Insolvency Law Update - Disclaiming an insolvent company's environmental obligations: the case of Linc Energy Ltd

Commercial Law
7 Jg3843
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In Longley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32, the Queensland Court of Appeal has clarified the ability of liquidators to disclaim onerous property, including obligations that arise in respect of that property under State environmental legislation.

On 9 March 2018, the Queensland Court of Appeal upheld a disclaimer under s 568 of the Corporations Act 2001 (Cth), by the liquidators of an insolvent resources company, of the ownership of land it had used for coal gas extraction.  By making that disclaimer, the liquidators successfully relieved themselves of any liability for the company’s ongoing statutory environmental obligations in relation to the land.

The Court of Appeal’s decision overturned a controversial ruling against the liquidators at first instance, and provides important clarity on the interaction between the disclaimer provisions in the Corporations Act and regulatory obligations concerning land and natural resources.

The facts

Linc Energy Ltd (Linc) owned land on which it operated an underground coal gasification project.  The project was the subject of a mineral development licence, a petroleum facility licence, and various environment authorities, all issued under State legislation.

On 13 May 2016, the Chief Executive of the Queensland Department of Environment and Heritage issued an environmental protection order (EPO) directed to Linc under s 358 of the Environmental Protection Act 1994 (Qld) (EP Act).  Among other things, the EPO required Linc to undertake certain work on the land in relation to the sampling and monitoring of gas and groundwater, to submit reports of that work to the Department, and to maintain certain infrastructure.

Shortly afterwards, Linc became insolvent and liquidators were appointed to wind it up.  In June 2016, well before the works specified in the EPO were required to be completed, the liquidators gave notice under s 568 of the Corporations Act, disclaiming both the land and the licences.  The Department contended that Linc was nonetheless bound to comply with the EPO.  In order to resolve the matter, the liquidators applied to the Court for directions on how to proceed.

At first instance, the Supreme Court held that the liabilities under the EPO could not be disclaimed.  The liquidators appealed.

Scope of disclaimer

The first issue was the scope of disclaimer.

Section 568 of the Corporations Act provides that a liquidator may give notice disclaiming certain property.  Section 568D provides that, from the day it takes effect, the disclaimer is taken to have terminated the company’s rights, interests, liabilities and property in or in respect of the disclaimed property.

Justice McMurdo delivered the leading judgment. His Honour rejected the Department’s argument that Linc’s liability to comply with the EPO could not be disclaimed, and held that it was a liability in respect of the land for the purposes of disclaimer.

It was critical to his Honour’s reasoning that:

  • the EPO was issued in order to secure compliance with a general environmental duty associated with Linc’s activities on the land;
  • the EPO did not prevent Linc from ceasing that activity or disposing of the land;
  • each requirement under the EPO would have required Linc to be on the land, in order for those requirements to be discharged; and
  • failing to comply with the EPO would potentially expose Linc and/or its liquidators to liability for a criminal offence.

In making that finding, his Honour noted that the requirements of an EPO would not have the requisite connection with disclaimable property in every case – in this case, however, the connection was ‘clear and immediate’.

Significantly, McMurdo JA also noted that the disclaimer only operated prospectively.  Where the EPO required certain works to be carried out after the date of disclaimer, those obligations were effectively disclaimed.  Where other obligations under the EPO had arisen prior to the date of disclaimer, Linc remained liable for discharging them.

Inconsistent operation of State and Commonwealth laws

The second issue was the inconsistency between the State EP Act, which required compliance with the EPO, and the Commonwealth Corporations Act, which permitted that liability to be disclaimed.

Although s 109 of the Constitution would ordinarily operate so that Commonwealth law prevails to the extent of the inconsistency, its operation is modified by s 5G of the Corporations Act, which sets out particular circumstances in which State laws will prevail over the Corporations Act.

First, the Court considered whether the general preservation of State laws under s 5G(11) would apply.  The Court held that it would not, because it was not possible under that provision for the disclaimer power under s 568 to operate in other States, but not in Queensland.

Secondly, the Court considered the application of s 5G(8), which deals with the preservation of State-based laws concerning the external administration of companies.  In this case, the primary subject matter of the Queensland EP Act concerned environmental regulation, and not the conduct of the liquidation.  Accordingly, s 5G(8) did not apply, and the disclaimer provisions prevailed to the extent of any inconsistency.

Significance of the decision 

The Court of Appeal’s decision gives comfort to liquidators and creditors that, when property is disclaimed, the assets of the insolvent company (and the liquidators themselves) will not be exposed to ongoing environmental obligations in respect of that property.  It also clarifies the inconsistency provisions in s 5G.

For public authorities and other interested parties, it is an important reminder that laws requiring environmental remediation, or other positive steps, may be ineffective in the event of insolvency.  That risk must be considered when managing the impact of mining and resources extraction on the natural environment.

Finally, it is important for interested parties to consider the extent of any connection between environmental obligations and specific land that might be disclaimed, and to identify the point in time at which those obligations are required to be discharged.

Further developments

The Department has filed an application for special leave to appeal to the High Court – watch this space for further developments.

7 Jg3843
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Matthew practises in commercial law, public law and white collar crime

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