Energy companies cannot escape their responsibility to clean up old oil wells in the event of bankruptcy, the Supreme Court ruled on Thursday in a decision that will have large implications for resource extraction industries.

The court ruled 5-2 to overturn two lower court rulings that sided with the receiver of Alberta junior oil and gas producer, Redwater Energy Limited, which went bankrupt in 2015.

Redwater owned 84 oil wells, seven facilities and 36 pipelines at the time of its bankruptcy and owing $5.1 million to ATB Financial. The company’s receiver, Grant Thornton – which subsequently became its bankruptcy trustee – wanted to sell its producing oil wells to pay off its debts to ATB, but the Alberta Energy Regulator (AER) argued that the receiver was obligated to fulfill Redwater’s obligation to make its non-producing wells environmentally safe before creditors could see any money.

In Alberta, disclaimed wells become the responsibility of the AER, which has rules for how they should be taken care of, and the Orphan Well Association, an industry-funded group tasked with cleaning up these wells. The AER and the association took the case to court, with Grant Thornton filing a cross-application to question the constitutionality of the regulator’s position. Two provincial courts ruled in favour of Redwater’s receiver, which argued that the AER’s use of its statutory powers conflicted with the Bankruptcy and Insolvency Act by imposing the obligations of an oil well licensee onto a trustee and circumvented the established procedure for distributing assets laid out in the bankruptcy act.

The Supreme Court said that in cases of "genuine conflict" between provincial law and the bankruptcy act, the latter would prevail. But in this case, it saw no conflict.

“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy,” Chief Justice Richard Wagner wrote on behalf of the majority. “Alberta’s regulatory regime can coexist and apply alongside the [bankruptcy act].”

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Wagner noted that a section of the Act specifically protects trustees from liability in the event that provincial law requires the environmental remediation of any of the bankrupt’s assets, which undercut Grant Thornton’s assertion that it had assumed the responsibility of a licensee.

The decision also disagreed with the trustee’s argument that the asset distribution procedure had been violated. Because the regulator was not set to benefit financially from the cleanup of abandoned wells, it could not be seen as another one of Redwater’s creditors. “A regulator exercising a power to enforce a public duty is not a creditor of the individual or corporation subject to that duty,” Wagner wrote.

In the dissenting opinion, Justices Michael Moldaver and Suzanne Côté wrote that Grant Thornton and ATB had demonstrated a “genuine inconsistency” between provincial and federal law, because Alberta’s laws governing oil and gas producers prevent bankruptcy trustees from disclaiming assets while the bankruptcy act would grant them that power.

The Canadian Association of Petroleum Producers, which intervened in the case, said in a statement it was "encouraged" by the court decision.

"CAPP has argued on behalf of industry that when a company declares bankruptcy, the value of any assets should go to abandonment and reclamation costs first. The Orphan Well Association...should be a last resort and only used after all other sources of funding are exhausted," the association said. "CAPP believes that this judgment restores the balance between environmental obligations and creditor interests to that which existed for many years before this case."

Several provincial governments were also registered as interveners in the case.

UPDATED at 3:17 p.m. with comment from the Canadian Association of Petroleum Producers