Thursday, 4 May 2017

Creditors become a weaker Linc in the chain: You can’t disclaim the environment in insolvency

Regional towns across Queensland are often recognised, remembered and cherished for their unique attributes and historic events.  Birdsville has their famous races, Barcaldine has the tree of knowledge, Longreach has the Stockman’s Hall of Fame and the Qantas Museum, and now the town of Chinchilla, in addition to being the melon capital of Australia, has a new claim to fame as the town where the environment conquered creditors.

The recent Linc Energy(Linc) decision did not frame the arguments in such terms, but nonetheless considered whether the liquidators of Linc were justified in causing the company not to comply with an Environmental Protection Order (EPO). Ultimately, Jackson J of the Queensland Supreme Court held that the liquidators had to use available money to help the environment at the expense of other claims.

Of course at the outset it’s important to note that Jackson J confined his analysis and the direction he gave to the specific set of facts before him. Nonetheless, there are lessons to be learnt from this fracas.

How did we end up at a face-off?
It’s undoubtedly well known that the Linc underground coal gasification project at Chinchilla did not go to plan. Some have described the venture into so-called ’clean energy‘ as “the biggest pollution event probably in Queensland’s history.”2

The underground coal gasification plant operated by Linc is alleged to have polluted soil and groundwater during its operation in a significant way.  In April 2016, Linc was placed into administration.  Shortly thereafter the Department of Environment and Heritage Protection of the Queensland Government (DEHP) issued an EPO to Linc, which imposed obligations on Linc regarding environmental monitoring and reporting.  When the company was placed into liquidation in May 2016, the issues regarding those EPOs and in particular who was liable for the obligations under them, came to a head.  

Asking nicely: the liquidators seek clarity 
After Linc went into liquidation, the liquidators gave notice under the Corporations Act 2001 (Cth) (Corporations Act) disclaiming land at Chinchilla, the Environmental Authorities (EAs) issued under the Environment Protection Act 1994 (Qld) (EP Act) and the Mineral and Petroleum Licences.  

The liquidators sought directions as to whether they would be justified in allowing Linc to not comply with the EPO issued.  If the liquidators were obliged to cause Linc to comply with the EPO, it would require them to use all available money to do so (money, which would otherwise go to creditors such as employees).  Linc’s liquidators argued that: 
  • the disclaimer of the land, licences and authorities had the effect of discharging Linc from future compliance with the EPO
  • the requirement to make Linc comply under the EP Act was inconsistent with the termination of that liability by the disclaimer
  • to the extent of the inconsistency, the EP Act was invalid by reason of section 109 of the Constitution of Australia, and
  • they were not ‘executive officers’ of Linc under Queensland’s environmental laws.

The DEHP contrarily argued that the liquidators were executive officers of Linc and that in this capacity they were obliged to cause Linc to comply with the EPO.

It’s the law. It’s the vibe. It’s the Constitution. 
The Court considered the inconsistency of the EP Act and the Corporations Act.  Ordinarily, there is a general rule that where there is inconsistency between State and Federal legislation, the Federal legislation will prevail; but this was no ordinary case. 

The Queensland Attorney-General weighed in on the matter on behalf of the DEHP and successfully utilised section 5G of the Corporations Act, which doesn’t typically see the light of day. This rarely used provision gives State laws a leg up over federal laws where the State law was in operation when the States referred their corporations’ powers to the Commonwealth in 2001.  The result was a finding by the Court that the EPOs established by Queensland law were inconsistent, but ultimately prevailed, over the disclaimer provisions of Corporations Act.

Liquidators left lonely at the top
Linc’s liquidators contended they were not executive officers under the EP Act, meaning they didn’t have to cause Linc to observe its environmental obligations. Jackson J didn’t see it that way and found no difficulty in resolving that the liquidators were executive officers of Linc for the purposes of the EP Act. 

In reaching his decision, Jackson J looked to the general purpose of the EP Act, which was to ”protect Queensland’s environment while allowing for development that improves the total quality of life, both now and in the future, in a way that maintains the ecological processes on which life depends.“ He went on to say that if the liquidators’ argument were accepted, there would be no-one with a personal statutory obligation to ensure that the obligations of Linc under the EP Act were met during the liquidation. 

What was not decided
There was no dispute that the liquidators were able to disclaim the land and the Mineral and Petroleum Licences.  The result of disclaiming such land and licences is that Linc ceased to have any further rights, liabilities or obligations in relation to the land or under the licences.  

As for the EAs, because Jackson J had found that in these circumstances the Queensland EP Act prevailed over the Federal Corporations Act, he felt it was unnecessary to decide the question of whether the EAs were property able to be disclaimed under the Corporations Act.  Unfortunately for our readers, this means that the question as to whether you can disclaim an EA is still up in the air. 
The DEHP has power to issue an EPO for many reasons, including securing compliance with the general environmental duty that a person must not carry out any activity that causes, or is likely to cause, environmental harm, unless the person takes all reasonable and practicable measures to prevent or minimise the harm.  His Honour conceded that it wasn’t completely clear that an EPO could be made to secure compliance with a general environmental duty relating to activities that had ceased. 

But what does it all mean?
The broad brush view is that those accepting insolvency appointments in Queensland, whether as liquidator, administrator or a receiver, need to very carefully consider any environmental concerns facing the company they’re involved with.  The Linc decision is authority that liquidators are executive officers under the EP Act.  This means liquidators have duties to cause the company to comply with environmental responsibilities under the EP Act.  The same would apply to administrators or receivers.  Failure to do so could lead to prosecution, because where a company commits an offence under the EP Act, each executive officer of the company is deemed to have committed an offence.   

Given this decision (unless overturned), it now appears Jackson J has significantly altered the landscape of insolvency law in Queensland.  This ‘environment-comes-first’ notion, whilst arguably admirable depending on your view on the environment versus economic development debate, departs from well-established standards of insolvency law.  It means that money that would otherwise be paid to creditors, including employees, will have to be spent on environmental issues.  For example, it would push the Federal Government down the queue in recovery of payment of unpaid entitlements which it has paid under the Fair Entitlement Guarantee scheme.  This is of course relevant to other insolvent mining companies like Queensland Nickel. 

The decision may result in insolvency practitioners refusing to accept insolvency appointments over any insolvent company that has environmental obligations.  This places directors in an invidious position.  If they continue to trade whilst the company is insolvent, they risk being liable for insolvent trading.  If they decide to do the right thing and place the company into administration or liquidation, they may be unable to find anyone willing to take the appointment.  The end result may be directors simply resigning from their positions leaving companies with environmental responsibilities without any officers at all.

Of course, it is noteworthy that this decision did not consider the amendments to the EP Act under the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (Chain of Responsibility amendments).  These amendments came into force in 2016 and widened the definition of a ‘related person’ and hence extended the persons to whom the DEHP can issue an EPO.

Insolvency practitioners had been concerned about the impact of the Chain of Responsibility amendments on them as they would fall within the definition of ‘related persons’.  The recently issued Issuing ‘chain of responsibility’ environmental protection orders guidelines (Guidelines) clarifies how the DEHP will apply the Chain of Responsibility amendments when issuing EPOs to ‘related persons’.  Importantly, if it is determined that the related person was not culpable for a matter, or was culpable but took all reasonable steps in the circumstances, DEHP will not issue the person with an EPO.  The Guidelines provide some level of comfort to ‘related persons’ about when they may or may not be issued with an EPO.  But these are cold comfort to administrators, receivers and liquidators given they are executive officers and have obligations as such, even if an EPO is not issued directly to them as a related person. 

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