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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Queensland’s environmental protection “chain of responsibility” law – part 1

Queensland’s new chain of responsibility laws seek to broaden the legal scope of those who should be held accountable for environmental obligations of a failed mining operation, extending to financiers and other benefiting economically and financially from the enterprise. It evidences a common frustration among many a regulator that insolvency can lead to the perpetrator dissolving before their eyes, leaving unattended responsibilities behind. Even corporate restructures can severely compromise the costs of remediation. It highlights insolvency’s inherent difficulty in addressing the insolvent’s long tail liabilities and responsibilities. Queensland’s approach has to be taken carefully, and should have regard to issues raised in a number of corporate and insolvency related reports, un-actioned themselves in the federal sphere.

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A problem with addressing the fallout of much corporate or individual business misconduct is that it will often result in community damage and loss, the remediation of which cannot in practice be sheeted home to the perpetrator. The offender may be an individual without financial or other means to address the damage. Or a company may have caused the damage and unless it is an enterprise of substance, though many are, it may not itself have the capacity to fix the problems its often illicit activities have caused.

Mining

To put this in current context, if a company conducts mining operations, but it is ultimately unsuccessful, the disused or unprotected or contaminated mining site may need remediation. While the responsibility for remediation properly lies with the company, and should have been the subject of on-going attention and continued regulatory oversight, and provisioning in the company accounts, the company may fail with those obligations unaddressed. The company’s failure may lead to its insolvency and liquidation, a regime with an outcome and policy focus that does not address the many difficulties left by a failed enterprise.

Insolvency seeks to address the financial losses caused by the company and provide some monetary recompense.  Viable assets of the company are in economic terms recycled to better use.  Expediency is a focus.  An aim is to have the company and its assets disposed of as promptly and efficiently as possible.  The company does not remain around to continue to deal with the consequences of its default.  In legal terms, the company then “ceases to exist”.

To some extent, if there are funds and assets remaining in the insolvent company the liquidator would work with the environmental regulators to assist in preventing any immediate environmental harm continuing, such as contaminated leakage.  But ultimately it is not for the liquidator to take responsibility for any substantial tasks, even if moneys are available. Insolvency law in fact ultimately allows a liquidator to ‘disclaim’ property of the company that is ‘onerous’ or unsaleable, for example where the cost of remediating the property would exceed its sale price.  In common parlance, the liquidator can walk away from the contaminated or unsaleable property, leaving it for others to deal with. Environmentally degraded or contaminated land is one common example, dumped car tyres another. That disclaimed land can ultimately revert to the government.

The community, the government, is often left with the task of funding its remediation.

While the company ceases to exist, its directors and managers live on. They may well have been the subject of investigation by liquidators complying with their offence reporting obligations under the Corporations Act. Governments’ legal focus is often then brought to bear on whether those individuals should be personally held responsible for the unfunded responsibilities of the company.

That in itself goes against the purpose of limited liability that a company offers; save that there are limits to that protection, as many tax laws reveal, or where corporate misconduct has occurred.

Queensland’s approach

Queensland’s environmental protection “chain of responsibility” law – the Environmental Protection (Chain of Responsibility) Amendment Act 2016, which amends the Environmental Protection Act 1994 – tries to address this problem by taking a broad approach, focusing not only on the company officers but also on the banks and others who might have directly or indirectly benefited from the company’s lack of corporate, and environmental, and perhaps other, responsibility. How that law should be framed, and has been enacted in Queensland, and the limits of that law, are all the subject of some current debate.

Insolvency’s perspective

In the context of insolvency however, this is not a new issue. It is one that confronts the ACCC when there is need for a recall of unsafe goods when the seller disappears into insolvency; or criminal prosecutors of a successfully penalized but defunct company; or one that confronts fair work regulators pursuing underpayment of workers by a limited company.  It remains an issue in corporate restructures, where monetary liabilities may be compromised and finalised, but on-going environmental compliance required, and perhaps more closely monitored.

Long-tail liabilities: The treatment of unascertained future personal injury claims

As well, what are termed “long tail liabilities” are other claims with which insolvency has limitations in addressing, often arising from environmental degradation. The damage done may be a slow unseen process that manifests much later in time after the environmental breach.  A serious health outcome of environmental default, illustrative of the problem, is asbestosis. Such liabilities were the subject of examination and recommendation to government by CAMAC in its 2008 report – Long-tail liabilities: The treatment of unascertained future personal injury claims. CAMAC was in fact invited to address what the Australian Conservation Foundation’s submission said was a more generic problem, that of environmental damage involving “very large remediation costs borne by public authorities and/or private landholders”: [3.6.2]. While CAMAC did not take that broader focus, the report and its recommendations illustrate the nature of certain types of difficult claims in insolvency that parallel those in the environmental sphere.

