1. Presented by: Carole J. Hunter
RISKY BUSINESS: Protecting Against Counterparty Default and Insolvency Risk
Presented by:
Carole J. Hunter

2. Identifying Risk with Third Parties
How to identify counterparties with potential financial difficulties and ways to mitigate your risk
Consider areas of vulnerability
Third party is a joint owner in high value asset
Third party is Operator of high value asset
Material contracts/long term contracts with third party
Long lead payment terms or where credit is extended to third party
No specific security in place (LOC)

3. Identifying Risk LMR 2 changes impacting cash flow & budgets
There have been a number of changes with respect to a producer's regulatory compliance obligations. Some non-compliance could be the 'canary in the coalmine' if a counterparty is encountering difficulties
Keep an eye on the LMR ratings of your counterparties
The IWCP will impose greater strain on licensees. Make sure you know if the licensees of your assets are complying with the program.
Consider checking participants in the LLR Program Management Plan
IWCP
2 changes impacting cash flow & budgets
Immediate enforcement of D13 requirements
Obligation to bring into compliance (suspend or abandon) 20% of its IWCP Inventory (non compliant inactive wells) each year
Indirect impact on joint operators
Acquisition of a well in the IWCP  into your quota
Monitoring

4. Identifying Risk Accounts Receivables
Slow payments or recent changes in payment timing
Missed payments
Action on overdue accounts – 120 days is too long
Look at rights under agreements and strictly enforce
Press on terms and consider payment plans
Balance of increasing risk of loss v. putting someone into bankruptcy -

5. Identifying Risk Public Information
Daily Oil Bulletin – monitor for accelerated activities
Insolvency Insider – watch list published every Monday
BCOGC – Liability Management Rating Program
 click on LMR Summary Report
AER – Liability Management Rating Program
AER – Compliance Dashboard
 Compliance & Enforcement  company name or search term (i.e. "reclamation certificate")
AER – Abandonment and Closure Orders
IWCP – Inactive Well Compliance Program
 Digital Data Submission (DDS) System  AER  Reports Licence Download IWCP annual target quotas

6. Protect Yourself: Pre-Filing
Before your counterparties are in BIA or CCAA, there is a suite of protections and remedies which are typically available to you.
Consider specific terms of each agreement because not all remedies will be available in all circumstances
Generally the remedies in contractual arrangements are presented as a cascade, although unless it is specifically provided for, you may not have to proceed in the order in which the remedies are presented

7. Best Practices Under Agreements
Adopt stricter joint venture billing practices.
Comply with duties and obligations under your agreements
By focusing on communication and ensuring work is completed as described in the agreement, your exposure for claims arising out of non-approval of operations, a failure to communicate, missing deadlines and cost-overruns is limited

8. Best Practices Under Agreements
Where possible do not extend credit to counterparties
Invoice in advance for costs (i.e. under approved AFEs)
Require that non-operators or counterparties provide security for payment
Under the 2007 CAPL requiring security is only available when the operator is "reasonably certain" that the non-operator will be unable to pay its costs
Events such as entering bankruptcy protection or a history of financial default will bar a non-operator from disputing the operator's request for security
Challenge operatorship
Must be unchallenged or proven in arbitration

9. Pre-Filing Remedies: Notice of Default
Interest: Operator may immediately charge compound interest on the unpaid amount at the prime rate plus 2%
Withhold Information: the operator may withhold any information or rights with respect to the joint operations
Notice: Operator must issue a notice of default to the non-operator before it can exercise any other default remedies.
Additional remedies available after 30 or 60 days
For example, under CAPL 2007
Provide examples of what can be withheld
Additional remedies will be discussed throughout
WHAT HAPPENS AFTER 60 DAYS:
The Operator may enforce the Operator's lien against the defaulting parties interest in all joint lands and property.
Section 505 of the CAPL (1990 Version)
"Effective from the date of the Agreement, the Operator shall have a lien and charge which is first and prior to any other lien, charge, mortgage or other security interest, with respect to the interest of each Joint-Operator in the joint lands, the wells and equipment thereon, the petroleum substances produced therefrom and any production facilities, to secure payment of such Joint-Operator's proportionate share of the costs and expenses incurred by the Operator for the joint account."

