Linc Energy’s insolvency disclaimer prevails over environmental demands

The success of the claims of Linc Energy’s liquidators against Queensland’s Environmental Protection Authority (EPA) won’t resolve the continuing legal and policy tension between insolvency law and environmental law.

But the Queensland Court of Appeal’s decision is a step in a certain direction away from a general view that insolvency principles of equal sharing should cede to certain priority claims in the public interest, and not only in relation to environmental claims: Longley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32 – Linc Energy.

The dispute concerned the EPA’s environmental protection order (EPO) that Linc attend to its environmental obligations in relation to a pilot underground coal gasification project on land near Chinchilla in Queensland.  The liquidators disclaimed the land, and its potentially financially burdensome environmental requirements.

The EPA claimed that its EPO prevailed over the right of disclaimer because of the operation of s 5G of the Corporations Act (CA), which preserves the paramountcy of certain state laws inconsistent with Commonwealth law, despite section 109 of the Constitution; that is, that s 5G “rolls back the operation of the CA in order to avoid that inconsistency”.

The Court of Appeal held that the timing was such that there was no cause to consider the operation of s 5G, because the EPA accepted that the property had been disclaimed and thereby accepted that the disclaimer terminated the liabilities under the EPO.

Section 5G 

“should not be construed and applied to produce an operation of the CA which the Commonwealth Parliament could not have intended.  It could not have been intended that by a disclaimer of property, a liquidator could cause a company to lose all of its rights and interests in or in respect of the property, but remain burdened by a liability in respect of it.  That would be an absurd operation of a law which has a long recognised purpose of enabling the company to rid itself of burdensome obligations”.

The Court of Appeal did go on to analyse the potential operation of s 5G, were it to have applied, and its limitations.

There is some potential fallout

  • The EPA could seek special leave to appeal to the High Court of Australia. Given the significance both of s 5G, and of the need to maintain environmental standards in mining operations, there may be other states, and territories, seeking leave to intervene to support leave being given.
  • It might prompt the EPA to seek a wider range of respondents under its ‘chain of responsibility’ provisions in Queensland’s Environmental Protection Act;
  • As the decision stands, it may be some impediment to the outcome of the WA government’s referral to COAG of the idea that ‘something must be done’ about liquidators walking away from environmental claims. On the other hand, it may be a prompt for that issue to be agitated;
  • Also if the decision stands, it might not impede other such legislative attempts, based on s 5G, in different sequences of events;
  • It will be relevant to the current Senate inquiry into the federal government’s environmental protection laws; and into accounting standards;
  • Preferably, it may cause governments to reflect on a better way to recover mining remediation costs than seeking to recover them from remaining assets of a failed company, and over the rights of other creditors;
  • It may be relevant to the reserved decision of the Supreme Court of Canada which itself is determining very similar issues, in terms of federal paramountcy of Canadian insolvency law over provincial (state) environmental regulation; and the nature and extent of the right of disclaimer.

One important provision in Canada, is that its law sensibly draws a line (if this need be said at all) confirming that liquidators are not to be found responsible for past environmental breaches of companies to which they have just been appointed.  The law then provides a more realistic standard of care for the liquidator’s handling of the environmental issues during the winding up or restructure of the business: see Insolvency disclaimer of orphan wells – Linc Energy compared.

A resolution

The issue is not simple and perhaps lies more in the environmental camp, which has to achieve the balance between the prosperity that mining and related activity can bring, and the financial and social costs that it can also inflict.  Getting money, or justice, from the depleted or non-existent assets of a failed company is not the best way, as the ATO, and many other creditors understand.

 

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