ALRC 95

Penalties, including in relation to environmental breaches, were the subject of earlier and detailed consideration by the Australian Law Reform Commission in its 2002 report – Principled Regulation: Federal Civil and Administrative Penalties in Australia [2002] ALRC 95. The report examined how remedial and retributive penalties should be framed, and imposed upon whom, when insolvency in effect allows the corporate offender to ‘disappear’ before the regulators’ eyes. In some cases, insurers may, properly, be visited with the monetary cost of any redress; or related entities.

As the ALRC noted then, environmental concerns had come to the fore only in more recent times, but experience at that time already showed that it was not enough to impose monetary penalties for environmental breaches directly on a company, there being a movement in state laws towards penalising those individuals who could be shown to be personally responsible for the environmental damage: see Brazil and Boreham, ‘The Liability of Company Officers for Corporate Breaches of the New Federal Environment Legislation’ (2000) 19 Australian Mining and Petroleum Law Journal 145.

That move away from the traditional penalties to those of alternative sanctions, such as orders for environmental restoration and rehabilitation, and even community service orders in the case of individuals, incorporating tenets of restorative justice, has nevertheless also recognized that a stronger monitoring and enforcement approach to prevention of the damage up-front will better serve to reduce environmental crime and its impact. See Environmental Crime in Australia, Australian Institute of Criminology Reports, Research and Public Policy Series, S Bricknell, 2010. The concept of crime prevention by way of pro-active up-front regulation, rather than ex post penalties, is not new, but where the consequences of breach can be catastrophic and extensive, the former approach is the subject of greater regulatory focus.

The 2002 ALRC report received limited if any government law reform attention, certainly in relation to its insolvency related recommendations, hence sympathies with government predicaments must be qualified. The same comments apply to CAMAC’s 2008 report.

2016 Senate Economic References Committee inquiry into penalties for white collar crime

In so far as environmental crime might be termed “white collar”, certainly in terms of its financial impact, the issue may come up again in this Senate Committee inquiry, yet to be reinstated after the recent federal election.

Assessment

In the end result though, a reality of insolvency is that blood cannot be got from a stone, whether that be a deregistered company or a bankrupt individual. Law generally and insolvency law in particular cannot do much about that per se. Reliance on potential liabilities and ex post penalties does serve some deterrence and compliance purposes, and the retributive aspects of penalties also provide the community a sense of justice having been done. But in reality criminal penalties are not paid by the insolvent company, or anyone.

Given this legal and regulatory background, Queensland legislators appear to have taken a broader economic and financial view of who is actually involved in and benefits from environmental inattention, not just the company (which has failed in any event), but the financiers and other backers behind it. It may have been decided as a policy approach that the threat of liabilities and penalties will have more of an impact if those substantial players supporting and profiting from the business are lined up as well. All care and no responsibility is not acceptable.

But that then brings in further important issues not only about limited liability, but also the costs of access to finance, and insurance, the need for entrepreneurial business risk taking, the acceptance of business failure, and the opportunity to start again despite it. These are common themes in current government business policy, including internationally. Even the option of rigorous and on-going enforcement of the laws raises the issue of undue regulatory ‘red-tape’.

The social responsibility of corporations

In the end though, Australia is a first world nation and a prosperous society, one that seeks to uphold the rule of law in support of the quality of life of its citizens. Among many qualities to be maintained are those of our environmental surroundings, acknowledging the social and economic benefits in doing so. Another CAMAC report, The social responsibility of corporations, of 2006, addresses this broad issue.

Maintenance of the environment and other qualities of our society can involve up-front costs to our community but longer term economic benefits are there. Profits in mining and other industries that seek to legitimately exploit our resources are still to be made over and above the costs of good governance and of compliance with environmental and other legal responsibilities.

As with many a regulatory regime, Queensland’s approach may beneficially be seen as not so much aiming for a financially penal outcome imposed on claimed to be hapless bystanders, but rather one seeking to define and hold potentially accountable, beyond legal concepts of responsibility, a broader group of players backing and benefiting from the company’s defaults. Whether that reach is valid, and what unintended impact it might have, are questions for debate. A positive impact may be to cause those financing and supporting a major enterprise to take greater interest in the maintenance of, in this context, its environmental responsibilities.

CAMAC’s 2006 report on the need for corporate social responsibility cautioned against a simplistic approach to the imposition of liability and responsibility that would focus on one particular social perspective to the exclusion of others. Rather, CAMAC invited a balanced approach under which “companies are judged according to their overall economic and other contributions and impacts, including how they manage social and environmental issues relevant to their business”: p iii.

That guidance may well have been adopted, and maintained, in Queensland’s policy approach but it is one that calls for some on-going scrutiny, including where regulatory policy makers in other industries call for similar chains of responsibility and accountability to be identified and pursued.

For details of references in this article, or for any further comment, please contact Michael Murray

 

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