In a recent Alberta Court of Appeal decision, Alberta (Energy and Minerals) v. Spartan Delta Corp., the Court considered whether Alberta’s energy regulator could pursue royalty arrears from third-party co-lessees after an oil and gas company completed a sale process under the Companies’ Creditors Arrangement Act and later dissolved. The case raised important questions about Crown royalties, co-lessee liability, vesting orders, and the finality of insolvency proceedings.
The appeal was dismissed. The Court held that the regulator was precluded from collecting the royalty arrears from the co-lessees, both for amounts said to have arisen before the insolvency filing and for amounts said to have arisen during the insolvency process.
For Alberta businesses, particularly those in the energy sector, the decision is a useful reminder that transaction structure, insolvency orders, statutory obligations, and closing processes can have long-term consequences.
The Business and Insolvency Background
The debtor company was an oil and gas business and a co-lessee under several joint Crown petroleum and natural gas leases. Another major energy company was also a co-lessee under some of those leases.
During CCAA proceedings, the debtor company sold most of its assets, including its interests in joint Crown mineral leases, to a purchaser. Under the purchase agreement, the debtor company retained liabilities connected to the leases before closing, including Crown royalty obligations. The purchaser assumed liabilities related to the leases from the closing date forward.
The sale was approved by an approval and vesting order. The vesting order stated that the purchased assets were transferred free and clear of claims, except for permitted encumbrances. The transaction closed on June 1, 2020, and the monitor retained an $8.5 million holdback intended to address post-filing liabilities, including any royalty arrears owed under the Crown leases.
Alberta Energy’s Later Royalty Demands
Shortly after closing, the regulator wrote to the debtor company about default for royalties owing to the Crown for a period before closing. The same letter was sent to several co-lessees, advising that the Crown might seek payment from them.
The purchaser responded that any pre-filing royalty arrears had been expunged, discharged, and vested off the purchased assets by the vesting order. It also took the position that a claim against the purchaser or its working interest partners would amount to a collateral attack on the order.
The regulator later advised that the purchaser did not appear to be liable for the arrears and that it would not pursue collection against the purchaser. However, years later, after royalty recalculations, the regulator issued notices to the purchaser and several co-lessees demanding immediate payment of alleged royalty arrears.
The Role of the Royalty Recalculation Window
A key feature of the dispute was Alberta’s royalty recalculation process. The decision notes that the Mines and Minerals Act and regulations allow data to be provided for up to three years after the end of a royalty period. The regulator then has another two and a half years to review that data for recalculations.
During that five-and-a-half-year window, the regulator determined that additional royalty obligations existed in relation to the debtor company’s joint leases. The regulator argued that the co-lessees remained responsible under the Mines and Minerals Act.
The Court accepted that recalculations may occur after the fact. However, it held that the possibility of future royalty adjustments did not change the effect of the vesting order or the CCAA process. The regulator had opportunities to protect its position within the insolvency proceeding.
Chambers Judge Ordered Regulator to Return Credits
At first instance, the chambers justice found that the regulator was precluded from collecting payments connected to the royalty arrears. The regulator was ordered to return any credits it had taken. For pre-filing royalty claims, the chambers justice found that the claims were barred by the wording of the vesting order. The order had addressed claims relating to the purchased assets, including royalties.
For post-filing claims, the chambers justice noted that the regulator had notice of the CCAA process and the holdback. The regulator had also been asked to confirm outstanding post-filing royalties before the estate closed. After receiving information from the regulator, the estate proceeded to closure and the holdback was released.
The Appeal Issues
The appeal focused on whether the chambers justice erred in finding that the Crown’s pre-filing and post-filing royalty claims were not recoverable from the other co-lessees under the lease agreements.
The regulator relied on section 20(2.1) of the Mines and Minerals Act, which provides that where two or more persons are recorded as lessees, they are jointly responsible to the Crown for obligations and liabilities arising under the agreement. The regulator argued that this allowed it to pursue co-lessees for the debtor company’s royalty arrears.
