A successful appeal from a decision of the Supreme Court of Queensland in respect of Linc Energy Limited (in liquidation) (Linc) has made it clear, at least for the time being, that the environmental obligations imposed on the company and the liquidator in respect of land ceased on the liquidator’s disclaimer of the relevant land, licences and site infrastructure.
The Court noted, however, that a disclaimer may not terminate all environmental obligations and it will not relieve the company or liquidator from obligations that arose prior to the disclaimer.
Background
Prior to its liquidation, Linc operated a pilot underground coal gasification project on land it owned near Chinchilla. The project was operated under the authority of a mineral development licence (MDL) granted under the Mineral Resources Act 1989 (Qld) (MRA), a petroleum facility licence (PFL) and environmental authorities issued under the Environmental Protection Act 1994 (Qld) (EPA).
Linc had been issued an environmental protection order (EPO) by the Chief Executive of the Department of Environment and Heritage Protection (DEHP) pursuant to section 358 of the EPA. The EPO had imposed obligations on Linc in connection with that land, including the obligations to maintain certain infrastructure and to carry out site monitoring, testing and reporting.
The liquidators of Linc disclaimed the Chinchilla land, the MDL, the PFL the environmental authorities under the EPA, together with items and plant and equipment on the land.
The liquidators applied to the Court for directions as to whether they and Linc were still obliged to comply with the EPO and the environmental authorities, or whether the disclaimer operated to terminate those liabilities.
The Decision at First Instance
At first instance, the Court decided in favour of the DEHP, and found that Linc’s obligations pursuant to the EPO (and the liquidators’ obligation to cause Linc to comply with those obligations) continued, despite the disclaimer. Jackson J found that:
- There was an inconsistency between the obligations imposed by the EPA (being State legislation) and the termination of the obligations arising under the disclaimer provisions in the Corporations Act (being Commonwealth legislation); and
- Pursuant to section 5G(11) of the Corporations Act (Act) that inconsistency was to be resolved by limiting the operation of the disclaimer provisions such that the obligations under the EPO and EPA continued despite the disclaimer.
The Appeal
Two questions arose on the appeal, being:
- Was Linc’s obligation to comply with the EPO a liability in respect of disclaimed property and therefore terminated (for the purposes of the Act) with effect from the disclaimer; and
- Is the inconsistency between the EPA and the Act resolved by section 109 of the Constitution – with the Commonwealth legislation prevailing – or by section 5G of the Act – with the State legislation prevailing.
Liabilities in respect of the disclaimed property
The Court was satisfied in this instance that the EPO comprised liabilities in respect of the disclaimed property, as:
- The EPO imposed requirements for the stated purpose of securing compliance with Linc’s general environmental duty;
- The EPO was expressly issued with respect to the activities of Linc on the land under its MDL;
- By the disclaimer, Linc’s authority and capacity to engage in those activities was terminated; and
- Once the land and the MDL had been disclaimed there was no activity to which the general environmental duty could have attached and for which the EPO could have operated.
The Court held there was a clear and immediate connection between the disclaimed property and the liabilities under the EPO, such that the obligations under the EPO were ‘in respect of’ the disclaimed property and terminated with effect from the disclaimer.
It is important to note that the Court expressly commented that the requirements of an EPO will not have the requisite connection with the property, such that its requirements would be liabilities in respect of property for the purposes of section 568D of the Act, in every case. Accordingly, there remains a prospect that the particular requirements of an EPO will continue despite the disclaimer of property pursuant to the Act.
Inconsistency
In respect of the inconsistency question, the Court accepted that the provisions of the Act would prevail over the obligations arising under the EPO, which arose out of state based legislation.
The Court held that a valid disclaimer terminates the company’s rights, interests, liabilities and properties in or in respect of the disclaimed property. The Court found, contrary to the decision of the primary judge, that the disclaimer provisions could not operate such that a company would lose all of its rights and interest in respect of property but remain burdened by a liability in respect of the property arising under the state based legislation.
That was so despite section 5G of the Act providing that the winding up provisions of the Act do not apply to the extent they are inconsistent with a state law. The Court held that the state legislation contemplated by this section was legislation directed to windings up generally rather than state based legislation to be complied with during the course of a winding up.
The Court noted, though, that the termination of obligations pursuant to a disclaimer only operated with effect from the disclaimer – any obligations that arose prior to that time were unaffected by the disclaimer.
Implications
Importantly, this appeal has overturned a decision that would have had significant consequences for liquidators given the difficulty, and potential personal exposure, in continuing to comply with environmental obligations.
Although it is a positive development for insolvency practitioners, it is important to note that the principle is not necessarily applicable in all cases (it is affected by the nature of the obligation) and a prompt disclaimer where appropriate is desirable given accrued obligations are not terminated by the disclaimer.
Finally, an application for leave to appeal to the High Court has been lodged so there yet may be further developments in relation to the issue.
This article was written by Andrew O’Halloran, Partner, and Chloe Parker, Senior Associate.
Publication Editor: Grant Whatley, Partner.