When will the replacement of operator provisions in the 2007 CAPL Operating Procedure (“Paragraph 2.02”) be enforced against a party in receivership in the context of a court approved sale of the underlying oil and gas properties? This question was recently considered by Justice Macleod in Bank of Montreal v. Bumper Development Corporation Ltd., 2016 ABQB 363 (CanLII).
In this case, what was specifically at issue was whether Eagle Energy Inc. (“Eagle”) could rely on Paragraph 2.02 to take over operatorship from Bumper Development Corporation Ltd. (“Bumper”) (the party in receivership). Bumper had been placed in receivership by Bank of Montreal, which applied for and was granted a receivership order pursuant to s. 243 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3. As is common in most receivership orders, upon the appointment of the Receiver (Alvarez & Marsal Canada Inc.), Justice Macleod also ordered that there be a stay of proceedings.
At the time the receivership order was granted, Eagle and Bumper were parties to a Joint Operating Agreement (“JOA”) that pertained to several wells and was governed by the 2007 CAPL Operating Procedure which reads in part at Paragraph 2.02:
2.02 Replacement of Operator
- Immediate Replacement – The Parties acknowledge that the Operator’s ability to fulfill its duties and obligations for the Parties’ benefit is largely dependent on its ongoing financial viability and that the operator may not seek relief at law, in equity or under the Regulations to prevent its replacement in accordance with this Subclause. The Operator will be replaced immediately after service of notice from Non-Operator to the other Parties to such effect if:
(a) the Operator becomes bankrupt or insolvent, commits or suffers any act of bankruptcy or insolvency, is placed in receivership or seeks debtor relief protection under applicable legislation (including the Bankruptcy and Insolvency Act (Canada) and the Companies’ Creditors Arrangement Act (Canada)), and it will be deemed to be insolvent for this purpose if it is unable to pay its debts as they fall due in the usual course of business or if it does not have sufficient assets to satisfy its cumulative liabilities in full…
Upon learning of the receivership, Eagle notified the Receiver of its intention to take over operatorship. The Receiver responded that, because of the stay of proceedings, Eagle could not terminate Bumper’s operatorship and, as a result, Bumper remained as operator. In the interim, the Receiver undertook a sales process of Bumper’s assets (including its interests in the wells). Later, an agreement was reached that in the event Eagle was not the successful bidder for the properties, the Receiver would not entertain any offer to convey operatorship of Bumper’s assets. Bids were received from both Eagle and Forent Energy Ltd., with Forent being the successful bidder. A vesting order was granted subject to Eagle’s claim; the claim which formed the basis for this decision.
Ultimately, Justice Macleod decided that the JOA provided Eagle with a clear, contractual right to take over operatorship, despite the receivership and accompanying stay of proceedings. Stating that finding the contrary would “be tantamount to appropriating Eagle’s right for the benefit of Bumper’s creditors”, Justice McLeod lifted the stay and declared that Eagle was entitled to enforce the terms of the JOA.
As this was a liquidating receivership, the purpose of the stay was to permit the “orderly realization and distribution” of Bumper’s assets, rather than the ongoing survival of Bumper. This distinguishes this case from other insolvency proceedings where the goal is either to sell a company as a going concern or where the company is seeking to restructure its affairs. As stated by Justice Macleod at paragraph 20 of the decision, this liquidating scenario was different from that dealt with in the case of Norcen Energy Resources Ltd v Oakwood Petroleums Ltd (1988), 1988 CanLII 3560 (AB QB), 92 AR 81 (ABQB), 63 Alta LR (2d) 361:
In that case s. 11 of the Companies Creditor’s Arrangement Act, RSC 1970, c C-25 (CCAA) was at issue. Section 11 gives very broad powers to the Court in situations where arrangements involving compromise can be utilized to rescue insolvent companies. The CCAA has proved to be an extraordinarily flexible Act. The Act has been used effectively to give debtors respite from creditors in order to allow the stakeholders to negotiate a proposal for continuing the business, rather than allowing the business to fall into bankruptcy. Here, the issue is not Bumper’s survival but the realization on its assets.
In the Norcen case, the court upheld the stay and permitted the company under CCAA protection to retain operatorship in order to help facilitate it remaining a going concern. In this case, Bumper’s assets were in the process of being sold and there was no “going concern” to be preserved.
So, what does this decision mean for joint-operator’s rights in the event of an insolvent operator? First, it clearly depends on the goal of the insolvency proceedings: sell off the assets of the debtor company or rearrange the debtor’s affairs and preserve its business as a going concern? Given this decision, a joint-operator is likely going to have more success enforcing its rights under a JOA when dealing with a liquidation scenario and, as a corollary, less success when the insolvent operator is using the process to restructure and carry on in operation. Second, this case illustrates the importance of being aware of an operator’s financial situation. In the event that an operator becomes insolvent or commits an act of bankruptcy, a notice to replace the operator should be served as soon as possible pursuant to the applicable replacement of operator provisions. Alternatively, if a trustee/receiver has already been appointed, contacting the trustee/receiver at the outset to advise of the intention to enforce the JOA and seeking the lifting of the stay early in the proceedings may be more likely to result in a decision in the joint-operator’s favour.