The Court did not accept that argument. In a related decision released at the same time, the Court held that section 20(2.1) creates joint liability, not joint and several liability. That distinction was important because the liability was indivisible.
Joint Liability and the Vesting Order
The Court found that the vesting order was not a judgment in favour of the Crown. It also was not a release by the Crown. This mattered because section 20(2.1) allows the Crown to pursue other lessees in certain circumstances, including where the Crown has obtained judgment against one lessee or released one lessee. Neither circumstance applied.
The Court then reviewed the wording of the vesting order. It found that the order expressly referred to royalties and claims under the Mines and Minerals Act. The purchased assets included the leases to which the royalty arrears related. The Court concluded that the order was clearly intended to capture the royalty claims at issue.
Pre-Filing Royalties Were Barred
The regulator argued that the royalty claims were permitted encumbrances and therefore survived the vesting order. The Court rejected that position. The Court held that unsecured royalty claims were not similar to the listed permitted encumbrances that ran with the purchased assets. The express inclusion of royalties in the claims bar made it clear that the pre-filing royalties were intended to be caught by the order.
The Court also noted that the regulator could have protected its position in the CCAA process. It could have sought a carve-out for future royalty adjustments or required payment of pre-filing arrears as a condition of lease transfers. The Court concluded that the pre-filing claims against co-lessees were barred.
Post-Filing Royalties and the Holdback
The post-filing royalty arrears were treated differently because they accrued during the CCAA process, between the filing date and the closing date. These amounts were not liabilities owing as of the filing date. However, the transaction structure included a holdback to address post-filing payables, including royalty arrears.
The regulator had notice of the holdback. It was asked to confirm the post-filing royalties owing. In October 2021, it advised that the debtor company’s royalty deposit was sufficient to offset the debt owed and that the estate could proceed to closure. After that, the parties relied on the closing process, the holdback was released, and the CCAA proceedings were terminated. The regulator later sought payment from co-lessees years after closing.
Finality in the CCAA Process
The Court found that the CCAA process established a mechanism through which the regulator could recover post-filing royalty arrears. The regulator did not use that mechanism and did not seek to preserve part of the holdback for future adjustments.
The Court accepted that allowing later collection from co-lessees would undermine the integrity and finality of the CCAA process. The decision emphasized that insolvency proceedings often rely on a single proceeding model, where claims connected to the debtor’s restructuring are dealt with through one supervised process.
Third parties were entitled to rely on the CCAA process to assess their risks and rights. The Court agreed that the later collection actions offended fundamental principles of fairness.
Structuring Transactions With Future Risk in Mind
The decision does not eliminate the possibility of royalty recalculations. Instead, it shows that timing and process matter. Where a claim can be addressed in a CCAA proceeding, a party that does not protect its position may face limits later.
In commercial transactions, especially in regulated industries, closing is not always the end of potential liability analysis. Asset transfers, approvals, permitted encumbrances, royalty accounts, indemnity provisions, and post-closing adjustment mechanisms can all affect future risk.
Clear documentation is particularly important where multiple parties are connected to the same assets. Co-lessees, purchasers, vendors, monitors, creditors, and regulators may each view liability differently. The case demonstrates how a court may look closely at the wording of orders, agreements, and correspondence when later disputes arise.
Contact DBH Law for Multi-Displinary Oil & Gas Legal Services in Alberta
For Alberta businesses, energy companies, co-lessees, creditors, purchasers, and vendors, this decision highlights the importance of careful planning in CCAA proceedings, asset sales, royalty disputes, corporate restructuring, and regulated industry transactions. DBH Law advises on commercial transactions, insolvency-related issues, asset purchase agreements, shareholder and co-ownership arrangements, and risk allocation for businesses in Calgary, Edmonton, Red Deer, Fort McMurray, Grande Prairie, Lethbridge, Medicine Hat, and across Alberta.
To discuss business structuring, transaction planning, or commercial risk management with a Calgary oil and gas lawyer, contact us online or call 403-252-9937.