10. Pre-Filing Remedies: Debt Claim Potential Litigation Strategy
Have concerns over counterparty's ability to pay
CCAA or bankruptcy proceedings not yet commenced
What are your options?
File a claim at the same time as Summary Judgment application and supporting affidavit
No need to wait for Statement of Defence to file Summary Judgment application
New Rules 7.2 and 7.3 (summary judgment may be brought at "any time"),
Talisman v. Direct Energy Marketing Limited, 2015 ABQB 13.

11. Pre-Filing Remedies: Debt Claim
Keep claim simple and try to push for quick judgment—balance between:
filing a claim that can be moved quickly to judgment, versus
pleading proprietary (such as a trust) or other claims that survives the bankruptcy or a plan filed under the CCAA but will be difficult to argue on simple summary judgment application.
Quickly move to collect on judgment: whatever you collect (before bankruptcy or plan filed) is yours to keep.
If summary judgment not successful, can amend claim later to include:
Conversion/breach of trust,
Constructive trust,
Fraudulent preference

12. Pre-Filing Remedies: Debt Claim
Other options (balanced with risk that it brings the house of cards down):
Injunctive relief,
Other interim remedies,
Appointment of receiver.

13. Pre-Filing Remedies: Set Off
Restrictions
Contractual Set-off
Usually the easiest way to establish a right to set-off as it is based on the rules of contractual interpretation
Trilogy Energy LP v. SemCAMS ULC
Despite the existence of a contractual right of set-off, the Court found that the provision was not broad enough to cover agreements where SemCAMS contracted as operator or acted as trustee for the other joint owners.
Set-off is available under the CAPL
- Trilogy owes $5.3 million plus interest to SemCAMS as Operator
SemCAMS in its own corporate capacity owes Trilogy $4.1 million as of the filing date under the CCAA
The CO&O Agreements and the Gas Processing Agreements do not provide Trilogy with a right of set-off expressly or implicitly
- The Inlet Purchase Agreement states:
"At its sole option and without Notice to the Defaulting Party, the Non-Defaulting Party may net or setoff against any Net Settlement Amount owing by the Non-Defaulting Party to the Defaulting Party any amounts owing to the Non-Defaulting Party by the Defaulting Party under any other agreement between the parties".

14. Pre-Filing Remedies: Set Off
Restrictions
Legal Set-off
Requires the existence mutual cross-obligations between the same parties and in the same right.
Trilogy Energy LP v. SemCAMS ULC
There no mutual cross-claims or obligations where Trilogy owed money to SemCAMS, as operator for operator fees and SemCAMS, in its corporate capacity, owed money to Trilogy for the sale of natural gas.
- The Court found that the Trilogy indebtedness was a liquidated debt, but not a mutual cross obligation.
SemCAMS' indebtedness under the Inlet Purchase Agreement and the Trilogy indebtedness under the Trilogy CO&O Agreement and the Gas Processing Agreements are not between the same parties and not in the same right.
- SemCAMS was either a trustee for the Joint Owners under the CO&O Agreements and the Gas Processing Agreements, or it was at minimum acting as an administrator of an account set up for a special purpose.
- The Court found that the Joint Owners would consider it a misappropriation if money designated for the joint account were used for the unauthorized purpose of setting-off SemCAMS' debt in its individual capacity.

