Application for Lifting of Stay – Receivership
In this decision, the Alberta Court of Queen’s Bench (“ABQB”) considered an application by Midstream Canada Ltd. (“Midstream”) requesting to lift the stay of proceedings in the receivership of Lexin Resources Ltd, 1051393 BC Ltd, 0989 Resource Partnership, LR Processing Ltd and LR Processing Partnership (collectively, “Lexin”). The request to lift the stay would allow Midstream to assume operatorship of certain gas facilities and gathering systems.
The ABQB denied the application to lift the stay on the basis that the prejudice to Lexin’s Receiver (the “Receiver”) of lifting the stay far outweighed the prejudice to Midstream, and it was therefore not equitable to lift the stay.
Background
Midstream applied to lift the stay imposed under the receivership order with respect to three gas facilities and gathering systems (the “Facilities”).
The wells and Facilities were shut-in pursuant to an AER order dated February 15, 2017. At that time, the wells and facilities were co-owned by Lexin and Exxon Mobil Energy Canada and operated by Lexin.
On December 21, 2017, Midstream agreed to purchase Exxon’s interest in the wells and Facilities. The sale included not only Exxon’s interest in the 21 wells jointly owned with Lexin, but also 32 additional wells in which Lexin had no interest.
Midstream applied to the AER for approval of the transfer of the Exxon well licenses, but had not yet obtained such approval at the time of the application to lift the stay.
The three Facilities at issue were:
(a) the Hooker Gas Gathering System, in which Lexin owned a 75% interest;
(b) the Hooker East Compression and Gas Gathering System, in which Lexin owned a 75% interest in three of the four functional units and a 50% interest in the fourth functional unit, and therefore a 68.75% overall interest in the system; and
(c) the South East Hooker Compression and Gas Gathering System, in which Lexin owned an approximately 45% interest.
The receivership order imposing the stay was granted on March 20, 2017. Since July 2017, the Receiver had been marketing Lexin’s assets, including the wells and Facilities at issue. The marketing materials specified that Lexin was the operator of the wells and Facilities. The sales process had been extended several times, due in part to complications arising from an unrelated claim.
On May 3, 2018, Midstream filed its application to lift the stay.
While Midstream may have been entitled by reason of its majority ownership to assert operatorship of the South East Hooker Facility, it required the operatorship of all three Facilities to commence moving product to market from the 32 wells in which Lexin had no interest.
The Facilities were governed by Construction, Ownership and Operation Agreements (the “CO&O Agreements”). These CO&O Agreements adopted the standard form model Petroleum Joint Venture Association 1999 Standard Operating Procedure (the “1999 PJVA”).
The Test for Lifting the Stay
The ABQB set out the following:
• The test for lifting a stay imposed pursuant to a receivership order focuses on the totality of circumstances and the relative prejudice to the parties involved in the receivership.
• Guidance can be drawn from the provisions of section 69.4 of the Bankruptcy and Insolvency Act, as amended, in determining whether a stay in a receivership should be lifted. The Court should be satisfied that the party applying to lift the stay is likely to be materially prejudiced by the stay or that it would be equitable to lift the stay on other grounds. The burden is on the applicant.
• In order for a party applying to lift the stay to show material prejudice, it must show that it would be treated differently or some way unfairly or would suffer worse harm than other creditors if the stay is not lifted.
Application of the Test
Prejudice to the Receiver
The ABQB found that the most persuasive reason why the stay should not be lifted was that this would prevent the Receiver from relying on certain replacement of operator provisions in the relevant contracts. This would result in Midstream taking advantage of the insolvency process to appropriate operatorship rights that would not otherwise be available to it. Specifically, the ABQB found:
(a) lifting the stay would subject the Receiver to significant capital and operating expenditures which it could not realistically fund; and
(b) lifting the stay would introduce uncertainty into the sales process, particularly at this late state of the process, well after the bid deadline of October 2017.
Prejudice to Midstream
Midstream submitted that it suffered prejudice from its inability to rely on the ipso facto or operator insolvency contractual provisions.
The ABQB found that the mere existence of such contractual provisions was not in itself a sufficient basis to lift a stay. While they might be valid between contracting parties in the ordinary course of events, these provisions were void against a receiver on policy grounds.
The prejudice to a creditor seeking to rely on such a clause was no different from that suffered by other creditors by reason of the debtor’s insolvency. Giving effect to such clauses would undermine the purpose of a stay in insolvency, to permit the orderly and equitable realization and distribution of the debtor’s assets.
The ABQB observed that the insertion of ipso facto clauses in agreements relating to operation of oil and gas assets reflected operators dealing with funds on behalf of the non-operating parties, and that the insolvency of an operator can give rise to a risk that the operator will comingle funds and/or put a non-operator’s share of revenues at risk. However, that risk ceases to exist when a receiver is appointed.
The ABQB further found that Midstream purchased its interest in the Facilities knowing that they were shut-in and that there was no risk that the Receiver would make any long-term investment or operational decisions that may not align with Midstream’s interests. While it was possible that a third-party purchaser’s interests may not align with those of Midstream, Midstream must surely have been aware of that possibility when it made the business decision to purchase the properties.
Midstream submitted that it wanted to restart the Facilities, and thus would suffer delay in its plans if the stay was not lifted. However, it was not clear to the ABQB that Midstream would be able to obtain the necessary license transfer and approvals to reopen the Facilities.
The ABQB observed that the insolvent operator provisions were not intended to be utilized strategically by co-owners or their assignees to obtain operatorship that would otherwise not be contractually available. Rather, they were intended to protect non-operators from the real risks and prejudices that can arise when an operator becomes insolvent.
Prejudice to Other Creditors
If the stay was not lifted, a purchaser of two of the three Facilities, the Hooker Gas Gathering System and the Hooker East Compression and Gas Gathering System, would have a contractual right to replace Lexin as operator of these Facilities.
If the stay was lifted prior to the conclusion of the sales process and Lexin was replaced as operator, Lexin and the eventual purchaser would not be able to rely on these operatorship rights. Thus, Midstream’s suggestion that the stay could be lifted without prejudice to any rights a purchaser would acquire did not address the prejudice.
Summary
The ABQB determined that the prejudice to the Receiver and other creditors of Lexin if the stay was lifted outweighed the prejudice, if any, that would be suffered by Midstream if the stay was not lifted.
There were no equitable grounds that would otherwise justify the lifting of the stay.
