In the context of the recent intersections between environmental protection laws and insolvency laws, in relation to CORA laws and Linc Energy in Queensland, and Redwater in Canada, NSW has now revealed concerns it has about the adequacy of funds set aside to meet rehabilitation costs resulting from mining company collapses.

The NSW Auditor-General has reported that despite NSW laws allowing security to be taken for the costs of mining rehabilitation, NSW has not maintained adequate security to cover the liabilities associated with mine closures and rehabilitation. This is also despite the total value of security – usually in the form of a bank guarantee or cash – having increased from $500 million in 2005 to around $2.2 billion in 2016, covering around 450 mine sites.

Under Part 12A of the Mining Act 1992, NSW mining companies must provide a security deposit to cover the full costs of rehabilitation of their mine sites in the event of default by the company. The amount of the deposit for each site is based on approved estimates of the mine’s full rehabilitation costs as approved by the NSW Department of Planning and Environment.

Security deposits are regarded as an option of last resort. The Department has other legislative and regulatory tools under the Mining Act which it normally uses to promote environmental compliance, such as directions, fines and in the end revoking a mining lease. To date, the Department says it has never had to access a security deposit for any significant development mine site.

However, the Auditor-General has found that the security deposits held are not likely to be sufficient to cover the full costs of each mine’s rehabilitation in the event of a default. The deposits have not been updated since 2013 and some activities required for effective rehabilitation are not covered or covered fully, and they do not include sufficient contingency given the substantial risks and uncertainties involved. The audit also showed that the risk of significant unexpected environmental degradation in the long-term was not factored in, after a mine is deemed to be rehabilitated and the security deposit is returned, for which some protection other than a security deposit is needed.

The Department says it has legal advice that it should be able to claim on these bank guarantees, for example, if the mining company goes into liquidation. If the deposit proves inadequate, NSW would be making what may well be a fruitless claim in the company’s liquidation, along with the bank.

While some queries may be raised about these findings of the audit report, none are asked here.

Some points to note

• At least this NSW law recognises that the way to cover such claims is to take security, as a default position if regulation itself does not address the risks of deposit moneys being inadequate.  Queensland also has the fall back option of bringing accessorial claims against the financiers and others benefiting from the mining operations.
• While environmental damage is a provable debt, assessments of its contingent losses are difficult and inherently uncertain. Also, there are practical difficulties identified by the Auditor-General, those of significant unexpected environmental degradation long after a mine is deemed to be rehabilitated and the security deposit is returned. Insolvency law has difficulty in addressing such claims: see my article Latent environmental damage and a deregistered company (2001) 1(7) INSLB 117; CAMAC Report on Long Tail Liabilities: The treatment of unascertained future personal injury claims, May 2008. 
• One other point of comparison is that Canada has its “orphan wells”, being abandoned and contaminated oil wells, whose responsibility partly falls to the underfunded Orphan Wells Association. NSW has its Derelict Mine Sites Fund set up under s 242C of the Mining Act, the adequacy of which is not addressed in the audit report.
• And it should be understood that environmental rehabilitation following legitimate resource exploitation is a world wide problem. For the latest international review of this topic, although before Redwater, see The Environmental Liabilities of a Bankruptcy Estate, International Insolvency Review, March 2017 pp 40–59, by Professor Tuula Linna.