The Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) puts lenders at risk of being in the firing line of the Queensland Department of Environment and Heritage Protection for environmental harm caused by their borrowers in Queensland.
The Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld)(Act)commenced on 27 April 2016, and amends the Environmental Protection Act 1994 (Qld) (EPA). The motivation behind the Act is to expand the class of persons over whom the Department of Environment and Heritage Protection (DEHP) has power to recover environmental management and clean-up costs when the company who then owns the project site is in financial difficulties.
Distressed companies are often unable to adequately comply with their environmental obligations and are at risk of being issued with an Environmental Protection Order (EPO) (an order requiring the recipient to remediate or rehabilitate the relevant site) on sites where environmental harm has occurred.
These amendments to the EPA have significant implications, which reach far beyond companies in financial distress. For an in-depth overview of the amendments see the recent Corrs article DEHP’s new weapons to ensure clean-up of mining sites: are you in the firing line?
What could lenders have liability for?
It is commonly acknowledged that lenders who willingly or knowingly permit contamination of a site by a borrower may be held liable under environmental laws.
Lenders may also have direct liability for environmental damage caused by a project where a lender has taken possession of a site or where its security over the borrower entitles it to appoint a controller or receiver to project assets. Notwithstanding an independent audit of a borrower’s environmental due diligence or covenants to comply with environmental law, the environmental risk remains with the lender in those instances. The Act now adds a separate and new layer of regulation that lenders must consider when entering into borrowing arrangements with companies that engage in ‘environmentally relevant activities’ under the EPA.
An EPO can be issued to a ‘related person’ of a company at the same time as an EPO is issued to the company (or where an existing EPO issued to a company is already in force).
An EPO can also be issued to a ‘related person’ of a ‘high-risk company’, whether or not an EPO has been issued to the high-risk company itself.A high-risk company is a company (or related entity) which is in external administration. An EPO issued to a related person of a company or a related person of a high risk company can have retrospective application. This means it can relate to past activities and impose requirements in relation to relevant activities or environmental harms caused before the commencement of the Act.
Who is a ‘related person’?
The Act remains unclear on its classification of exactly who a related person is and how the DEHP will determine the threshold criteria. The Minister for Environment and Heritage Protection stated in the Second Reading Speech for the Act that the chain of responsibility will not attach to genuine arm’s length investors, including merchant bankers.
The Explanatory Notes to the Bill suggested that the existence of an arm’s length transaction for the purposes of providing finance or taking a security may be sufficient to establish that a person should not be determined to have a relevant connection such that it would be a related person and capable of being held liable for environmental harm.
Despite these comments, lenders are not provided with a safe harbour from being categorised as a related person under the Act. The factors that the DEHP may take into account are discretionary. The fact that a lender provides finance under an arm’s length, commercial transaction does not exclude a lender from having a relevant connection to its borrower, and therefore is not a related person.
The Act contemplates that it is possible that a lender could be defined as a related person where the DEHP is satisfied the lender has a sufficient level of influence over an entity in relation to the way in which or extent to which it complies with its environmental obligations, or if it significantly benefits financially from the entity carrying on the relevant activity, irrespective of whether the transaction was at arm’s length or not.
As an EPO can have retrospective application, a lender can be categorised as a related person even if it is no longer providing financing (for example where it terminates its financing due to non-compliance with environmental laws or the debt has been repaid in full).
What are the next steps?
The Queensland Government is currently working with stakeholders (including representatives of the Australian Bankers’ Association, the Queensland Resources Council and the Queensland Law Society) to develop guidelines under section 548A of the Act which the DEHP must consider when determining whether or not someone is a related person.
Draft guidelines are currently being considered by the working group and are expected to be made available for public consultation later this year. The guidelines will take effect when approved by regulation.
The good news for lenders is that it is anticipated the guidelines will make clear that true arm's-length lenders will not be considered related persons for the purposes of the Act. This is positive news for lenders funding projects in Queensland.
However, until there is clarity on the position, lenders remain at risk of falling within the chain of responsibility for environmental harm. Accordingly, lenders should take all reasonable steps to ensure that their borrowers comply with any environmental obligations, which may entail additional monitoring. Loan documentation for the financing of Queensland projects involving environmentally relevant activities under the EPA will need to be carefully considered.