Missing Linc - Queensland Court of Appeal rules environmental protection order ineffective after liquidators' disclaimer
The Queensland Court of Appeal has unanimously allowed an appeal by the liquidators of Linc Energy Limited, holding it was possible to use a disclaimer notice to avoid the consequences of an environmental protection order issued under the Environmental Protection Act 1994 (Qld).
The outcome is to be welcomed by creditors and insolvency professionals as it removes uncertainty about how the priority regime for liquidations interacts with Queensland's EPA. For the State however it underscores the difficulties of seeking to ensure compliance with environmental obligations where a company is subject to a formal insolvency appointment.
The key points for insolvency practitioners to take from the decision are:
- State environmental legislation will not override directly inconsistent provisions about the winding up of companies under the Corporations Act 2001 (Cth).
- A liquidator's statutory disclaimer notice issued under the Corporations Act can usually be used to stop further liabilities arising as a consequence of State legislation, where those liabilities are "in relation to" property.
- The case provides an example of the wide interpretation of the phrase "in relation to". Liabilities do not have to arise as a result of rights directly in the disclaimed property for those liabilities to be terminated by section 568D of the Corporations Act. The relevant connection is established where the continued enjoyment of the property depends on meeting ongoing obligations, being the relevant liabilities.
For those interested, more detailed discussion follows below.
The decision considered in the appeal
Last year, Justice Jackson determined that a disclaimer notice, purported to be issued under section 568 of the Corporations Act by the liquidators of Linc Energy Limited, was invalid. That notice had sought to disclaim real property at the site of its former underground coal gasification operations, a Mineral Development Licence and an environmental authority for its activities at the site, and infrastructure and equipment also at the site.
The trial judge found that the liquidators were unable to issue a disclaimer notice in respect of the infrastructure and equipment because of an EPO issued by the Queensland Department of Environment and Heritage Protection. The EPO required Linc Energy to retain that equipment and to undertake regular monitoring at the site. It had been issued to enforce the "general environmental duty" contained in section 319 of the EPA. That section states 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.
Important to that reasoning was an interpretation of section 5G of the Corporations Act. On his interpretation of section 5G, the trial judge considered that as a result of a direct inconsistency and applying section 5G, the EPO (issued under State law in force prior to 2001) overrode the disclaimer notice (issued under the Commonwealth Corporations Act).
The Linc Energy EPO was invalid
The Court of Appeal disagreed. In summary, it determined that:
- the obligations created by the EPO to monitor the site and to maintain equipment were liabilities "in respect of" the disclaimed property. There was no need for the rights to be "in" the property, or for the liabilities to operate like an encumbrance on it. There was a sufficient connection for the disclaimer to take effect and remove prospective liabilities created by the EPO;
- the EPO obligations terminated under section 568D of the Corporations Act, which operated to end all liabilities, not selective liabilities;
- the interpretation at first instance of section 5G of the Corporations Act was wrong. The insolvency provisions in the Corporations Act would override inconsistent State legislation.
The Court therefore determined that the liquidators could issue their disclaimer notice, avoiding liability for Linc Energy from the date it took effect, and avoiding the consequential offence that would otherwise have been committed by the liquidators if they failed to ensure Linc Energy complied with the EPO.1
But what about other EPOs issued to liquidators?
The conclusions of the Court of Appeal, however, did not directly deal comprehensively with all ways in which an EPO might be issued to a company in liquidation. So, the Linc Energy decision might not be the end of the road.
- First, the leading judgment (from Justice McMurdo) accepted that it might be possible for an EPO to be crafted such that it could have operation without imposing liabilities in respect of property2. The effect of an EPO of that kind could not be avoided by issuing a disclaimer notice. Fortunately for liquidators, it is difficult to see how such an EPO could require substantial expenditure in remediating a site without it creating liabilities "in respect of" property. It therefore appears likely that a disclaimer notice would stop liquidators from being compelled to undertake expensive remediation or other works.
- Second, the Court did not consider whether or not the environmental authority issued to Linc Energy, and also sought to be disclaimed by the liquidators, was "property" that could properly be the subject of a disclaimer notice3. Because it was accepted that the MDL and the underlying real property were both "property" to which liabilities created by the EPO were related, it was unnecessary to consider if an environmental authority could also be disclaimed. The effectiveness of an EPO directed at compliance with an environmental authority not directly associated with property of the company (which might be disclaimed) was therefore not decided.
- Third, the Court raised the intriguing possibility that any EPO requiring a liquidator to do something which involved substantial expenditure might be inconsistent with the priority regime in a winding up4. EHP argued that any costs of a liquidator could be accommodated within the statutory priorities of a liquidation as expenses properly incurred by a liquidator: section 556(1)(dd) Corporations Act. However, the Court considered there was a real potential for the priorities to be disrupted if EPO related costs were paid first, but there were insufficient funds to pay expenses of that kind and other claims attracting a higher priority. The Court did not directly decide the issue, but made the observation as a step in its reasoning as to why section 5G should not be interpreted as the EHP argued.
- Fourth, Linc Energy was issued with an EPO under provisions that have long been in the EPA. It did not seek to utilise the Chain of Responsibility amendments introduced into the EPA in 20165. However the likelihood of a direct inconsistency between an EPO issued to a liquidator under CoRA and a disclaimer notice raises further question marks over the effectiveness of such an EPO.
So, the Linc Energy decision might not be the end of the road, but it certainly has the status of EPOs issued to companies in distress back on track, so far as insolvency practitioners should be concerned.