INSOL Academics in Singapore on 1-2 April 2019 and the following day’s meeting of academics at the National University of Singapore provided a number of thought-provoking presentations, which then serve to prompt connections with local Australian issues.
Here is one series of connections.
Climate change
Climate change came up in the insolvency context, as to its impact on the financial position of businesses now, and in the future, imposing either or both of present or contingent or future liabilities that should properly be recognised in determining the company’s solvency.
The bankruptcy of Pacific Gas and Electric in the US was said to have been prompted by “billions of dollars in liability claims from two years of deadly (Californian) wildfires, seen by some as an “early indicator of a wider economic toll from climate change, which is making wildfires more frequent and destructive”: Bloomberg.
Such a liability assessment can prompt, and allow, a business to seek pre-emptive insolvency protection – under Australian law, on the basis that the company is “likely to become insolvent at some future time”: s 436A Corporations Act.
Contingent and future liabilities
Contingent and future liabilities and their relevance to present insolvency create complexity; for a recent decision see Smith v Sandalwood Properties [2019] WASC 109, the issue concerning who is a creditor under a deed of company arrangement – specifically in relation to contingent claims in the Quintis collapse and the rights of growers to defer management fees.
Directors’ duties
Climate change liabilities can also have an impact on the duties of directors of a company, in their obligations to the company to both ensure compliance with relevant environmental laws, and, possibly, with their corporate social responsibilities. In the context of financial instability, those duties to the company can require that directors’ attention be given to the creditors: for a recent UK decision see BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112. Class actions can loom.
Insurers
A further impact is on insurers, who assume the liabilities of the company. Even if spread through reinsurance, the liabilities can be large.
Costs of remediation – Senate report
On a related but relevant environmental issue, the recognition of the costs of attending to environmental remediation laws in the records of a mining company were the subject of a report by the Australian Senate Committee of 20 March 2019 – Rehabilitation of mining and resources projects as it relates to Commonwealth responsibilities. There seems to have been little assistance given the Committee on the issues, but in any event its recommendations were split.
By way of background, issues were raised by the Western Australian government relating to mine site rehabilitation financial obligations; in the context of insolvency, whether the liquidator should be able to disclaim non-remediated land: see Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91 in the context of the Ellendale Mine. Issues were also raised about the Australian Accounting Board Standards and their requirements for disclosure of liabilities for environmental remediation. As with many issues in environmental protection, it was decided that ‘issues around financial provisioning for mine site rehabilitation are best dealt with at the jurisdictional level’, that is, at state level; although there was to be established a set of National Principles for Managing Rehabilitation Risks.
In respect of Australian Accounting Standards, no specific changes were proposed but the Board agreed to future consideration of options to upgrade closure and rehabilitation reporting requirements in the Standards at an aggregate level. It was said that any consideration of changes to the standards would need to ensure consistency with international standards is maintained. A dissenting recommendation [19] of the Australian Greens was that the Corporations Act and the Commonwealth Accounting Standards, as necessary, be amended to ensure that mining companies account for and report on mine closure liabilities on a site by site basis. Site-specific information should be included in annual financial statements and as an individual line item in company balance sheets.
Regulatory ‘non-liabilities’
The remaining but important matter to mention is the finding in the Canadian Supreme Court Redwater decision that environmental regulation requirements may still need to be attended to by an insolvent company if they do not create a provable debt. That is a lurking issue in some of Australia’s regulatory interventions in relation to companies in insolvency.
Comments welcome: michael@murrayslegal.com.au
