Insolvency and the environment – some law reform suggestions

While we await some pending developments in the areas of tension between insolvency law and environmental law, including the High Court’s consideration of an application for special leave to appeal in Linc Energy, a useful Australian article has come out of the recent INSOL Academics conference in London[1] which adds to the debate.

Symes’ Environmental Protection Orders and Insolvency

Professor Chris Symes’ Environmental Protection Orders and Insolvency[2] discusses this tension in the context of the Linc Energy decisions and the law of disclaimer in insolvency; and the Queensland government’s 2016 chain of responsibility laws, with their potential for imposing personal liability on liquidators appointed to administer failed mining and resource companies.

He makes some recommendations for legislative change, one being to give claims for environmental damages to be given a priority position over unsecured creditors, including as expenses of the liquidator.  He also contemplates requiring the liquidator to consider the interests of parties affected by a disclaimer, and to seek input from the relevant environmental regulator before exercising the right to disclaim.

He does acknowledge that ‘part of the answer must lie with good policing during the life of the mine’, including by way of security bonds, but says these are not the complete answer.

Whatever the outcome of the High Court application, he concludes that it is better if Federal and State governments work to explore the ideas in his paper.

In a limited way, and as we have reported, that is happening, with COAG’s Energy Council looking at the law of disclaimer, and a Senate committee also examining the issue more broadly, including the disclosure of environmental costs under accounting standards.

Comments

However, I respectfully take issue with some of Professor Symes’ conclusions.  As Jason Harris and I have written,[3] an insolvency regime is not there as a panacea for all the wrongs and losses with which creditors and others are confronted when a business collapses.  It makes some special priority concessions, including to employees, but to add environmental claims takes it too far and is not justified.

There is a moral hazard issue to start with – ‘there is no need to ensure the security bond is in place, we have priority if it all falls over, and the liquidator won’t be able to disclaim the contaminated land anyway’.

Also, there should not be a priority over ordinary unpaid creditors in favour of environmental remediation costs which arise from public interest requirements, for which we all should pay.

Refining the disclaimer law provisions would assist little.

Imposing personal liabilities on neglectful directors may assist, by way of prompting compliance, but such an approach generally produces little by way of recoveries in instances of non-compliance.

Ex post recovery through insolvency is neither the best option for any creditor, nor is it generally productive of any worthwhile recoupment of loss by way of dividend.

While Professor Symes is correct in saying that bonds are not the complete answer, they can, if fully enforced, provide that answer.  The costs of securing the bond is met by the miner, which costs are then reflected in its pricing.  If it is not sufficiently capitalised to secure a bond, it perhaps should not be there in the first place, subject to whatever government policy seeks to encourage entrepreneurial risk, including the government’s own. If there is inevitably a loss or shortfall, the lack of any further recovery from insolvency should be factored in.

Liquidators’ liability

As to liquidators and their potential personal liability, an answer may lie in Canadian law, that excludes liability for any pre-existing lack of compliance by the company (if that need be said at all) and it allows a higher liability threshold for post appointment tasks conducted by the liquidator in trying to resolve what can be major environmental defects.[4]

Canada and elsewhere

The tension between insolvency and environmental law is significant internationally, including England and Ireland and Europe.[5]

The current debate in Canada is in particular worth examining, where the tension has been judicially and academically debated more comprehensively and at an advanced level.  In particular, as I have reported at length, the Supreme Court of Canada is presently considering its judgment on that very issue, both as to the law, and the policy, including its own country’s constitutional issues, not unlike those in Linc Energy.

There are a few things pending upon which it is best to wait before the issue can be considered further.  Professor Symes’ article usefully gathers many of these.

 

[1] INSOL Academics, London, July 2018.

[2] Environmental protection orders and insolvency: it is onerous to disclaim, or to prioritise or to resolve the conflict of two public interests, (2018) 37(1) Australian Resources and Energy Law Journal, Symes C.

[3] Keay’s Insolvency, 10th ed, 2018, Murray and Harris, Chapter 1.

[4] See ‘The last man standing’ (2017) 18(2) INSLB 38, Murray M.

[5] See Managing Waste: the gap between EU Directives and corporate law in Member States – a mess of case law needing a clean-up, Professor Irene Lynch Fannon, School of Law, University College Cork, April 2017.

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