Environmental and insolvency law – parallel appeals in Australia and Canada

Australia’s odd constitutional arrangements have allowed a State environmental protection law to prevail over Commonwealth insolvency disclaimer law, in Linc Energy Ltd (in Liq) [2017] QSC 53. The reverse scenario is being played out in Canada, where federal insolvency disclaimer law has been held to prevail over provincial – Alberta – environmental law: Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124 (“Redwater”).

In both jurisdictions, appeals are being pursued, in Australia, by the liquidator, to the Queensland Court of Appeal; in Canada, by way of the energy regulator, only last week, seeking leave to appeal to the Supreme Court.

Linc Energy

The finding in Linc Energy was that a liquidator’s right to disclaim unwanted and onerous property did not alter the company’s environmental obligations in respect of that property under Queensland law. Funds in the company were directed to be used to attend to the company’s clean up. In effect, the Queensland government gained a priority right over other creditors.

This outcome arose because of a concession in the Corporations Act when it was introduced in 2001 following the referral by the states of their powers to the Commonwealth under s 51(xxxvii) of the Constitution.  Since federation there have been a number of references of power, more so in recent years because of the post-Wakim referrals in relation to corporations law and more recently in relation to the PPSA.  Given what are the fraught power plays of the states and the Commonwealth in constitutional referrals of power, the sort of outcome in Linc Energy is not unanticipated but unsatisfactory nonetheless.

The problem in Linc Energy is based on s 5G of the Corporations Act. It allows the corporations legislation to make way for a provision of a state or territory law (a “state provision”), where the state provision meets any of the conditions in s 5G(3).  In Linc Energy, the Supreme Court of Queensland held that Queensland environmental law was a state provision that did meet those particular requirements.

The purpose of s 5G was to limit or qualify the operation of the Corporations legislation so that it does not purport to have an operation that would be directly inconsistent with a relevant state or territory law. This was to

“leave each of the states with the flexibility to deal legislatively with certain state-specific issues in light of the operation of s 109 of the Constitution … seen as necessary to accommodate some existing and future variations in the operation of the new federal legislation in particular states, many of which are historically based and all of which would have been accommodated by the previous Corporations Law scheme”.[1]  

The fact that the use of s 5G does not accord with environmental or insolvency policy is not legally relevant.

The Commonwealth did not intervene in the trial, except by written submissions, which may indicate its (reluctant) acceptance of the outcome.

The resolution lies in amending legislation closing the gap that this case has revealed. The concern would be that states could their focus on their laws that may come within the gap in s 5G, and use them to prevail in favour of parochial state interests, or at least to seek to disturb national policy governed by Commonwealth law.

Redwater

The appeal in Canada concerns an almost parallel situation, including whether federal law should prevail over provincial. There, the Alberta Court of Appeal held in favour of the liquidator’s right to disclaim property, being abandoned and contaminated oil wells, against a claim by the Alberta Energy Authority for costs of remediation to be drawn from the remaining moneys of the insolvent company, Redwater.  An application for leave to appeal has been filed with the Supreme Court of Canada, in late June 2017, with a request for expedition.  Given the 2:1 split in the Alberta appeal court, leave may be granted.[2]

Comments

Power plays in our federation are an unhappy consequence of what may be said to be a dysfunctional governance arrangement for the 21st century.

The best practice policy is that the remediation costs of environmental harm should be factored into taxes, registration and licensing fees; with compliance regulated, whether that is pursued by the states or the Commonwealth.

NSW

The NSW Regulator now continually reports on a series of mine suspensions or closures due to miners failing to pay outstanding environmental rehabilitation security deposits. These deposits cover the full estimated cost of rehabilitation and are required for all mining leases in NSW. “These security bonds ensure the NSW Government is not left with the rehabilitation bill should a mining authorisation holder default on their obligations”. They are supported by requirements for progressive rehabilitation during the life of a mine. The recent environmental audit in NSW was a useful regulatory and community message that contingent liabilities for remediation should be monitored and regulated.  Other states have similar arrangements.

Chain of responsibility

An alternative or supporting policy is for compliance with environmental requirements to be enforced by way of a spread of responsibility, as is the case in Queensland, with its chain of responsibility laws – to banks, shareholders, and others benefiting from the company’s enterprise. On a related issue, with environmental attention being raised as an increasingly significant financial risk for business, that spread may be a useful reminder of those responsibilities.[3]

Protection of the liquidator

One aspect of Canada’s law that I have recommended we consider in Australia is a statutory provision saying that a liquidator has no responsibility or liability for environmental harm caused before the insolvency appointment, hardly necessary to say but perhaps useful anyway.[4]

The fallback of environmental regulators reactively and belatedly trying to recoup these costs out of the company when it fails is hardly satisfactory. In fact, the lack of a company’s expenditure on environmental requirements may only be serving to unfairly allow the company to compete with compliant enterprises.  The incurring of debts through failure to pay environmental levies may also constitute insolvent trading.

We await the outcome of both appeals, but, preferably some law reform.

 

[1] “Measures to address Wakim and Hughes: How the Reference of Powers will Work” (2001) 12 Public Law Review, Govey and Manson.

[2] As in Australia, only a minority of applications for leave are successful.

[3] APRA has highlighted company directors’ increasing legal obligations to consider the financial risks of climate change.

[4] “The Last Man Standing” [2017] 18(2) INSLB 38, Murray M

 

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