15. Pre-Filing Remedies: Set Off
Restrictions
Equitable Set-off
The test is set out in the SCC case of Holt v. Telford
Nexen Marketing v. SemCAMS ULC
"The important point for invoking equitable set-off is the close connection of the transactions."
Equitable set-off must demonstrate that the cross-claim "was so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim."
Nexen owed SemCAMS $1,253,
SemCanada and CEG owed Nexen money under crude oil purchase contracts.
-The Court found that the claims at issue did not arise from the same contract. While it found that this was not necessary, many cases cited for equitable set-off concerned claims arising from the same contract.
The relevant inquiry was whether the cross-claims sought to be set-off by Nexen were so clearly connected to SemCAMS' claims that it would be manifestly unjust to allow SemCAMS to enforce payment without taking into account the cross-claim.
Mere connection by membership in a corporate group is not a sufficient connection to establish a right of equitable set-off. Accordingly, the Court placed no weight on fact that SemCAMS, SemCanada and CEG were affiliated companies.
The fact that the contract at issue involved similar products sold in the same months amounted to at most a weak connection.
The fact that SemCAMS and SemCanada shared the same credit department at SemGroup was immaterial as the SemCAMS agreements were not part of the guarantee or referenced in the Nexen-SemCanada/CEG agreements.

16. Pre-Filing Remedies: Realizing on Security
Practical Implications (LOC, GSA or other)
Specific steps
i.e. treat the default as an assignment of the defaulting party's proceeds of production/share of production, and apply the proceeds to the amount in default.

17. Pre-Filing Remedies: Realizing on Security
Pitfalls of Operator's Lien
The Operator's lien can be registered pursuant to the provisions of the following legislation:
Personal Property Security Act – perfects the interest in the production and proceeds therefrom
Land Titles Act – perfects the interest in freehold lands
Law of Property Act – perfects the interest in Crown lands
The order of registration typically determines the priority of the creditors to the proceeds from the assets.
The current industry practice is not to register the operator's lien.
Banks, if not already in priority will 'request' a postponement

18. Pre-Filing Remedies: Realizing on Security
Pitfalls of Operator's Lien
Direct Energy Marketing Ltd. v. Kalta Energy Corp.
An operator's lien is a contractual lien which is subject to the provisions of the Personal Property Security Act.
The failure of the operator to perfect its lien by registration meant that the operator did not have priority over the secured creditor.

19. Pre-Filing Remedies: Trust Arrangements
Indicia of a trust
CAPL – not as great a protection as you might think (Brookfield)
Consider taking in kind
Indicia of a trust:
Certainty of intent: it must be clear in the agreement that the subject matter of the trust is held by the trustee exclusively for the benefit of the beneficiary
Certainty of subject matter: the subject matter of the trust must be specified and be in existence, either in whole or in part, at the date of the bankruptcy – so having the funds in a segregated account and including some checks and balances on withdrawals will help guard against the funds simply be dissipated
Certainty of object: the beneficiaries must be clearly identified as well as the manner in which the property is to be applied

20. Pre-Filing Remedies: Trust Arrangements
Section 507 of the CAPL (1990 Version) provides that the Operator holds the moneys of the joint operators in trust. The specific provision states:
"The Operator may commingle with its own funds the moneys which it receives from or for the account of the Joint-Operators pursuant to this Operating Procedure. Notwithstanding that moneys of a Joint-Operator have been commingled with the Operator's funds, the moneys of a Joint-Operator advanced or paid to the Operator, whether for the conduct of operations hereunder or as proceeds from the sale of production under this Operating Procedure, shall be deemed to be trust moneys, and shall be applied only to their intended use and shall in no way be deemed to be funds belonging to the Operator, other than in its capacity as the Joint-Operator's trustee."
CAPL 2007 allows the joint operators to terminate right to commingle. (s 507)

21. Pre-Filing Remedies: Trust Arrangements
Brookfield Bridge Lending Fund Inc. v. Karl Oil & Gas Ltd.
The Court stated that the claims of the beneficiaries (i.e. non-operators) is prima facie limited to the lowest intermediate balance in the trust account.
Subsequent funds that may be deposited into a mixed trust account are not presumed to be impressed with a trust.
Absent a clear intention of the operator to replenish the trust, further deposits will not be subject to the express trust.
Where the beneficiary creates the risk of non-trust expenditure being made from a trust account by allowing commingling, it should not be allowed to divert funds from other creditors of the insolvent company.
March 14, $40,218 in general account
March 16, $40,599 deposit
March 28, 2007 (receivership) - $417,913
Vanquish owed $320,539 to Karl or Choice
Issue of priority between the secured lender and the non-operators

