pays' principle, and that all licensed assets are subject to priority associated with abandonment and reclamation obligations. However, whether the proceeds of assets completely unrelated to an insolvent debtor's oil and gas business will be subject to this priority has been left up for debate and will require future guidance from the courts.

Contact Doug Nishimura, Anthony Burden or Logan Maddin in Calgary or Ryan Krushelnitzky or Scott Matheson in Edmonton with any questions related to this case, builders' liens, or bankruptcy and restructuring.