Insights / April 28th, 2017

Liquidators cannot disclaim State environmental law obligations?

Linc Energy Ltd (in Liq) (Linc) operated a pilot underground coal gasification (UCG) facility at Chinchilla, Queensland.

As part of its operations Linc held Mineral Development Licence No 309 under the Minerals Resources Act 1989, Petroleum Facility Licence 5 under the Petroleum & Gas (Production and Safety) Act 2004 (the licences) and environmental authorisations (EAs) issued under the Environmental Protection Act 1994 (EP Act).

On 15 April 2016 administrators were appointed to Linc. On 13 May 2016 the Department of Environment and Heritage Protection (DEHP) issued an environment protection order (EPO) under the EP Act to Linc (in administration) requiring Linc to undertake ongoing monitoring and testing in relation to existing contamination. On 23 May 2016 liquidators were appointed and on 30 June 2016 the liquidators gave notice under section 568 the Corporations Act 2001 (Cth) (CA) disclaiming the Chinchilla land, the licences and the EAs.

The liquidators applied to the Supreme Court of Queensland for directions as to whether the disclaimer extended to non-compliance with the EPO.

DEHP argued that, notwithstanding the disclaimer, Linc was obliged to comply with the EPO as the liquidators were “executive officers” of Linc under the EP Act and were therefore personally responsible for ensuring that Linc complied with its obligations under the EPO.

The Court’s findings

The Queensland Supreme Court found that:

  • The liquidators’ disclaimer did not have the effect of discharging Linc’s obligation to comply with the terms of the EPO. As such, the liquidators were not justified in causing Linc not to comply with the EPO.
  • To the extent of any inconsistency between the State environmental law and the Federal CA, section 5G of the CA provides that precedence must be given to State laws where those laws were in operation when the States referred their corporation’s powers to the Commonwealth in 2001.
  • The liquidators were “executive officers” of Linc under the EP Act.

The Court confined its analysis to the specific facts of the Linc case and the site infrastructure. It did not consider the broader question of whether EAs are disclaimer property or whether the liquidators obligations will extend to any EPO issued in the future because the Court found that “the purpose of the directions power under s 511 of the CA is to give liquidators as officers of the court the protection of acting in accordance with the direction…The effect is confined to the statement of facts on which the direction is predicated”.

Implications of the Linc decision

While the Court sought to confine the Linc decision to the specific set of facts in that case the decision has the potential to be applied more broadly in other jurisdictions and to other factual scenarios.

The decision has significant implications for liquidators, namely:

  • In Queensland, environmental obligations cannot be avoided by simply disclaiming property under the CA.
  • Where a company is being wound up but has unsatisfied environmental obligations, the funds from the winding up must be used to satisfy those environmental obligations ahead of the liquidators own remuneration, employee entitlements and other unsecured creditors.
  • The funds required to satisfy environmental obligations could be significant and extend well into the future.
  • As “executive officers” under the EP Act, liquidators can be held personally liable. Accordingly, liquidators must carefully consider the personal risk in being appointed to companies that have existing environmental obligations, or, to companies that conducted potentially polluting activities for which environmental obligations could later arise, such as through the issue of an EPO. This increase in risk will likely feed into higher insurance costs and higher fees.

For more information about this decision and how it might affect you, please contact one of our team.