Not Easy Being Green: Insolvency Practitioners Face Personal Liability for Environmental Obligations
Liquidators, administrators and receivers in Queensland are on notice that they may face serious personal consequences if they fail to cause companies to which they are appointed to comply with Environmental Protection Orders (EPOs).
Re Linc Energy Limited (In Liquidation)  QSC 53 (13 April 2017) has determined that liquidators may not be able to escape obligations under an EPO by issuing a disclaimer notice.
The case establishes clear authority that liquidators – and therefore other types of insolvency appointees – assume the duties and liabilities of an executive officer under the Environmental Protection Act 1994 (EPA). They are therefore at risk of prosecution if they fail to cause companies to comply with environmental obligations under the EPA, including complying with certain EPOs issued to a company by the Department of Environment and Heritage Protection (EHP).
The case however did not resolve all issues which might arise in respect of the enforceability of an EPO which is given in an insolvency setting. Appointees who have received an EPO, or are aware an EPO may be issued, should seek legal advice as to the extent to which other grounds of challenge to the EPO may exist.
Understanding the risks posed by an EPO for insolvency appointees and creditors
The chief executive of the EHP has the power to issue an EPO directing a person to take, or refrain from taking, specified actions, with the aim of securing compliance by that person with various obligations under the EPA.
It is a serious offence under the EPA to contravene an EPO.
Executive officers must also ensure their company complies with applicable EPA obligations. Where the company commits an offence under the EPA, each "executive officer" of the company is also deemed to have committed an offence, although the officer may be able to establish a defence where the officer was not in a position to influence the conduct of the company, or, if she or he was, all reasonable steps were taken to ensure that the company complied with its obligations. The case removes any doubt that insolvency appointees meet the definition of "executive officer", for the purposes of the EPA.
How Linc Energy came to this point
Linc Energy Limited (Linc Energy) operated a controversial underground coal gasification project near Chinchilla, Queensland. It carried out its business under the authorisation of two environmental authorities issued under the EPA, and also owned the land on which the project was operated. Linc Energy is currently the subject of a prosecution in which EHP alleges Linc Energy's activities contaminated groundwater at the site.
The company entered administration on 15 April 2016, and subsequently liquidation on 23 May 2016.
On 13 May 2016, EHP issued Linc Energy with an EPO (2016 EPO) requiring it to conduct groundwater monitoring on the site, and to keep certain monitoring and land rehabilitation equipment.
The following June, the liquidators vacated the site, and issued a disclaimer notice under section 568 of the Corporations Act 2001 (Cth) purporting to disclaim the land title of the site itself, the mining and petroleum authorities under which it carried out its operations, the two environmental authorities which imposed conditions on performance of the activities, and various equipment used in the course of the business. They then sought directions that they were justified in not causing Linc Energy to comply with the 2016 EPO.
The Queensland Supreme Court finds EPO obligations apply notwithstanding liquidators’ disclaimer
The Court decided that:
- complex provisions in the Corporations Act regarding the priority between inconsistent Commonwealth and State legislation operated to suspend the liquidators’ power to disclaim, because the disclaimer power was inconsistent with the specific provisions used to issue the 2016 EPO. This was the case, despite the fact it could disrupt the usual creditor priorities by potentially forcing the company to remediate, after the liquidation commences, any environmental contamination or harm it had caused;
- liquidators were “executive officers” under the EPA. By extension, so would be administrators and receivers.
Insolvency appointees therefore may not be able to escape personal obligations to cause the company to comply with some EPOs merely by issuing a disclaimer notice.
What the Court did not address may be just as important as what it did
The case did not address all potential issues for an EPO where it is issued in respect of a company in liquidation.
- A live issue was whether an environmental authority was “property” for Corporations Act purposes and therefore capable of being disclaimed. The judge declined to decide that question. He considered he did not need to do so, as there was other property in the disclaimer notice to which the EPA obligations attached.
- The judge cast doubt on whether an EPO could be issued solely on the basis of the general environmental duty in the EPA, where the relevant activities have ceased prior to the issue of the EPO. This duty requires a person not to carry out any activity that causes, or is likely to cause, environmental harm unless all reasonable and practicable measures to prevent or minimise the harm are taken.
- The EPO in question was not issued under the new Chain of Responsibility (CoRA) amendments to the EPA, which widened the scope of persons to whom EHP may give an EPO. The sections in the Corporations Act which operated in the Linc Energy case to preserve the power to issue EPOs apply to the EPA in force prior to 15 July 2011. They would seemingly therefore not apply to the CoRA provisions which were enacted in 2016.
There therefore remains a real question as to whether the CoRA powers could extend to compel a liquidator or other insolvency appointee, as an executive officer of a company, to comply with an EPO directed to her or him personally.
Practically it is now evident that EHP has a growing awareness of issues in a formal insolvency, but is nevertheless willing to act to compel appointees to address environmental issues to the detriment of creditors.
There is a wide variety of legislation in Queensland and other State jurisdictions under which executive officers are required to ensure a company complies with its legislative obligations. The decision may therefore have wider application in the context of other similar protective State-based statutory schemes.
On 10 May 2017 the liquidators' lodged a Notice of Appeal to the Queensland Court of Appeal. The State respondent parties have now also lodged notices of contention. These issues will therefore receive a further round of judicial comment in the near future. Until at least then, the risk to insolvency practitioners from a vigilant EHP remains.