Thursday, 1 December 2016

Unchain my … environmental responsibilities. The Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) explained

The insolvency profession (and the Queensland market in particular) has been abuzz this year with the issue of CORA – a shorthand reference to the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld). 

What does it mean for insolvency practitioners?  Can banks really be hit with a bill to clean up their borrowers’ environmental damage?  Will turnaround and restructuring professionals refuse to accept appointments out of fear of falling foul of the new regime?

This post explains what you need to know.

What is CORA? 
‘CORA’ refers to the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld).  This legislation took effect on 27 April 2016.

The Act itself is not particularly long – only 27 pages in total.  But, as always, the devil is in the detail.

What does it change? 
As its name suggests, CORA amends Queensland’s Environmental Protection Act 1994 (Qld) (EP Act).  CORA does so principally by inserting a new Division 2 into Chapter 7, Part 5 of the EP Act.

What was the position prior to CORA?
Prior to CORA, Queensland’s Department of Environment and Heritage Protections (DEHP) held the power under section 358 of the EP Act to issue environmental protection orders (EPOs).  This power has not changed.

An EPO requires the recipient to take steps to ensure compliance with, amongst other things, any of the following:
  • that person’s ‘general environmental duty’ – being a duty not to undertake any activity that causes, or is likely to cause, environmental harm unless the person takes all reasonable and practicable steps to prevent or minimise that harm
  • a condition of an environmental authority (being an authorisation previously granted by DEHP, or its predecessor Departments, to engage in environmentally relevant activities), or
  • a development condition contained within a development approval. 

It was (and remains) an offence not to comply with an EPO.  The maximum penalty (if wilful contravention of the EPO can be shown) is over $760,000, or 5 years imprisonment.

If a corporation fails to comply with an EPO and thereby commits an offence, each of the corporation’s ‘executive officers’ is also deemed to have committed an offence under the EP Act.  ‘Executive officers’ include any person ‘concerned with, or [who] takes part in, the corporation’s management, whatever the person’s position is called and whether or not the person is a director’.

In this sense therefore, receivers, administrators and liquidators were already subject to potential criminal sanctions under the EP Act should the company to which they are appointed (or, in the case of receivers, the company owning the assets over which they are appointed) breach an EPO.  CORA does not change this position.

How has the position changed?
CORA greatly expands DEHP’s powers to issue EPOs.

DEHP now has the ability to issue an EPO (CORA EPO):
  • where an EPO has already been issued to a company, or is about to be issued – to a ‘related person’ of that company
  • to a ‘related person’ of a ‘high risk company’ – even if no EPO has been issued to that ‘high risk company’. 

The function of a CORA EPO has not changed from the pre-CORA position – in other words, DEHP can use a CORA EPO to direct the recipient to take steps to, for example, comply with a general environmental duty or the conditions of an environmental authority.

As will be seen below however, the effect of the amendments is to create a power on the part of DEHP to issue CORA EPOs, and therefore direct steps to be taken to minimise environmental harm or risk, to persons or corporations who are not directly participating in the activities causing environmental harm or risk.

Analysis – who are ‘related persons’, and why does this matter to the insolvency profession?
Section 363AB of the EP Act introduced by CORA establishes a very wide definition of ‘related person’.

Relevantly for the insolvency profession, a CORA EPO can be issued to any person who DEHP decides has a ‘relevant connection’ to, and is for that reason a ‘related person’ of, a company that has received an EPO.

A person can have a relevant connection to an EPO recipient company:
  • ‘Relevant Connection’ Test One – if that person ‘is capable of significantly benefiting financially, or has significantly benefited financially, from the carrying out of a relevant activity by the company’, or
  • ‘Relevant Connection’ Test Two – if that person ‘is, or has been at any time during the previous 2 years, in a position to influence the company’s conduct’ in relation to the company’s compliance with the EP Act.    

The first risk for the insolvency profession arising out of CORA is that financiers and shareholders:
  • would seem to satisfy Test One
  • could therefore potentially be decided by DEHP to have a ‘relevant connection’ to a company-recipient of an EPO, and 
  • could therefore be made subject to a CORA EPO. 

Furthermore, it seems clear that a receiver, administrator or liquidator would satisfy Test Two, and could therefore be subject to a CORA EPO in relation to the company to which they are appointed – or were appointed at any point over the last 2 years!

Analysis – who are ‘high risk companies’, and why does this matter to the insolvency profession?
The CORA amendments provide that a ‘high risk company’ includes any company subject to external administration within the meaning of the Corporations Act 2001 (Cth) – so, any company in administration, liquidation or which has had a receiver appointed in respect of its assets.

Accordingly, given CORA EPOs can be issued to the related persons of high risk companies, the discretion now rests with DEHP to issue a CORA EPO to any administrator/liquidator/receiver, or even potentially any financier or shareholder for, an externally administered corporation – regardless of whether that corporation itself has received an EPO.

The restraints on DEHP’s new powers to issue CORA EPOs
The potential for DEHP to issue CORA EPOs is very wide.  There are real risks for insolvency professionals and banks to be subject to a CORA EPO, and the potential obligations to spend time and money taking steps to minimise environmental harm.

However, it is helpful to bear in mind that firstly, when deciding whether to issue a CORA EPO, DEHP may consider whether the proposed recipient of the CORA EPO ‘took all reasonable steps, having regard to the extent to which the person was in a position to influence the company’s conduct, to ensure the company complied with its obligations’ under the EP Act.

It is hoped that this discretionary factor will lead to CORA EPOs being directed at persons genuinely culpable for environmental harm and risk, and will ensure that financiers, shareholders or external administrators that have acted reasonably and prudently are not subject to CORA EPOs.

Secondly, DEHP must have regard to any statutory guidelines published by the Chief Executive of DEHP in relation to the issuing of CORA EPOs.  These guidelines presently remain in draft form, however the current draft states that DEHP will consider its Enforcement Guidelines when deciding whether to issue a CORA EPO to a particular person.  Those Enforcement Guidelines make it clear that culpability is a key consideration of DEHP when deciding what enforcement action to take.  Again, it is hoped that consideration of culpability will steer DEHP away from issuing CORA EPOs to external administrators, financiers or shareholders who have acted reasonably and prudently.

What’s next
CORA remains in its infancy.  Its development will in particular be shaped by the CORA Guidelines, which are expected to be finalised shortly.

McCullough Robertson will track developments in this area of law and remains able to assist insolvency professionals, financiers, shareholders and other participants in the industry with issues arising out of CORA.

Scott Butler
Daniel MacKenzie


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