On October 21, 2016, the Saskatchewan Court of Queen’s Bench decision in KNC Holdings Ltd v. FTI Consulting et al. (“KNC Holdings) confirmed, if you provide services or materials in relation to the extraction of minerals in Saskatchewan, you are entitled to a lien under The Builders’ Lien Act (Saskatchewan) (the “BLA”) for the value of such services or materials which trumps secured creditors. The decision is one more in a line of cases which have left secured creditors, accustomed to certainty and primacy, nonplussed. 

Background:

Coast Resources Ltd., 101033165 Saskatchewan Ltd., Viewfield Oil & Gas Ltd. and Coast Services Inc. (collectively the “Debtors”) were forced into receivership on application by a secured creditor, National Bank of Canada (the “Secured Creditor”) on March 6, 2014. The Secured Creditor had registered its security interest in the Debtors’ personal and real property interests, including the minerals and their proceeds, the mineral interests and the assets used in the extraction of the minerals (collectively, the “Oil and Gas Assets”), and was confident it had a first priority charge over such property.

FTI Consulting Canada Inc. (the “Receiver”) was appointed as receiver. Shortly after its appointment, the Receiver discovered that numerous companies which had previously provided services and materials to the Debtors for the purposes of mineral extraction (collectively the “Lienholders”) had registered liens against the Oil and Gas Assets”). The Lienholders subsequently brought an application to the Court of Queen’s Bench claiming priority over the Secured Creditor to the Debtors’ Oil and Gas Assets. 

The Lienholders submitted that they had priority over the Oil and Gas Assets pursuant to section 22 of the BLA, relying on a line of cases wherein the Saskatchewan courts have accorded priority to lien claims relating to mineral extraction over secured lenders, beginning with the Court of Appeal decision in Canada Trust Co v. Cenex Ltd. (1982), 131 D.L.R. (3d) 479 (“Cenex”) and most recently affirmed in Justice Rothery’s decision in Boomer Transport Ltd. v. Prevail Energy Canada Ltd. 2014 SKQB 368 (“Boomer”).

The Secured Creditor, on the other hand, submitted that the Cenex interpretation of section 22 of the BLA was “bad law”. In support of that argument, the Secured Creditor proffered a report prepared for the Minister of Justice in 1984 which was critical of the Cenex decision and appeared to recommend the BLA be amended to overrule Cenex. In further support of that argument, the Secured Creditor pointed to neighbouring jurisdictions such as Alberta, whose courts have recently rejected Cenex and have declined to elevate the priority of mineral extraction liens over secured lenders.

In his judgment, Justice Labach ultimately concluded that he was bound by precedent to affirm the Lienholders’ priority claim and uphold Cenex. However, in doing so, His Lordship observed that the Secured Creditor’s contention that the Saskatchewan courts have misinterpreted the legislative intent surrounding section 22 of the BLA is “an interesting argument”, adding that, “[i]f counsel think that Cenex is wrongly decided then their argument is more properly made to the Saskatchewan Court of Appeal”.

It appears as though the Secured Creditor has taken Justice Labach’s advice to heart, because it has done just that.  The appeal was heard before a full panel of the Court of Appeal on April 11, 2017.

Unless and until the Cenex decision is overturned, secured creditors must take this priority flip and the attendant uncertainties into account when lending to entities in Saskatchewan involved in mineral extraction.

Mike Russell regularly represents lien claimants in Saskatchewan and has extensive experience representing court officers, secured and unsecured creditors and lien claimants in insolvency proceedings and otherwise, including in relation to mineral extraction.  Mike Russell successfully argued on behalf of two of the lien claimants in the Boomer case.

Prepared with the assistance of Paul Fedoroff, Student-At-Law

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