Additional clarity for lenders, alternative asset managers and insolvency professionals
In April 2016, the Queensland Government introduced landmark environmental chain of responsibility laws, which seek to enable the state's environmental regulator to take enforcement action for environmental damage or breaches beyond the company or person with whom the liability originated. The CORA regime, as it has become known, is an anti-avoidance type framework which creates a new category of related persons to the entity that caused the damage or committed the breach who may now be made responsible for the associated liability.
The Department of Environment and Heritage Protection has now issued its binding statutory Guideline covering the detailed circumstances in which the Department may issue environmental protection orders or EPOs under the CORA regime to related persons. The Guideline clarifies the Department's intended approach to its decision as to whether a person has a relevant connection with the subject company, and may therefore be an appropriate EPO recipient (amongst other related persons).
This guidance is particularly significant for bank lenders, alternative asset managers and insolvency professionals.
What is a relevant connection?
Under the legislation, there are two ways in which a person may have a relevant connection with a company that caused environmental damage or committed an environmental breach:
- the person has received, or may receive, a significant financial benefit from the carrying out of a relevant activity by the company - this may include profit, income, revenue or dividends received, obtained, or enjoyed by the person, and ascertaining whether a significant financial benefit exists will depend on the particular circumstances; or
- the person is, or has been at any time during the previous two years, in a position to influence the company’s conduct in relation to the way in which, or extent to which, the company complies with its obligations under the Environmental Protection Act 1994 (Qld).
So, it is necessary to consider whether a person has obtained a significant financial benefit or is otherwise in a position to influence the company's conduct in determining whether a relevant connection exists. Given the broad nature of this test, and the level of discretion the regulator may exercise in issuing EPOs under this regime, the State government agreed during the consultation phase for the legislation to create a binding statutory guideline to assist industry in understanding their potential exposure under the new regime.
Who might have a relevant connection?
The Guideline is relevant to bank lenders, alternative asset managers and insolvency professional (among others). We consider some common scenarios below, noting the examples listed in the Guideline are explanatory only and would not necessarily bind the regulator not to issue an EPO where it considered it to be warranted in the circumstances and where the legislative test was met.
For more traditional bank lenders:
- the extension of secured debt facilities at arm’s length commercial terms and the receipt of interest and repayments would not constitute a significant financial benefit;
- the taking and enforcement of security for a secured debt facility would not place a secured financer in a position to influence the actions of the company;
- debt restructuring discussions or negotiations would not give rise to a relevant connection; but
- a debt-for-equity swap, whereby secured bank debt is wholly or partially converted to equity in a customer may establish a relevant connection to the original liability holder.
For investors (including hedge funds and alternative investment managers):
- acquiring an equity stake in a customer, including as part of a wider investment that also involves provision of secured debt facilities, may result in a relevant connection if the investor receives a significant financial benefit from the investment (e.g. by receiving dividends or capital gains).
For insolvency professionals:
- in our view, the Guideline must logically extend to insolvency professionals undertaking advisory assignments; for example, where a practitioner has provided debt-restructuring advice to a company and the advice is implemented, then no relevant connection would exist as the advice relates to the company's financial affairs and not its environmental obligations;
- the Guideline makes clear that, while an insolvency professional working in the role of a formal appointee (e.g. receiver, administrator, liquidator) may be liable for environmental harm resulting from acts or omissions during their appointment, that liability would not extend to pre-appointment harm.
In addition to the guidance above regarding particular scenarios, the Guideline makes clear that the Department may choose not to issue an EPO to a potential relevant connection where there is no evidence of culpability on the part of the relevant connection (although we note this consideration is not in the legislation itself, and would not necessarily be binding on the Department where it chose to issue a CORA EPO despite a lack of culpability on the recipient's part). The Guideline also provides more information on the reasonable steps defence in the legislation, which may apply where a related person can demonstrate it took all reasonable steps to ensure the company complied with its environmental obligations and made adequate provision for required land rehabilitation. In considering if an entity took reasonable steps, the Department may have regard to factors such as that entity's role, powers and responsibilities vis-à-vis the company, that person's state of knowledge, and the foreseeability and probability of the occurrence of the incident in question.
The Guideline gives additional colour to the kinds of entities which may have a relevant connection to a company (and the types of typical situations in which a relevant connection may arise), but they are not a code. Anyone considering an investment in or engagement with a counterparty who may hold Queensland assets with environmental/contamination risks should always start with careful diligence on those risks.