22. Pre-Filing Remedies: "Share the Pain"
Under the 2007 CAPL, non-defaulting parties can assume defaulting party's share of unpaid costs for the joint operation, making the defaulting party a non-participating party for the operation.
Once this remedy is implemented, the other remedies are no longer available
Alternative is to require each joint owner to bear its proportionate share of the amount in default
*operator is deemed to assume its share and anything not picked up by the other joint owners

23. What Happens if the Counterparty Commences Insolvency Proceedings?
Difference between CCAA, receivership and bankruptcy
CCAA is generally aimed at restructuring the company so it can continue operations, however, liquidating CCAAs are becoming more common in Alberta
Receiverships are aimed at selling the assets of the company principally for the benefit of the secured creditors. The Receiver can continue to operate the assets pending a sale.
A bankruptcy are used to sell unencumbered assets and distribute the proceeds of sale to the unsecured creditors. A trustee in bankruptcy typically does not continue to operate the assets pending a sale.
Priorities – GORR/Royalties/Freehold leases/Surface Leases/trade liens

24. What Happens if the Counterparty Commences Insolvency Proceedings?
Effective date of the filing for protection – pre/post issues
Activity in production month
Subject to rights of set-off:
The insolvent company will be entitled to collect all amount owing to it from production in the pre-filing period
The counterparty will not be entitled to collect any amounts owing to it from production in the pre-filing period.
This can result in significant losses to the counterparty if the filing occurs right before a settlement date.

25. What Happens if the Counterparty Commences Insolvency Proceedings?
The stay of proceedings in an Initial Order under the Companies' Creditors Arrangement Act or a receivership order under the Bankruptcy and Insolvency Act results in:
Creditors being unable to take any enforcement proceedings with respect to "pre-filing" debts
A requirement for suppliers (who will often be creditors) to continue to supply goods and services to the company based on the terms of their agreements
There is no obligation to extend credit so payment terms can be revised to require prepayments, COD or shortened payment terms.
-Stay of proceedings does not impact the right the termination and netting provisions of EFCs or ability to draw on L/Cs

26. What Happens if the Counterparty Commences Insolvency Proceedings?
Cannot rely on any contractual provisions that permit termination of the agreement in the event of insolvency.
If a contract is terminated or a party attempts to unilaterally revise the terms the consequences could be:
Contempt proceedings brought by the debtor or court officer. There will be cost consequences for the supplier.
Damages awarded in favour of the debtor company if the termination results in the loss of an agreement or valuable asset.
Revoke rights to take in kind – call us. It is possible but not without serious negotiation.

27. What Happens if the Counterparty Commences Insolvency Proceedings?
CAPL/JOA
Remedies stayed
**Can you commence to take in kind? Is it a right or a remedy?
Take over operatorship?
Sell/surrender interest if low working interest?
Take-in-kind
Consider capacity to take the production
Consider effect on operator (i.e. long term contracts)
Notice requirements
Consider financial impacts to the insolvent company

28. What Happens if the Counterparty Commences Insolvency Proceedings?
Can you take over operatorship?
Likely stayed by the insolvency proceedings and debtors/court officers are very reluctant to give up operatorship
AER requirements for the transfer of licences will be subject to the normal rules
Obligations to comply with AER orders
Have any orders been issued?
Miscellaneous orders
Closure orders (WIPs are notified and included in the order)
Abandonment orders (WIPs are notified and included in the order)

29. What Happens if the Counterparty Commences Insolvency Proceedings?
Lifting the stay of proceedings
A creditor can bring an application to lift the stay of proceedings if, for example, post-filing payments are not being made.
This may be a useful if the debtor if a non-operator and significant expenses must be incurred by the operator in the post-filing period which the debtor cannot pay.
There is no statutory test for lifting the stay of proceedings.
The court must balance the interests of all affected parties.

30. Burnet, Duckworth & Palmer LLP – Contact Information
Carole Hunter – (Insolvency and Restructuring) (403)